How unexpected cost of bank merger puts govt in liquidity stress
Govt plans to revise up bank borrowing target, expecting further rise of expenditure ahead of election
Highlights:
- Unexpected Tk20,000 crore bank merger costs triggered government liquidity stress
- Government bank borrowing surged, crowding out private sector credit
- Low ADP spending masked even higher potential government borrowing
- Treasury yields rose near 11%, banks favored bonds over loans
- Private credit growth slumped; government credit growth exceeded targets
- Bangladesh Bank injected liquidity, plans higher borrowing, warns inflation risks
The rise of an unexpected Tk20,000 crore cost for bank mergers has created liquidity stress for the government, prompting additional borrowing from the banking system and crowding out private sector credit.
Moreover, election costs, higher house rent for MPO-listed school and college teachers, and a new pay scale for government employees have increased budgetary expenditure, prompting the government to revisit its borrowing target for the current fiscal year.
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Despite a record-low Annual Development Programme (ADP), government borrowing from the banking sector increased by more than Tk25,000 crore in the first six months of FY26.
ADP expenditure in the first five months of FY26 stood at Tk28,043.62 crore, the lowest in recent history, according to an Implementation Monitoring and Evaluation Division report.
Government borrowing would have been even higher if ADP implementation had been normal, said a senior executive of the central bank.
Bangladesh Bank had to call an additional auction to provide Tk10,000 crore for the merger of five banks, causing a rise in treasury bill and bond yields.
The newly formed Sammilito Islami Bank is set to start repaying depositors' money from the end of this month with government funding.
The government's liquidity stress is also reflected in unpaid remittance subsidy dues of more than Tk4,000 crore.
Meanwhile, treasury bill and bond rates, which had dipped below 10% since September, rose sharply to nearly 11% in December due to heavy bank borrowing, according to Bangladesh Bank data.
The higher rates encouraged private commercial banks to invest more in treasury bills and bonds instead of lending to the private sector.
Private sector credit growth fell to 6.23% in October, well below the FY26 monetary target of 8%, while government sector credit growth stood at 24%, surpassing the 18% ceiling, central bank data show.
Borrowing target set for upward revision
The government is planning to revise the bank borrowing target upward from Tk1.04 lakh crore to Tk1.17 lakh crore, a move discussed mainly at the coordination council meeting held in November, according to central bank sources.
There is also concern about possible disruption to foreign financing inflows for deficit funding due to election-centric unrest, the official said.
Total government borrowing stood at Tk34,648 crore as of 15 December in FY26, which remains within the official target.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said some banks are in a strong liquidity position, with advance-deposit ratios below 80%.
However, the overall market remains under liquidity stress, as most banks are struggling with high default loans.
Banks with surplus liquidity are investing in treasury bills and bonds due to limited lending opportunities in the private sector, he said.
Inflation risks and central bank stance
Rising government treasury yields have pushed deposit rates higher, which will ultimately increase financing costs for businesses and add to inflationary pressure, he added.
Speaking to The Business Standard, a senior central bank executive said government borrowing could rise in the coming months due to falling revenue amid sluggish economic activity.
If government borrowing continues to increase, it will shrink space for private sector credit and weigh on economic growth, he added.
He said the central bank is not concerned as long as borrowing remains within budgetary limits, as inflation targets were set after adjusting for those limits.
However, Bangladesh Bank may need to call a special auction of treasury bills and bonds in the near future due to rising unexpected expenditure, he added.
Despite high bank borrowing, the money market has remained liquid, as Bangladesh Bank has been injecting funds through dollar purchases to balance inflows and outflows.
Bangladesh Bank has injected more than Tk30,000 crore by buying $2.5 billion so far in FY26 and has continued dollar purchases to prevent appreciation pressure.
Explaining the dollar buying, the central bank executive said banks find investing in treasury bills and bonds more profitable than holding dollars due to appreciation risks.
Moreover, demand for dollars remains low because of sluggish economic activity and slower imports ahead of the election, he said.
Although government expenditure has increased for several unexpected reasons, the revenue shortfall has continued to widen amid weak economic activity.
National Board of Revenue collection during the first five months of FY26 fell short by Tk24,047 crore against a target of Tk173,023 crore.
Economist urges caution
Professor Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue, said it is normal for the government to supply funds in one area while borrowing in another.
"However, the scale of borrowing from the banking sector should not create distortions that could disadvantage private borrowers. As demand for private-sector loans rises, care must be taken to ensure fair access," he said.
