Govt borrows heavily from BB

The government depends more on the Bangladesh Bank than commercial banks for borrowing as the country’s banking sector faces a tight liquidity situation.

It borrowed Tk 82,056.91 crore from the banking sector in the first ten months (July-April) of this fiscal year, of which Tk 74,393.08 crore from the central bank, the latest data from the Bangladesh Bank showed.

The government borrowed only Tk 7,663.83 crore from the commercial banks.

Experts said that borrowing from the central bank instead of commercial banks is fuelling inflation. Such trend is tantamount to printed money, they added.

Zahid Hussain, former lead economist of the World Bank Dhaka office, told The Business Post that even though money is not printed directly, it can be said that new money has been created in the accounting process.

It is not a good process for a vibrant economy, he added.

The economist opined that the inflation is rising due to direct borrowing from the Bangladesh Bank.

In July last year, point-to-point inflation was 7.48 per cent and it jumped to 9.52 per cent in August which was the highest in the last one decade.

The inflation rate slightly declined to 9.24 per cent in April this year after the government took various measures to control import, increase supplementary duty on some non-essential products, increase LC margin and hike the consumer loan rate.

Hussain said, “In order to reduce high inflation, we need to reduce money flow from the market. If the government borrows from the bank, the flow of credit to the private sector will decrease. It would help tame the inflation further.”

All the countries across the world are doing so, he said, adding that the Bangladesh government took loans directly from the Bangladesh Bank, which increased money flow in the market.

However, a senior official of the central bank’s Debt Management Department said that borrowing from the central bank is not like printed money.

He said that now the country’s banking sector is facing a severe liquidity shortage due to the existing crisis in the forex market.

Country’s banks have been getting US dollar support from the Bangladesh Bank for import payment since August in 2021, the BB official said, adding that as a result, an equivalent amount of local currency was withdrawn by the central bank.

The BB pumped over $12 billion into the country’s banking sector from its forex reserves during the ten months of this fiscal year.

The banking regulator sold over $7 billion to banks in the last fiscal year that means the equivalent amount of local currency was withdrawn by the central bank.

The BB provided the money to the government after its withdrawal from the banking sector, as per the BB official.

The target of government borrowing from the banking sector has been set at Tk 111,608 crore in the national budget for FY23, but it borrowed 73.52 per cent of the target in just ten months.

Ahsan H Mansur, executive director at Policy Research Institute of Bangladesh, said that the government’s borrowing from the Bangladesh Bank means injecting printed money into the market which will fuel inflation.

He, however, said that there is no option for the government to meet the budget deficit as there was a shortfall in revenue income, which was the reason behind the surge in bank borrowing.

The National Board of Revenue (NBR) collected Tk 2,25,509 crore as income tax, value-added tax and import duty in the June-March period of the current fiscal year, up by 8.32 per cent as compared to the corresponding period of the last fiscal year.

During the first nine months of the current fiscal year, the revenue board fell short of revenue collection target by Tk 29,008 crore. The target was set at Tk 254,517 crore, according to the data from the NBR.

In the July-October period of the current fiscal year (2022-23), National Board of Revenue (NBR) has collected Tk 90,901.99 crore against the target of Tk 97,306.86 crore.

Ahsan H Mansur further said the government’s expenditure had increased as fertiliser prices and food subsidies had also increased due to price hikes in the global market.

The government borrowing during the July-April period is 138.02 per cent higher than the same period of last fiscal year.

Three treasury bills are now transacted through auctions to adjust the government’s borrowing from the banking system. The bills have 91-day, 182-day, and 364-day maturity periods.

Furthermore, five government bonds with tenure of two, five, 10, 15, and 20 years are traded in the money market.