Govt's bank borrowing decreases in August

The government's borrowing from the banking sector decreased in August as implementation of the Annual Development Programme (ADP) is yet to start in full swing at the beginning of the new fiscal year.

According to central bank data, the government borrowed Tk3,510 crore from the banking sector in August last year, which was Tk540 crore in August this year, meaning the government has reduced borrowing by 85% compared to the same month last year.

In the first two months (July and August) of FY24, the government has repaid Tk3,283 crore to the banking sector instead of borrowing. The government's net borrowing from the banking sector stood at Tk3.90 lakh crore at the end of August, data shows.

According to a central bank report, in August, the government borrowed Tk13,274 crore from commercial banks mainly through treasury bills, and repaid Tk12,733 crore to the central bank, which could mean that the government is borrowing from the commercial banks and repaying the central bank.

In the new fiscal year, the government's borrowing from public and private commercial banks has increased. A total of Tk18,800 crore has been borrowed from commercial banks in July and August.

Economists said increased government borrowing from commercial banks could further fuel inflation as the money supply to the private sector decreases.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told The Business Standard, "The government is mainly borrowing through treasury bills. Instead of lending to the private sector, banks have also increased investment in treasury bills as it offers better returns and safety."

He also said the demand for loans in the private sector has decreased compared to earlier due to the decreases in the opening of import letters of credit (LCs).

Another bank MD told TBS, "One of the reasons for investing in treasury bills is the high-interest rate. Now we are getting 8-9% interest against the bills. A private sector loan may fetch an interest rate of slightly more than 10%, but there is some risk involved. But there is no risk in lending to the government."

Salehuddin Ahmed, former governor of the Bangladesh Bank, said, "If the government takes loans from commercial banks, the amount of available funds for the private sector decreases. Already our economy is going through various crises including a liquidity crisis and a fall in deposits. The government borrowing more from the banks now is not a very good decision."

The former governor said, "Ahead of elections, banks are investing in treasury bills to avoid pressure on risky loan disbursements and for safe investment. Of course, lending in this way is beneficial for the banks. However, the main function of banks is to provide loans to the private sector. Instead of doing that they are lending to the government as a safe investment." Banks are favouring some clients in lending to the private sector, he added.

A central bank official, on condition of anonymity, said borrowing from commercial banks and repaying the central bank reduces the money supply in the economy. Due to the sale of dollars from the reserve, a lot of money is going to the vaults of the central bank every day.

The sale of $13.58 billion from reserves in the last fiscal year resulted in Tk1.14 lakh crore being deposited in the central bank's vaults from the market. The central bank sold more than $2 billion in July and August which withdrew Tk22,000 crore from the economy, he said.

The central bank itself had to print about Tk5,200 crore in new treasury bills and bonds purchased last July and August. The central bank calls this Net Devolvement. Earlier, about Tk78,140 crore was printed in FY23, which ended last June.

According to economists, when money is printed and released into the market, it fuels inflation. Inflation is currently increasing due to the printing of a lot of money in the last year. This debt reduction by the government will not be able to tame inflation much.

In the monetary policy of the current financial year which began on 1 July, the central bank has targeted to keep inflation at 6%. 

While global prices for staple foodstuffs hit a two-year low in August, Bangladesh experienced a staggering 12.54% food inflation that month, the highest in 13 years. As for the overall inflation rate increasing slightly to 9.92% in August from 9.69% in July indicates the prices for goods and services experienced an upward trend.

Pointing out that the government's move to take loans from commercial banks will not be very effective in reducing inflation, former governor of the Bangladesh Bank Salehuddin Ahmed said, "If loans in the private sector decrease, production will decrease and new employment will not be created. Loans taken by the government are not spent on the productive sector. This will further fuel inflation."

The government has set a loan target of Tk1,32,395 crore from the banking sector to meet the deficit of the FY24 budget.

In FY23, the government had targeted borrowing of Tk1,06,334 crore from the banking sector but had to borrow Tk1,19,275 crore at the end of the fiscal year as expenditure increased.