Although inflation was rising, the government was borrowing directly from Bangladesh Bank (BB) to meet the budget deficit in the last financial year. This move was criticised because directly borrowing from the central bank is like having newly printed, or high-powered, money entering the market, which was fuelling inflation further.
In light of that reality, the government has prioritised repayment instead of borrowing from the central bank in FY2023-24.
According to BB sources, during the first quarter (July to September 25) of FY24, the government repaid Tk 26,525 crore. In the same period of FY2022-23, the government had borrowed Tk 10,476 crore from the central bank.
However, the government is not making the repayments by increasing revenue collection. It is doing it by increasing borrowing from the scheduled banks (SBs). Due to this move, the government’s borrowing from SBs has jumped to Tk 27,925 crore in the first quarter of FY24.
During the same period in FY23, the government did not borrow money from SBs and repaid Tk 292 crore, according to BB data. The data also showed that net credit to the government from the banking system was Tk 1,400 crore in Q1 of FY24. It was Tk 10,184 crore in Q1 of FY23.
Economists and experts said that although it is a good move to pay without taking loans from BB, the increased borrowing from SBs, however, is not a good sign.
Former Bangladesh Institute of Bank Management director general Toufic Ahmad Choudhury told The Business Post that it would have been best if the government repaid BB’s debt with the money from collected revenue. “But since it’s unable to do that, it’s repaying BB by taking loans from commercial banks.
“This will reduce the money supply in the market to some extent, which will help in controlling inflation. But the downside and risk of that is that the private sector credit will fall and it will hamper employment generation. However, we have to prioritise reducing inflation now,” he said.
Echoing his concerns, Policy Research Institute Executive Director Ahsan H Mansur said that high-powered money will somewhat decrease as a result of not borrowing from BB. But in line with this, the bank loan interest rate should be increased and market management improved.
Direct loans from BB fuel inflation
The central bank recently held a series of meetings with the country’s leading economists, who advised BB to not lend directly to the government.
Economists believe that such money entering the market has increased the overall money flow at least five times. As a result, this money has further fuelled inflation in the country.
In FY23, the government took a direct loan of around Tk 1 lakh crore from the central bank and the move had garnered widespread criticism.
Toufic said that direct borrowing from BB means increasing the money supply in the market. “This fuels inflation and that is why economists have advised BB not to give loans to the government.”
Inflation has hovered around 10 per cent in the first three months of FY24. It was 9.69 per cent in July, 9.92 per cent in August and 9.63 per cent in September.
Also, Bangladesh has seen the highest food inflation in the last decade at the same time. Food inflation was 9.76 per cent in July but it jumped to 12.54 per cent in August, which was the highest after FY2010-11. It slightly decreased to 12.37 per cent in September.
However, Bangladesh Bank believes that the current high inflation has little connection to the government's borrowing money from it.
A BB official, requesting anonymity, said that there is no doubt that the money flow in the market has increased slightly as a result of the government’s direct borrowing from the central bank. But inflation is relatively high now mainly due to market mismanagement and syndicates.
Low revenue hikes bank borrowing
The government has announced a budget of Tk 7,61,785 crore for FY24 with a deficit of Tk 2,61,785 crore. To meet this huge deficit, the government has increased its reliance on domestic borrowing rather than foreign funding.
Of the domestic borrowing target of Tk 1,55,395 crore, the government plans to borrow Tk 1,32,395 crore from banks. In Q1 of FY24, the net borrowing from the banking system stood at Tk 1,400 crore.
The main reason behind the huge budget deficit is that a lower revenue collection is expected. In FY24, the revenue target is Tk 5 lakh crore and the National Board of Revenue (NBR) alone has been tasked with collecting Tk 4.3 lakh crore.
The NBR overall collected Tk 46,233 crore in revenue during the July-August period of FY24, up by around 15 per cent year-on-year.
However, the shortfall in revenue collection increased to Tk 4,087 crore as the actual target was Tk 50,321 crore for the first two months of the current fiscal year.
“Revenue collection must be increased for the stability of macroeconomy, there is no alternative. But our collection is not increasing as expected, especially direct tax is not rising. We should focus on it,” said Toufic.