Government rides on banks to source deficit financing

With the banking sector already under pressure of implementing stimulus packages, the high bank borrowing target in the proposed budget for FY2020-21 will multiply the financing burden on it, depriving the private sector of funds.

The government set the bank borrowing target at Tk84,000 crore in the budget proposal placed on Thursday, which makes up for 44.72 percent of the total deficit financing.

Rest of the funds will come from sales of savings instruments and foreign financing.

This high dependency on banks is a result of the pandemic squeezing other financing sources, including the inflow of foreign financing and sales of savings instruments.

The flow of foreign financing has been reduced as a result of the slowdown in implementation of development projects after the novel coronavirus outbreak. Meanwhile, the sales of savings certificates in the current fiscal year has also slowed down due to the tightening of investment procedures, which largely supplied money for deficit financing in previous years.

On top of that, the pandemic has reduced the saving capacities of people due to massive job cuts.

This leaves banks as the only hope for deficit financing, ultimately leaving the private sector dry and posing a risk to employment generation.

On their part, the banks are in a comfortable position to provide deficit financing at this moment as the Bangladesh Bank has eased regulatory requirements to tackle the pandemic and keep the banking sector afloat with excess liquidity.

Banks have never before witnessed so much supply of money in such a short time.

In April, excess liquidity of banks surged by Tk24,000 crore and reached a whopping Tk113,000 crore.

For the first time in its history, the Bangladesh Bank also created new money worth Tk70,794 crore within a short time after the Covid-19 outbreak in March to provide liquidity support to banks.

The liquidity position of banks now stands at 6.5 percent of the GDP.

But while the banking sector sits over so much surplus cash, credit flow to the private sector hit its lowest growth at 8 percent in the last two months – March and April.

On the other hand, the government has been on a borrowing spree from banks during this period.

Its borrowing has already exceeded the fiscal target of April. In the first 10 months of the current fiscal year, the government borrowed around Tk54,000 crore against the fiscal target of Tk47,850 crore.

The government has set a target to borrow Tk20,000 crore from national savings tools for the 2020-21 fiscal year – which is 26 percent lower than the budget target for the current fiscal year. But the target is 68 percent higher than the revised target of FY2019-20.

For the current fiscal year (FY2019-20), the government targeted Tk30,000 crore in loans from non-banking sources, of which Tk27,000 crore was expected to come from national savings schemes.

But it had to cut the target from savings tools to Tk11,924 crore in the revised budget.

The total target from domestic non-banking sources was reduced to Tk14,924 crore.

People also lost interest in national savings tools for the first eight (Jul-Feb) months of the present fiscal year after the government tightened the procedure of investing in them. The government ended up receiving Tk9,665.88 crore in loans from the sector.

In the proposed budget for the upcoming fiscal year, Finance Minister AHM Mustafa Kamal has set the target for foreign financing at Tk88,824 crore, which is 46.74 percent of the deficit budget.

The net foreign loan target for the current fiscal year was set at Tk63,848 crore, and was later notched down to Tk52,709 crore in the revised budget.

Economic Relations Division officials said implementation of development projects has also slowed down from January, and was hobbled further by the shutdown in March.

Activities of partner development organisations have also slowed down since January due to the Covid-19 outbreak.