Why Is the Yunus Government Following Sheikh Hasina’s Approach to Save Banks?

In August, Bangladesh Bank Governor Ahsan H. Mansur announced that the government or banks in crisis would no longer receive printed money. However, just three months later, the central bank reversed this decision.

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The governor recently disclosed that BDT 22,500 crore (approx. $2 billion) was printed and distributed to six struggling banks. He also assured that customers of these banks would be able to withdraw their money starting Sunday. The announcement was made during a press conference at Bangladesh Bank on Thursday.

This has raised critical questions:

• Why did the central bank retract its earlier decision not to print money?
• What could be the implications of this move?
• How effective will printing money be in rescuing failing banks?

A Dilemma for the Central Bank

Economists describe the current situation as a “double-edged crisis” for Bangladesh Bank. It must ensure the security of depositors’ funds while keeping inflation under control. The decision to print money for weak banks reflects the limited alternatives available to prevent their collapse. Some experts argue that this move is as much political as it is economic.

Central Bank’s Justification

Bangladesh Bank claims that while money is being printed, it is simultaneously being withdrawn from the market to control inflation. Governor Mansur emphasized that inflation management remains a priority, even with this temporary deviation from earlier commitments.

The Beneficiary Banks

The six banks receiving liquidity support are:

• National Bank
• EXIM Bank
• Social Islami Bank
• First Security Islami Bank
• Global Islami Bank
• Union Bank

The governor stated, “This support is aimed at ensuring that depositors can access their funds. We believe the provided BDT 22,500 crore is sufficient for now, but more can be arranged if necessary.”

A Politically Driven Decision?

Economist Mahbub Ullah called this a “political decision,” arguing that it aims to avert economic and political unrest. “Several banks are practically insolvent. They can’t meet depositors’ withdrawal demands, creating frustration and potential instability,” he said.

Lack of Alternatives

Earlier, in September, Bangladesh Bank introduced a guarantee scheme encouraging stronger banks to lend to weaker ones. However, this approach didn’t yield sufficient results, likely due to a lack of trust. Consequently, printing money became the central bank’s last resort.

Potential Risks of Money Printing

While printing money may stabilize depositors’ confidence temporarily, economists warn of significant risks:

Inflationary Pressure: Newly circulated money will likely lead to increased spending by depositors, further fueling inflation.

Public Burden: The general population will bear the brunt through rising costs of goods and services.

Long-Term Challenges

Experts suggest that mismanagement and corruption in the banking sector have led to this crisis. Mahbub Ullah argued that addressing the root cause—recovering money from loan defaulters—could resolve liquidity issues without harming ordinary citizens. He emphasized the need for more stringent actions against defaulters and accountability within the sector.

Finally

The central bank is walking a tightrope, balancing between preventing immediate banking chaos and averting long-term economic instability. Printing money, while temporarily addressing liquidity shortages, is fraught with inflationary risks. Only structural reforms, robust governance, and effective loan recovery can provide a sustainable solution to this ongoing banking crisis.