Job market caught between govt debt and pandemic

The flow of credit in private sector has been steadily declining due to the government’s aggressive borrowing from banks resulting in a sharp decline in private investment. Rubbing salt in the wound, businesses have been on a standstill for more than four months due to coronavirus crisis. Caught between the two, unemployment in the country may soon spiral out of control.

The government has been taking aggressive loans from the banking sector to meet budget deficit. Often, the amount of government debt is not kept within the set targets -- even going beyond the revised target.

In the outgoing 2019-20 fiscal year, the government borrowed Tk 85,000 crore from the banking sector, which was Tk 3,000 crore more than the revised target.

Economists say coronavirus-caused economic downturn in the new fiscal year could lead to lower government revenue collection than last year. This could increase the budget deficit, which could further increase the amount of government bank loans. This could lead to problems in obtaining loans from the banking sector for private sector businesses.

In the revised budget of the last financial year, the target for borrowing from banks was set at Tk 82,000 crore, which was almost double the target of the original budget.

In the original budget, the target for borrowing from banks to finance the deficit was set at around Tk 47,000 crore. But due to non-collection of revenue at the desired rate of the government, additional loans had to be taken from the banking sector at the last minute to keep the expenditure rolling.

Even after doubling the target of bank borrowing could not cope and at the last moment, it was increased to Tk 85,000 crore.

According to the relevant sources of Bangladesh Bank, about Tk 79,000 crore loan was taken from commercial banks in the outgoing financial year. The remaining Tk 6,000 crore was taken from the central bank.

Most loans were through 10-year, 15-year and 20-year bonds. In the current financial year, the government has set a target of taking Tk 84,000 crore bank loan to finance the budget deficit.

According to bankers, this practice is not bringing good results to the country's economy. New industries are set up by investment from private sector which in turn creates employment opportunities. 

Moreover, the transaction between private sector and banks increases business of the banks, increases the number of branches -- economic wheel as a whole gets in motion. But the way loans are often snatched away from the banking sector by the government, leaves banks with little money to spare for the private sector. 

Meanwhile, in the current situation, most of the banks are losing interest in lending to the private sector. One of the reasons for this is the unwritten culture of not repaying loans. 

Big borrowers are no longer repaying loans from banks. Instead of taking a firm stand against defaulters, they are being given concessions with various policies. Those who used to repay loans regularly are also finding no incentive to do so anymore.

A managing director of a private bank, on the condition of anonymity, told The Business Post that the interest rate on bank loan has been fixed at 9 percent. There is no guarantee the entrepreneurs will be able to repay loans at this rate. And if the government is given a long-term loan, the interest is up to 10 percent. At the same time, to meet any crisis of the banks, government bills and bonds can be mortgaged and borrowed from Bangladesh Bank. As a result, most of the banks are now more inclined to lend to the government instead of investing in the private sector.

Bankers say many companies are unable to pay salaries because of the pandemic. Unable to bear the stress of financial losses, workers are being laid off. Moreover, large deposits used to be available from private educational institutions at the end of the month. But due to the closure of educational institutions, not much deposit is available from here. Deposits have decreased overall.

At the same time, debt collection has decreased. The opportunity not to be categorized as defaulter was extended from January to June and later to September. As a result, the bank's cash collection has declined at an unusual rate. In such a situation, the bank deposits are invested in risk-free government treasury bills and bonds.

According to bankers, economic activity will become more stagnant if government loans and investment in the private sector are not increased. Achieving the desired growth at the end of the year will not be possible at all. 

Sheikh Fazle Fahim, president of the FBCCI (Federation of Bangladesh Chambers of Commerce & Industries) told The Business Post, “We are in a deep crisis because of the coronavirus. Trade in the country was completely closed for more than two months. In this situation, it is normal for the credit growth in the private sector to be low. Now, most restrictions are lifted but economic activities are not fully operational. There is fear and panic among everyone. It is uncertain when the situation will return to normal. We have to address this crisis by increasing the flow of credit to the private sector and increasing investment.”

Dr Ahsan H Mansoor, executive director of the Policy Research Institute (PRI), a private research institute, told The Business Post, “Investment climate in the country has been stagnant for some time now. Although government investment has increased slightly, it has not increased in the private sector. Investment in both public and private sectors is declining due to the impact of Covid-19. The private sector has the biggest impact on our GDP. The steady decline in debt growth here means declining employment. It is having a negative impact on the growth, manufacturing and service sectors.”