Interest rate on one-year treasury bill hit 12% for first time

Infographics: TBS

The interest rate of the one-year tenure treasury bill reached a record 12% for the first time on Monday (3 June) as the government has started to borrow at a high rate from banks to make money costlier to tame inflation.

However, the rising interest cost will intensify pressure on the budget deficit, raising payment burden for the government, experts said.

Besides, it will negatively impact banks' balance sheets because they are counting losses due to mark-to-market accounting against their investment in government instruments.

For instance, if a bank buys a bond at a Tk100 face value, a rise of Tk10 of the bond will cause loss for that bank as the face value will be Tk110. So, the bank has to book the asset counting Tk10 loss against the bond worth Tk110.

The interest rate for the most popular one-year bill was 7.75% a year back, according to Bangladesh Bank data. The interest rates of all kinds of bills and bonds rose to a minimum 11.30% to 12.55% in June, which was between 6.75% and 8.5% a year ago. 

When contacted, Mirza Elias Uddin Ahmed, managing director of Jamuna Bank, said the government has been borrowing at a higher rate to control inflation through curbing money supply in the private sector.

However, it will have a negative impact on both the government's budget deficit and banks' operating profit, he said.

It is because the rising interest rate of bills and bonds will increase payment burden for the government and banks will incur loss in their balance sheet due to mark-to-market calculation, explained the banker.

"Although the interest rate is rising, there is still demand for loans. So, it's not obvious that higher interest rates will help control inflation," he said.

He further said banks are also unwilling to lend in the private sector due to rising default loans. If banks park their money in government treasury bills and bonds instead of their core lending business, it will affect development.

The banker added that banks still have enough liquidity, but rising borrowing at higher interest rates will soon create a crunch. Despite rising interest rates, inflation has continued to climb, reaching 9.89% in May, the highest in seven months.

The interest rate on bills and bonds started to rise faster after abolishing the Six-month Moving Average Rate of Treasury bill (SMART) reference rate for determining lending rates mechanism in May.

Lending rates in most banks increased to nearly 13% after lifting SMART rate, according to market insiders when average call money rates above 9%.

A senior executive of the Bangladesh Bank, wishing not to be named, said government borrowing in the last two months went up due to higher payments for ADP (Annual Development Project) implementation.

As a result, interest rates on bills and bonds are rising, said the official. Moreover, after abolishing the controlled interest rate mechanism SMART, the interest rate is now free to go up.

Low revenue earning also prompted the government to borrow from the banking system, the central bank executive said.

In the first 10 months of the current fiscal year from July to April, government's revenue was 52% of the budget target, central bank data shows.