Home ›› 12 Jan 2023 ›› Front
The government, instead of loaning money from scheduled banks to cover the budget deficit, is now borrowing directly from the Bangladesh Bank. This is evident by the fact that the government did not borrow a Taka from banks in the first half of FY23 (July-December).
During the period, the government repaid the banks Tk 33,355 crore, and borrowed Tk 65,604 crore from the central bank directly, show regulator data.
Sounding a note of caution, economists say borrowing money directly from the central bank is like printing money and injecting it into the local economy, which might be a bad idea amid already soaring inflation.
The regulator however does not fully agree with this notion.
Speaking to The Business Post, Central bank Spokesperson Mezbaul Haque said, “A lot of money has come into the hands of Bangladesh Bank from the market while we were providing USD support to the banks.
“The central bank is providing this money to the government as a loan. Therefore, it is incorrect to say that the entire amount of Tk 65,604 crore has been injected into the economy as fresh local currency.”
Although somewhat agreeing with the central bank spokesperson, former lead economist of the World Bank Dhaka Office Zahid Hussain said, “The money which is being injected into the market is more than the money that was made by the central bank by selling USD.
“As a result, the reserve money is increasing beyond the Bangladesh Bank target, and this increase means that new money is flowing into the economy.”
According to central bank sources, the amount of reserve money till November last year was Tk 3.55 lakh crore, which was within the BB target. But by mid-December 2022, the amount rose to Tk 3.75 lakh crore.
Economists say the figure indicates that Tk 20,000 crore of fresh money has been created in the local economy.
Curbing inflation could be difficult
Inflation hit a decade-high of 9.52 per cent in August last year as the Russia-Ukraine war pushed up import costs due to rising commodity prices on the international market, and a USD shortage at home.
Inflation then declined slightly to 8.71 per cent in December last year.
Economists say the governments across the world are now focusing on inflation control. The Bangladesh government also wants it, but the fact is, the flow of money is increasing in the economy in various forms.
This will make curbing inflation difficult in the days ahead.
They pointed out that aside from providing loans to the government, the regulator is also providing liquidity support to banks. Moreover, implementation of different refinance schemes is increasing the flow of Taka in the economy.
Bangladesh should have been able to keep such flow of Taka into the economy under tight control, so that the inflation can be kept in check. But the reality has been different.
Recommending a number of measures, Zahid Hussain said, “The government should borrow from the banks, instead of relying solely on the central bank. This will tighten credit flow to the private sector, which in turn would be useful in controlling inflation.
“USD support to the money market should be stopped, and the exchange rate for the greenback should be market-based. Such steps would help stabilise banks’ liquidity. Besides, the loan interest cap should also be lifted too.”
Such issues should be clarified in the upcoming monetary policy, he added.
Central bank data show that private sector credit growth was 13.97 per cent in November last year, where the target was 13.6 per cent in the monetary policy for FY23.
The central bank has withdrawn more than Tk 70,000 crore from the money market by selling USD in the first six months of the current fiscal year. Also, due to various irregularities and rumours, the growth of deposits has declined in the banks, triggering a liquidity crisis.
At the end of last October, excess liquidity in the banking system was Tk 1,69,555.72 crore, a decline from Tk 2,20,865.87 crore compared to the same month of 2021.
Budget targets
Budget size of the current FY is Tk 6,78,064 crore, out of which the budget deficit is Tk 2.45 lakh crore. To meet the deficit, the government plans to borrow Tk 1.45 lakh crore from internal sources, of which Tk 1.06 lakh crore will be taken from banks.
On the issue, Zahid Hussain said, “The government is under pressure to meet the budget deficit as the revenue collection is not increasing as per the target. The decision to rein in import expenditure in a bid to overcome the USD crisis could reduce revenue collection as per target.”
The revenue collection target during July-November of FY23 was Tk 1.25 lakh crore, but Tk 1.15 lakh crore has been collected. Revenue collection target for the NBR was set Tk 3.70 lakh crore for ongoing FY.
