How Cenbank turns to major sources of funding for govt

Despite the austerity measures taken to contain expenditures, the government borrowing from the banking sector increased by nearly four times in the first seven months of the current fiscal, as rising interest bills inflated the public spending. 

The net government borrowing stood at Tk45,000 crore in July-January of the current fiscal year while the figure was only Tk12,000 crore in the same period of the last fiscal year, according to the Bangladesh Bank data.

However, the borrowing figure is still far below the target of Tk1.06 lakh crore set for current fiscal year.

The borrowing may rise in the last three months of the current fiscal year as revenue income and inflow from foreign sources are slowing down, said a senior executive of the Bangladesh Bank.

He said the government's borrowing is higher even after austerity measures as interest payment burden is rising against loans from both domestic and foreign sources due to liquidity shortage and the depreciation of taka.

In this situation, the Bangladesh Bank became the major source of financing for the government's budget expenditure now as it keeps printing taka to meet up government demand amid falling revenue collection, foreign loan inflow and rising interest payment burden.

In the first seven months of the current fiscal year, the central bank supplied Tk54,000 crore to the government through creating new money which is also known as devolvement process, according to the Bangladesh bank data.

The Bangladesh Bank did not create new money through development in the same period of the last fiscal year. 

In the development process, the Bangladesh Bank plays the role of lender for the government through buying treasury bills and bonds.

In this process, the Bangladesh Bank keeps creating fresh money as the government is unwilling to pay high interest against borrowing from commercial banks through treasury bills and bonds.

When the Bangladesh Bank supplies money through printing new taka it increases the money base creating future risk for hyperinflation which many developed countries including America are facing now for easy monetary policy, said a senior executive of the central bank.

He said at present money creation is not a problem as current inflation is not because of money supply but due to high import cost amid faster depreciation of taka and fuel price adjustment.

However, the monetary transmission mechanism does not work immediately and it has a lag effect which the country will feel when ongoing import driven inflation will cool down, he added.

At present, the highest interest rate for long term bonds above 15 years is 8.8%, central bank data shows.

If the government would borrow its entire demanded amount from commercial banks, the rate would pick up further, said a central bank official.

Bangladesh Bank is not providing money to the government at free of cost. The government borrows from the central bank at the lowest rate than any bank bid in auction for treasury bills and bonds, he said.

When the government needs money the Bangladesh Bank calls an auction to collect money from the commercial banks through selling treasury bills and bonds. For instance, if the auction is called for Tk1,500 crore, banks start to bid prices. The finance ministry verbally instructs the central bank about their desired interest rate. If the bidding price goes above that rate, the central bank buys the bills and bonds at the government's desired rate instead of selling to the commercial banks.

The reserve money growth increased to 9% in January this year from 7% growth in the same period of the last year due to creating fresh money.

However, reserve money growth is still far below the target of 14% set for the current fiscal year, central bank data shows.

The growth of net foreign assets became negative 17% in January this year which was positive 2.47% in the same period of the last fiscal year. The negative growth of foreign assets was because of slowdown in foreign loan inflow and the central bank having to sell dollars from the reserve.

However, domestic asset growth increased by 315% in January this year compared to 32% growth in the same period of the last year. This was because the central bank printed new money against government treasury bills and bonds.

The government borrowed only Tk1,865 crore from commercial banks in July to January of the current fiscal year when the borrowing figure was Tk20,000 crore in the same period of the previous fiscal year, central bank data shows.     

The devaluation of taka against the US dollar, increases in global interest rates, and rise in interest rates on treasury bonds and other related factors are expected to lead to a 27% rise in the interest payment burden next fiscal year, according to a finance ministry estimate.

On the other hand, interest payments will rise above Tk1,00,000 crore in the forthcoming budget from Tk79,530 crore this year, according to the documents.

As such, the government's expenditure on interest payments will see almost a three-fold hike in FY24 when compared to Tk35,691 crore in FY17. In FY22, the figure was Tk68,213.

The downward trend in revenue collection that began in November last year continues with collection growth falling as low as 3.07% this February, sliding by more than a percentage point from 4.91% in January.