The government continues to borrow from scheduled banks and repay the central bank, while the banking sector struggles to navigate a persisting liquidity crisis amid sluggish private sector credit growth.
Between July 1 and April 22 of FY24, the government borrowed Tk 65,431 crore from the scheduled banks, and at the same time it repaid Tk 19,874 crore to the Bangladesh Bank.
In the first ten months of FY23, the government borrowed Tk 5,334 crore from the scheduled banks, and Tk 72,904 crore from the central bank during the same time period of FY23.
During the current financial year, the central bank has stopped injecting high-powered money into the economy after facing criticism from different quarters. The government then turned to scheduled banks for borrowing.
Economists believe due to the government’s borrowing, scheduled banks are suffering a liquidity crisis, and the Bangladesh Bank has been providing liquidity support to these banks through Repurchase Agreement (Repo) and assured liquidity support facility (ALSF).
Speaking to The Business Post, Policy Research Institute of Bangladesh (PRI) Executive Director Ahsan H Mansur said, “The scheduled banks are getting liquidity support through repo and ALSF from the central bank, which is not good for the economy.
“Scheduled banks are suffering as the government is borrowing from them. As a result, these banks are facing a liquidity crunch as well. The private sector is the ultimate sufferer as they are not getting enough loans from banks, which will impact our economy as well.”
Forty scheduled banks borrowed Tk 28,867 crore from the central bank through repo and ALSF, according to Bangladesh Bank data. These banks continue to borrow a huge amount from the central bank every working day.
According to central bank data, excess liquidity in the banking sector was Tk 1,81,090 crore in July last year, which declined to Tk 1,62,061.35 in February this year.
Many scheduled and Islami Shariah based banks are failing to maintain the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) due to the liquidity shortage.
A senior Bangladesh Bank official, on condition of anonymity, said, “The regulator has been supporting these banks since 2022, as these banks maintain their transactions with their depositors.”
According to central bank data, the government’s net credit from the banking system was negative Tk 45,557 crore in the first ten months of FY24, compared to Tk 78,238 crore in the same timeframe last year.
On the issue, Mutual Trust Bank Limited (MTB) Managing Director & CEO Syed Mahbubur Rahman said, “The central bank is supporting the scheduled banks through repo and ALSF only for the depositors. Banks are concerned about being able to repay their depositors timely.
“Banks are not getting deposits as much as expected, and the depositors are not renewing their deposits due to the ongoing high inflation. Besides there is the pressure of government borrowing from banks, which in turn is creating a liquidity crisis.”
In this context, the senior banker suggested that the government should have to increase the revenue earnings, and there is no alternative way.
Zahid Hussain, former lead economist of World Bank Dhaka Office, said, “Private banks are willing to provide loans to the government. Because these scheduled banks usually buy treasury bills, and give loans to the government.
“These banks are getting more than 9 per cent interest from treasury bills and bonds. Banks are always concerned about the security of their money, and investments to the government are their best option.”
Preferring to be anonymous, managing directors of several banks mentioned that deposits are a liability to the banks. These scheduled banks are always concerned about making tidy profits, and the government treasury bills and bonds are the secured option for bankers.
Eminent economist AB Mirza Azizul Islam said, “The government has been suffering from a revenue deficit for years. The revenue deficit increased steadily. As a result, the government borrowed from banks to meet the revenue deficit in the budget.
“The revenue problem cannot be fixed overnight, so we need a proper plan.”
He added, “If the government continues to borrow from the scheduled banks, then the private sector credit will be in trouble.”
The private sector credit growth stood at 9.96 per cent in February this year, as investments declined due to high inflationary pressure. Besides, according to the Bangladesh Bureau of Statistics (BBS) the inflation rate stood at 9.81 per cent in March this year.
