The government continues borrowing from scheduled banks and repaying the central bank, while the banks continue to face liquidity crisis amid a sloth private sector credit growth. This in turn is leading to shrinking funds availability at banks to provide loans for the private sector.
Economists find this borrowing by the government to cover up the revenue deficit is a better solution compared to borrowing from the central bank by printing bills. They pointed out that the move may increase the liquidity crisis, but may play a vital role in taming inflation.
The government borrowed Tk 31,274 crore from scheduled banks in the July to November 29 period of FY24, and in the same timeframe, it repaid Tk 27,635 crore of the loans it took from the central bank.
In the first five months of FY23, the government – instead of borrowing from the country’s scheduled banks – had repaid Tk 1,055 crore in loans. The government had borrowed Tk 31,372 crore from the central bank during the same period.
Again, according to central bank data, the government’s net credit from the banking systems was Tk 3,639 crore in the first five months of FY24, compared to Tk 30,317 crore in the same timeframe last year.
These figures show that the trend has continued in the current fiscal year.
There has been some criticism over the government’s heavy reliance on borrowing from the Bangladesh Bank in recent times. As a result, the government is seeking loans from the scheduled banks.
Economists say the upward trend in scheduled bank borrowing by the government is having a direct impact on private sector credit growth, as evident by a significant decline of this indicator.
The trend of Bangladesh’s private sector credit growth has been comparatively less starting from June this year.
According to the central bank, the private sector growth reached 10.09 per cent this October, compared to the same month of the previous year.
However, the private sector credit growth was 10.57 per cent, 9.89 per cent, 9.75 per cent and 9.69 per cent in June, July, August and September respectively. This figure clearly shows a downward trend in private sector credit growth in the last five months.
On condition of anonymity, a senior central bank official told The Business Post, “When the government takes a loan from the central bank, it impacts the country’s inflation rate. Though, the government has stopped printing money, which is known as high-powered money.”
Dr Zahid Hussain, former lead economist of World Bank Dhaka Office, said, “Private banks are willing to give loans to the government. Because these scheduled banks buy treasury bills and give loans to the government.
“However, these banks are getting more than 8 per cent interest from treasury bills and bonds. Banks are always concerned about the security of money, and investments to the government are their best option.”
He added, “The central bank has tightened monetary policy to curb ongoing high inflation. As a result, we are seeing a liquidity crisis in the banking sector. But ultimately, the central bank stopped injecting high-power money to the economy, which had caused the inflation to surge.
“The big challenge for the central bank is to curb the high inflation now.”
Preferring to the anonymous, the 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.
Centre for Policy Dialogue (CPD) Distinguished Fellow Prof Mustafizur Rahman said, “When the government borrowed from the central bank, inflation soared in the country, which remains higher compared to the last two fiscal years.
“The process of government borrowing should avoid having an impact on the country’s private sector.”
The outstanding position of net borrowing from the banking sector was Tk 3.97 lakh crore in November 29 this year, compared to Tk 3.04 lakh crore year-on-year.
The target of government borrowing from the banking system has been set at Tk 1,32,000 crore to cover FY24 budget deficit.
A central bank official, on condition of anonymity, said, “There was a liquidity crunch in the banking sector a few months ago. This shortage has been mitigated due to the increased lending of money by the central bank to commercial banks through repurchase agreements (REPO) and liquidity facilities.
“The government has now increased borrowing from commercial banks. In addition, due to the sale of USD from the reserves, a lot of money is going to the central bank vault.”
Meanwhile, Federation of Bangladesh Chambers of Commerce & Industries (FBCCI) ex-president Shafiul Islam Mohiuddin said, “Private sector’s growth is already slow. The government should keep that in mind while borrowing from banks.”
