Home ›› 19 Feb 2023 ›› Opinion
Government borrowing in addressing the budget deficit in Bangladesh is extremely common in Bangladesh. More than 5 per cent of the budget deficit in Bangladesh is managed with internal and external borrowings. Borrowing from domestic sources, where mostly the banking system contributes, is on the rise in recent fiscal years, thanks to the low-level tax-to-GDP ratio. If the borrowing trend continues for long, the inflation-hit economy will likely experience yet another blow.
The government usually takes loans from the central bank and commercial banks in addressing unexpected situations and budget deficits. On the external side, the government seeks budget assistance from multilateral donor agencies on the condition of repaying with interest rates. The national budget which was drafted for FY 2022-23, came through around a 5.5 per cent deficit. Besides, the government cost due to the Russia-Ukraine war is rising. The war puts the government in a worrying situation. Soon after the beginning of the war, the government started to see the trend of macroeconomic indicators falling.
The country’s current account and overall Balance of Payment (BoP) are in a worrisome situation. There is no possibility of a developing BoP situation.
Ultimately, the government planned to take Tk 1.063 trillion from the banking system. The decision of taking money from the banking system came during the budget era. According to a newspaper report, in the current fiscal year, net public borrowing stood at Tk 351.8 billion as of February 2023, up by nearly 200 per cent. The net total credit to the government from the banking system figured to Tk 3.054 trillion as of February 2023, the report also said. The decision of borrowing from the banking system more than the estimation done earlier is bad for the economy, no doubt. Bangladesh at the International Monetary Fund (IMF) was highly criticized for bad governance in the banking industry. Recently, the banking industry fell into trouble due to the panic withdrawal of money.
As a result of panic withdrawal, the banking sector has been suffering from required liquidity. Given the liquidity shortfall in commercial banks, the government changed the decision of borrowing money from alternative sources.
Very recently, the Ministry of Finance (MoF) gave directives to the central bank in respect of utilizing debt instruments that are known as government borrowing instruments. The government usually takes loans from the central bank under two instruments- ways and means advance (WMA) and an overdraft. Based on the emergency situation, the government takes money amounting Tk 120 billion daily. Recently, this borrowing ceiling increased to Tk 160 billion following the MoF directive. After a decade, the ceiling revision came against the current demand in the economy. The ceiling of increasing WMA and overdraft amounts is a timely demand. It is essential to know that the government will borrow from WMA at 4.25 per cent-reverse repo rate. The interest rate from borrowing from overdraft will be 5.25 per cent. As the size of the economy is expanding, the need for raising WMA and overdraft ceilings is increasingly becoming relevant. So, a 33 per cent increase in WMA and overdraft ceiling is not surprising at all. The government did not borrow from the central bank under these two instruments during the fiscal year 2021-22.
In recent fiscal years, the government scaled up taking loans from commercial banks to counter the budget deficit. Its impact on the economy is huge. Money inflow in the private sector comes from commercial banks.
If the sectors do not get the required funds, economic growth will slow down. According to a monetary policy statement announced recently, private sector credit growth was set at 14.1 per cent up to June 2023. Right now, the liquidity crunch-hit banking sector is seldom able to finance, resulting in paralyzing economic activities. According to a Business Post news report,
Deposit growth in the banking industry was 5.44 per cent in 2022. Nine banks in Bangladesh recorded negative credit growth in the last couple of months, the report said. Purchasing the US dollar for import payments was a key reason for the deposit shortfall in commercial banks. Some Shariah-based lenders have, in the meantime, been suffering from a liquidity crisis due to panic withdrawal. The central bank already created a fund titled Mudarabah Liquidity Support (MLS) for cash-strapped Shariah-based banks.
Given commercial banks’ liquidity state, the government stepped down in borrowing loans. Ways and means advance (WMA) and overdraft maintained by Bangladesh Bank (BB) have become two dearest borrowing tools to the government. Finding no alternative ways, BB has become a last resort for the government. The central bank usually injects money into the economy during emergency times. The injected money by the central bank is called high-powered money. High-powered money is the liability of the central bank (monetary authority). High-powered money is money that is produced by the central bank of a country. It consists of currency held by the public and cash reserves with the banks.
There are advantages and disadvantages of money supply in the economy in the form of high-powered money.
During the coronavirus crisis, there was no cash money in the hands of people to survive. The vast number of the population heavily relied on government-provided cash support during the pandemic. During that time, the supply of high-powered money was a timely demand for the economy. It is essential to know that high-powered money brings inflationary pressure to the economy at one stage. Through money multiplier, high-powered money turns many folds after some days of releasing the money from the central bank.
As a result of the Ukraine-Russia war, the world’s people are under exorbitant inflationary pressure. The people in Bangladesh are no exception in inflation-related affairs. In January this year, around 8.57 per cent inflation rate was recorded. In such a situation, government borrowing from the central bank under WMA and overdraft tools might have raised the inflation rate. The low-income group people will ultimately face inflationary pressure arising from the high-powered money supply.
There is no alternative to increase revenue earnings in tackling the untoward situation in the economy. I am not critical of government borrowing from the banking system. In case of a contingency situation in the economy, the government is obliged to take emergency borrowing. But, the circumstances do not favour it due to the uncontrolled high price level pushed by the war. There is a fear of rising price levels in the days to come for flooding high-powered money. If the government can materialize IMF-provided commitment in respect of increasing the tax-to-GDP ratio, the tendency of borrowing from the banking system may be reduced. Flooding of high-powered money in the economy may not accord well with monetary policy as far as containing inflation is concerned. When the economy sees high inflation and unemployment at a time, the economy will definitely experience a recession resulting in slow growth.
The writer is an economic affairs analyst. He can be contacted at [email protected]
