Govt's bank borrowing falls 88% in 5 months
Banking experts said the central bank has already liquidated nearly $6 billion from reserves in the current fiscal year, resulting in around Tk66,000 crore shifting from the country’s money market to the central bank’s reserves
The government's bank borrowing decreased 88% in the first five months of the current fiscal year.
Data from the Bangladesh Bank show that from July to November, the government borrowed Tk31,274 crore and repaid Tk27,635 crore to the central bank.
This stands in stark contrast to the previous fiscal year, when the government borrowed Tk31,372 crore from the Bangladesh Bank and repaid Tk1,055 crore to commercial banks.
A senior official from the central bank explained that last year, the Bangladesh Bank acquired a substantial portion of Treasury bills and bonds and lent the funds to the government.
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However, this fiscal year has witnessed increased involvement from commercial banks, attracted by favourable returns on these financial instruments.
Now, there have been concerns that if this trend persists, it may lead to liquidity shortage in commercial banks, which will hinder their ability to extend credit to the private sector.
Central bank data show the interest rate for the 182-day Treasury bill as of 11 December stands at 11.20%, and for the 364-day bill, it's 11.40%, which is higher than the commercial banks' lending rate of 10.93% for November. Additionally, there are numerous risks and non-payment issues associated with private loans.
Banking experts said the central bank has already liquidated nearly $6 billion from reserves in the current fiscal year, resulting in around Tk66,000 crore shifting from the country's money market to the central bank's reserves. Concurrently, liquidity strain is emerging due to the government's heightened reliance on bank borrowing and repayment of central bank loans.
In response to these developments, banks are increasingly resorting to borrowing through the interbank call money market and repurchase agreements (repos) from the central bank to fulfil their routine operational requirements.
According to data from the central bank, the government's net borrowing from the banking system in the first five months of this fiscal year stood at Tk3,638 crore, compared to Tk30,317 crore in the same period a year ago. Loans were taken from the central bank mainly through Wage and Means and Overdraft in November. However, devolvement has come down by around Tk22,000 crore as some Treasury bills and bonds bought by the central bank expired a few months ago.
The government had set a target of borrowing Tk1,32,000 crore from the banking sector within a year to meet the deficit budget. Thus far, in the first five months, the government has only borrowed 2.76% of the annual target.
The government's net borrowing from the banking sector stood at Tk3.97 lakh crore at the end of November, compared to Tk3.94 lakh crore at the end of June.
The Bangladesh Bank seeks to control inflation by tightening the money supply. To achieve this goal in the current fiscal year, it is taking steps such as reducing government debt and increasing the policy rate and lending rate.
Zahid Hussain, former lead economist of the World Bank's Dhaka office, mentioned that lower government borrowing from the banking sector could be helpful in controlling inflation, emphasising the need for coordination between fiscal and monetary policies to achieve this goal.
He observed that the central bank had raised the policy rate as part of the monetary policy, emphasising the necessity of either reducing spending or increasing revenue in the fiscal policy to narrow the budget deficit.
"Revenue income has not increased significantly. According to the data, it can be assumed that the government has reduced expenses. However, the specific sector in which the expenses have been cut is not yet known," he told The Business Standard.
The economist suggested that the government can reduce costs in two ways. Firstly, unnecessary expenses can be cut from the available development budget. Secondly, expenditures can be reduced in the operating budget.
Binayak Sen, director-general at the Bangladesh Institute of Development Studies, told TBS, "Lower government borrowing from the banking sector is a positive sign. Additionally, it is a good decision to halt loans to the government by printing money from the central bank. These measures will undoubtedly contribute to reducing inflation."
He emphasised the importance of market-based exchange rates and interest rates in achieving this goal.
