Published: 08:48 AM, 30 April 2026
Printing Taka or Earning Dollars: The Real Constraint on Stability
The dominant narrative around fuel subsidies - rising global prices translate into rising fiscal burdens, and those burdens ultimately destabilize the economy – is considered an inevitable. The arithmetic appears straightforward. If fuel imports cost more in dollars, governments must either pass on the cost domestically or absorb it through subsidies. If they choose the latter, fiscal pressure mounts.
But this widely accepted view rests on a partial understanding of how modern monetary economies function - particularly in a country like Bangladesh, where external inflows play a decisive role in shaping macroeconomic outcomes. The real issue is not the size of the subsidy in isolation, but whether the broader system can absorb it without triggering instability.
Consider a simple baseline. At an exchange rate of Tk 120 per US dollar, an additional USD 1 billion in fuel subsidies requires Tk 120 billion. Conventional wisdom would treat this as a direct fiscal burden. If financed through borrowing, it adds to public debt. If financed through money creation, it is seen as inflationary and potentially destabilizing.
Yet this framing overlooks a critical dimension: the balance of foreign exchange flows. If the government finances this Tk 120 billion through monetary expansion - effectively creating Taka - and uses it to purchase dollars from the banking system, what actually happens? The answer depends not on the act of money creation itself, but on whether the resulting demand for foreign exchange is matched by supply.
If export earnings, remittances, and capital inflows are sufficiently strong, they generate a steady stream of dollars into the system. Commercial banks accumulate foreign currency liquidity. In such a scenario, the government’s demand for dollars to finance fuel imports is not disruptive; it is accommodated within the existing flow structure.
This is the point often missed in conventional analysis: when inflows are strong, monetary expansion does not automatically lead to exchange rate depreciation. Instead, a form of natural equilibrium emerges. The newly created Taka circulates within the domestic economy, while the corresponding foreign exchange demand is met by real inflows. The exchange rate remains broadly stable, and the supposed ‘burden’ of the subsidy does not escalate in domestic currency terms.
Under these conditions, the oft-cited risk of a spiraling fiscal cost simply does not materialize. We can take the earlier example. At Tk 120 per dollar, USD 1 billion translates into Tk 120 billion. If the exchange rate remains stable - because inflows continue to offset outflows - this figure remains unchanged. There is no automatic progression to Tk 150 billion or beyond. The feared 25 percent increase in Taka cost, often invoked in policy debates, is not an inevitability; it is a conditional outcome that depends on exchange rate movements. And exchange rate movements, in turn, depend on the balance of payments - not on subsidy financing alone.
This distinction is crucial. It shifts the focus from a narrow fiscal lens to a broader macroeconomic perspective. The question is no longer ‘how large is the subsidy?’ but rather ‘is the external sector strong enough to sustain it?’
In periods of robust remittance inflows, strong export performance, or favorable capital movements, the answer may be yes. Bangladesh has experienced such periods in the past, where foreign exchange reserves accumulated and the central bank intervened to prevent excessive appreciation of the Taka. In those moments, the economy was not constrained by a shortage of dollars but rather managing their abundance.
In such a context, financing fuel subsidies through monetary expansion is not inherently destabilizing. On the contrary, it can be viewed as a mechanism for redistributing liquidity within the economy while utilizing available foreign exchange resources.
This is not to suggest that money creation is ‘free’ in an absolute sense. Rather, its cost is contingent. When external inflows are strong, the system can absorb additional liquidity without triggering depreciation or excessive inflation. The macroeconomic environment acts as a buffer, neutralizing what would otherwise be a source of instability.
However, this equilibrium is neither automatic nor permanent. It must be understood as a dynamic condition, sustained by continuous inflows. The moment these inflows weaken, the balance shifts.
If remittances slow, exports falter, or capital flows reverse, the supply of foreign exchange tightens. The same demand for dollars - previously accommodated without strain - now exerts pressure on the exchange rate. The Taka begins to depreciate. At that point, the arithmetic changes. The USD 1 billion subsidy that required Tk 120 billion at a stable exchange rate now requires Tk 150 billion if the currency weakens to Tk 150 per dollar. The fiscal burden increases not because of the initial decision to subsidize, but because the underlying equilibrium has been disrupted.
This is the real risk - not the act of monetary financing itself, but the loss of external balance.
It is therefore misleading to argue, as is often done, that printing Taka to finance subsidies will inevitably lead to macroeconomic instability. Such arguments conflate possibility with certainty. They ignore the mediating role of foreign exchange inflows and the capacity of the system to absorb shocks.
At the same time, it is equally misleading to claim that such financing carries no risk. The apparent stability is conditional, and reliance on favorable external conditions can create complacency. Policymakers must recognize both sides of this equation. A more accurate formulation would be this: fuel subsidies financed through monetary expansion are sustainable as long as they are consistent with the economy’s external balance.
This perspective has important policy implications. First, it underscores the importance of strengthening foreign exchange inflows. Policies that support export growth, facilitate remittance transfers, and attract stable capital are not merely growth-enhancing; they are central to maintaining macroeconomic stability in the face of fiscal pressures.
Second, it suggests that the management of fuel subsidies should be integrated with external sector strategy. Rather than viewing subsidies purely as a fiscal issue, policymakers should assess them in the context of balance of payments dynamics. In periods of strong inflows, there may be greater space for accommodating subsidies without destabilizing the economy. In periods of weakness, adjustment becomes more urgent.
Third, it highlights the role of expectations. Exchange rate stability is not determined solely by current flows but also by anticipated future conditions. Clear and credible policy signals - regarding both fiscal discipline and external sector management - can help anchor expectations and reduce the risk of abrupt adjustments.
Finally, it calls for a more nuanced public discourse. The simplistic narrative of ‘subsidy equals burden’ fails to capture the conditional nature of macroeconomic outcomes. It obscures the fact that the same policy can have very different effects depending on the broader economic environment.
The reality is more complex, but also more empowering. Governments are not entirely at the mercy of global price movements. By managing the external sector effectively, they can create the conditions under which fiscal measures - such as fuel subsidies - can be sustained without triggering instability.
This does not eliminate trade-offs. Subsidies still involve resource allocation decisions, and their distributional impacts must be carefully considered. But it does change the terms of the debate.
The focus shifts from inevitability to contingency - from fixed burdens to manageable conditions.
In the final analysis, the sustainability of fuel subsidies in a Taka-based economy is not determined by how much money the government prints, but by how well the economy earns and attracts dollars. When inflows are strong, a natural equilibrium can emerge - one in which monetary expansion is absorbed, the exchange rate remains stable, and the fiscal burden does not spiral.
When that equilibrium breaks, the costs become visible - and often severe.
The challenge for policymakers is not to avoid subsidies at all costs, nor to rely blindly on monetary financing, but to align fiscal actions with external realities. Stability, after all, is not a given. It is a condition that must be continuously earned.
Mehdi Rahman works in the development
sector. He also writes on foreign trade
and monetary issues.
