Why is bank dependency rising to meet budget deficit?

When the country’s banking sector is facing multiple challenges, including a stressed liquidity situation due to the foreign exchange crisis, the government has fixed a 14.70 per cent higher bank borrowing target for the upcoming fiscal year of 2023-24.

The government plans to borrow Tk 1,32,395 crore from local banks in FY24 to finance the projected deficit in the proposed budget of Tk 7,61,785 crore.

The target is 14.70 per cent higher than the revised target of Tk 1,15,425 crore for the outgoing FY2022-23.

Industry insiders said that the government will largely depend on the banking sector to meet the budget deficit in the upcoming fiscal year because it lowered the borrowing target from the savings tools.

The overall budget deficit in FY24 is expected to be Tk 2,61,785 crore, which is 5.2 per cent of the national gross domestic product (GDP).

To meet the deficit, Tk 1,02,490 crore will come from foreign sources and Tk 1,55,395 crore will come from domestic sources, where the biggest portion will come from the banking industry.

The government aims to borrow at Tk 18,000 crore from national savings scheme sales, which is 10 per cent lower than the revised budget FY23.

Finance Ministry sources said that the government wants to reduce the interest burden because the interest on saving tools is higher than the bank borrowing.

That is why the bank borrowing target is higher against the lower borrowing target from the saving tools, they added.

The government also did not borrow enough in FY23 from the savings tools due to the skyrocketing inflation.

In April of FY23, net borrowing from the saving tools stood at Tk 582 crore, down from Tk 1,015 crore in the same month of FY2021-22.

Reacting to the FY24 budget, a senior executive of a private commercial bank told The Business Post that the higher bank borrowing target will impact the private sector credit growth.

He, however, said that banks are now facing a liquidity shortage due to the crisis in the forex market and that is why the Bangladesh Bank (BB) will have to provide money to the government.

The government is now heavily borrowing from the banking sector, especially from the central bank, even though that tends to fuel inflation, which stood at 9.24 per cent in April.

The government borrowed Tk 82,056.91 crore from the banking sector in the first 10 months (July-April) of FY23, of which Tk 74,393.08 crore was from the central bank, as per BB data.

Zahid Hussain, the 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 opined that inflation is rising due to direct borrowing from BB.

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 decade.

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

“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,” Zahid said.