Budget 2024: Domestic bank borrowing to finance 17% of record deficit

The pre-election budget of Tk 7.61 trillion runs a deficit that is 5.2 per cent of the GDP

As the government unveiled a Tk 7.61 trillion spending plan for the upcoming fiscal year to get the ball rolling on the 'Smart Bangladesh' initiative, more than 17 percent of the record budget deficit will have to be offset by loans amid looming fears of recession.

Finance Minister AHM Mustafa Kamal tabled the pre-election budget, the biggest in the country's history, in parliament on Thursday.

With a strong emphasis on reining in inflation, the minister plans to mobilise Tk 5.04 trillion from revenue earnings in FY24, a 15 per cent increase from FY23.

But the budget runs a deficit of more than Tk 2.61 trillion, or 5.2 per cent of the GDP.

Historically, governments have sought to cap budget deficits at 5 per cent of the GDP. But the conventional 'red line' was crossed after the onset of the coronavirus pandemic as the government set the deficit-to-GDP ratio at 6.1 per cent in FY22 amid pressure to increase liquidity.

The gap was 5.5 per cent in the original budget for the outgoing year, but it was later revised down to 5.1 per cent.

If government expenditure exceeds its income, the shortfall has to be covered by borrowing. The government can offset the deficit by seeking foreign aid and loans, borrowing from the local banking sector, selling savings certificates to the public, and borrowing from the central bank.

And, the government is likely to borrow heavily this time, with loans set to account for around 34 per cent of its total budget.

To this end, Kamal revealed plans to borrow Tk 1.06 trillion from foreign sources including grants and Tk 1.55 from domestic sources.

In recent years, there has been an increase in borrowing from abroad in order to undertake major infrastructure projects. However, the government has to spend dollars from its forex reserves to pay interest on foreign loans.

But in the wake of the war in Ukraine, the heat on Bangladesh's forex reserves has intensified as the price of the US dollar soared in the world market.

Last year, the government adopted a policy of delaying financing for 'less urgent' projects as well as discouraging the import of luxury goods to protect the reserves.

The shift in emphasis to domestic sources for borrowing in this year's budget also points to a strategy to save dollars.

The government's domestic borrowings will tilt heavily towards the banking sector, from which it aims to raise Tk 1.32 trillion, or 17.37 per cent of the total expenditure.

When the amount of national debt increases, funds are injected into the economy from external sources, which in turn raises the risk of inflation. Moreover, the government has to pay interest on those loans.

In times of recession, the addition of liquidity in the form of loans can speed up the government's development initiatives, thereby kickstarting a flagging economy.

But Dr Zahid Hussain, a former lead economist at the World Bank's Dhaka office, has warned that the fiscal plan has been designed with a large deficit, which could aggravate the dollar crunch and increase inflation.

Noting that the inflow of dollars has slowed due to the lack of foreign funding, he stressed the need to cut the deficit, along with other unnecessary expenditures.

"Projects which will be financed domestically, but require imported raw materials, machinery and equipment should be avoided."

In light of the government's borrowing plans from domestic sources, the key question is whether Bangladesh Bank or commercial banks will provide the funds, according to Hussain.

However, if credit is drawn from the banking sector, it should not be facilitated by printing money, he said.

The central bank printed Tk 700 billion in new currency notes from July 2023 until now to maintain the credit flow. Hussain believes that the notes printed by the Bangladesh Bank are ‘high-powered money' that will only drive inflation.

However, Salehuddin Ahmed, a former governor of Bangladesh Bank, believes the government should completely steer clear of bank loans to implement the budget. Even if loans are taken out, the amounts should be low.

Commercial banks have been lending funds to the government at 7 per cent interest without any risks, but this is discouraging the private sector, according to him.

Instead of borrowing from banks to offset the deficit, he advised the government to turn to savings bonds.

Ahmed believes it would be far more beneficial to ordinary people if the interest on borrowing from savings bonds is spent on the country's economy.

"The interests paid in this sector will go to the middle class and the common people. So, the government can borrow from this sector.”

In the original spending plan for the outgoing fiscal year, the government had set a borrowing target of Tk 1.06 trillion from the banking sector. But the amount increased to Tk 1.15 trillion in the revised budget.