The government continues to borrow from scheduled banks and repay the central bank, while the sector struggles to navigate a persisting liquidity crisis amid sluggish private sector credit growth.
This in turn is leading to shrinking funds availability at banks, needed to provide loans for the private sector. Economists too believe that when the government increases borrowing from scheduled banks, it directly impacts the country’s private sector credit growth.
The government borrowed Tk 27,952 crore from scheduled banks in the July to December 27 period of FY24, and in the same timeframe, it repaid Tk 35,798 crore of the loans it took from the central bank, according to central bank sources.
In the first five months of FY23, the government – instead of borrowing from the country’s scheduled banks – had repaid Tk 19,064 crore in loans. The government borrowed Tk 45,161 crore from the central bank during the same period.
According to central bank data, the government’s net credit from the banking system was negative Tk 7,846 crore in the first six months of FY24, compared to Tk 26,097 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.
On the issue, Policy Research Institute of Bangladesh (PRI) Executive Director Ahsan H Mansur on Wednesday said, “The government has stopped borrowing from the central bank, instead of repaying to the regulator.
“The government has increased borrowing from scheduled banks in the current FY, compared to the same period of previous year. So now banks are facing a liquidity crisis as well. It is directly impacting the private sector credit.
He added, “Entrepreneurs and importers are finding fewer loans due to liquidity shortage in banks. It should be noted that banks are more willing to invest their excess liquidity in treasury bills because they provide good profits.”
Eminent economist AB Mirza Azizul Islam told The Business Post, “The government has been suffering the revenue deficit for many years. The revenue deficit increased frequently. 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.”
Dr 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 8 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.”
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 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.
According to the central bank, the private sector credit growth reached 9.90 per cent on November 2023, compared to the same month in 2022.
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.”
The government borrowing target from the banking system has been set at Tk 1,32,000 crore to cover FY24 budget deficit.
A central bank official, preferring not to be named, 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 point out, “Private sector’s growth is already slow. The government should keep that in mind while borrowing from banks.”
