Govt eyes Tk1,12,000cr bank borrowing to bridge budget gap
Economists, however, have cautioned that such heavy bank borrowing by the government risks crowding out private sector credit, potentially weighing on broader economic activity.
The government plans to borrow Tk1,12,000 crore from the banking sector, the primary funding avenue, in FY2026–27 to cover a ballooning budget deficit, raising concerns among economists over its potential drag on private sector credit.
Economists, however, have cautioned that such heavy bank borrowing by the government risks crowding out private sector credit, potentially weighing on broader economic activity.
According to the Ministry of Finance, the government plans to formulate a budget of approximately Tk9,38000 crore for FY2026–27. The total deficit and financing requirement under this budget is projected to reach Tk2,43, 000 crore equivalent to 3.6% of GDP.
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In the previous FY2025–26, the initial bank borrowing target was set at Tk1,04,000 crore, which was later revised upward to Tk1,18,000 crore in the revised budget.
Economists note that sluggish private sector credit demand, driven by high inflation and an ongoing energy crisis, has allowed banks to lend to the government without much friction for now. But if conditions improve and private sector appetite for credit picks up, a direct competition for funds between the government and businesses could emerge.
Earlier in the FY2025–26, the government's initial bank borrowing target stood at Tk1,04,000 crore, which was later revised upward to Tk1,18,000 crore.
Speaking to TBS, Executive Director of the Centre for Policy Dialogue (CPD) Fahmida Khatun said the government's heavy dependence on bank borrowing to finance its deficit reflects the failure to achieve a meaningful improvement in the Tax-to-GDP ratio.
"The government says the budget will be investment-friendly, but if government borrowing demand remains high at the same time, a crowding out situation could arise, pushing up borrowing costs for private entrepreneurs," she warned.
She also stressed that easing pressure on the banking sector would require the government to step up tax collection and seek concessional loans from external sources, while ensuring accountability and productive deployment of foreign borrowing.
Sohail R K Hussain, managing director of Bank Asia PLC, said contractionary monetary policy in FY2025–26 helped stabilise the exchange rate and partially rebuild foreign exchange reserves, but a shortfall in revenue collection drove a sharp increase in government borrowing from banks.
"In the past, weak private sector credit demand kept crowding-out risks at bay. But if business demand picks up under the new government, this could become a significant challenge," he said.
