The International Monetary Fund has cautioned the Bangladesh Bank against unsecured liquidity support to weak banks, saying such actions undermined tight monetary policy and threatened financial stability.

The observation came after IMF executive board completed the Article IV Consultation for Bangladesh last week in connection with the ongoing $5.5 billion loan programme, according to a statement issued on Friday.

The IMF said that the Bangladesh Bank’s unsecured liquidity injections into non-viable banks should stop, except in extreme crisis situations and only with explicit government guarantees.

It noted that several weak banks remained dependent on uncollateralised central bank funding, amounting to about 1 per cent of gross domestic product as of end-June 2025, alongside restrictions on deposit withdrawals.

‘The BB offered special liquidity support of Tk 33,020 crore to banks struggling to meet their daily operational needs and an additional Tk 19,354 crore was provided in June 2025 to liquidity-stressed banks to address their cumulative negative current account balances with the BB, which have persisted since November 2022,’ according to monetary policy statement for July-December, 2025.

The global lender urged the central bank to rely instead on transparent, rules-based liquidity facilities backed by adequate collateral.

The IMF reiterated that the policy rate must remain restrictive until inflation shows a firm and durable decline.

It said that large unsecured liquidity injections into troubled banks during 2024 and 2025, combined with foreign exchange purchases in 2025, weakened policy transmission.

According to the statement, increased demand for government securities in July-August 2025 lowered government bond yields by around 200 basis points, even though the policy rate remained unchanged at 10 per cent.

The fund observed that Bangladesh’s economic growth had slowed in recent years while inflation had stayed high.

GDP growth fell to 3.7 per cent in the financial year 2024-25 from that of 4.2 per cent in FY24.

The IMF projected a modest recovery, with growth rebounding to 4.7 per cent in FY26 and FY27 and gradually rising towards 6 per cent in the medium term, assuming reforms move forward.

Inflation, however, remains a concern. The IMF forecasted average inflation at 8.9 per cent in FY26, easing to about 6 per cent in FY27.

It warned that delays in reforms could keep inflation elevated for longer and weaken confidence.

On fiscal policy, the IMF said that the overall deficit remained contained but faced increasing pressure from higher interest payments, energy subsidies and bank recapitalisation needs.

It projected the fiscal deficit to stay about 4.5 per cent of GDP in the near term.

In FY25, the deficit stood at 2.9 per cent of GDP, but the IMF noted that this resulted mainly from sharp cuts in capital and social spending rather than stronger revenue performance.

Revenue mobilisation emerged as a major weakness.

Tax revenue fell to 6.9 per cent of GDP in FY25 from that of 7.4 per cent in FY24.

The IMF attributed the decline to weaker compliance, lower public sector purchases, disruptions from public unrest and staff strikes at the revenue authority.

It highlighted that Bangladesh’s tax-to-GDP ratio remained below 9 per cent, one of the lowest globally, and called for urgent reforms to tax policy and administration.

The fund recommended limiting the primary deficit to 2 per cent of GDP in FY26 through revenue-based consolidation.

Foreign exchange reserves rose to $26.7 billion in FY25 from those of $21.7 billion a year earlier. It said that maintaining a tight policy mix and fully implementing the flexible exchange rate regime were critical to rebuilding reserves further and safeguarding external stability.

The IMF identified the banking sector as the most pressing vulnerability.

System-wide non-performing loans surged to 34 per cent by June 2025, reflecting deep governance failures and prolonged regulatory forbearance.

The IMF urged comprehensive asset quality reviews of all systemic and state-owned banks, stronger risk-based supervision and improved transparency.

It said credible banking sector restructuring is essential and must include clear estimates of capital shortfalls, defined fiscal support and legally robust resolution plans.