Government plans to borrow Tk 1.12tn from banks to meet budget deficit

Higher government borrowing from banks may reduce private sector credit and production

The government plans to borrow Tk 1.12 trillion from the banking system in the new fiscal year, equivalent to 1.64 percent of total GDP.

In the outgoing fiscal year, the original budget set the borrowing target from this sector at Tk 1.04 trillion, which was later revised upward to Tk 1.18 trillion, which means the new target is Tk 80 billion higher than the original budget of fiscal year 2025-26, but Tk 60 billion lower than the revised estimate.

Finance Minister Amir Khosru Mahmud Chowdhury presented the Tk 9.38 trillion budget for the 2026-27 fiscal year in parliament on Thursday.

He expects Tk 6.95 trillion in revenue, leaving an overall deficit of Tk 2.43 trillion, or 3.6 percent of GDP.

To finance this gap, the government plans to borrow Tk 1.27 trillion from domestic sources, equal to 1.86 percent of GDP.

Of this amount, Tk 1.12 trillion will come from banks, Tk 85 billion from savings certificates, and Tk 150 billion from non-bank financial institutions.

In the 2025-26 fiscal year, domestic borrowing was originally set at Tk 1.25 trillion and later revised to Tk 1.37 trillion.

The government also plans to borrow Tk 1.56 trillion from foreign sources to cover the deficit, equal to 2.28 percent of GDP.

In the previous fiscal year, foreign loans were set at Tk 1.35 trillion in the original budget and later reduced to Tk 950 billion in the revised estimate.

When the interim government came to power, it reduced the amount of bank loans to control inflation, bring discipline to the financial sector and reduce government spending.

However, the amount of government loans from the banking system increased near the end.

In the 2024-25 fiscal year, the government borrowed a total of Tk 1.14 trillion from banks.

The latest data from Bangladesh Bank says that the government borrowed Tk 1.12 trillion from the banking system over the 11 months of the outgoing fiscal year.

Economists say that if the government borrows more from the banking sector, entrepreneurs and businessmen in the private sector get fewer loans, reducing the country's production.

According to Bangladesh Bank data, the growth of credit flow to the private sector, one of the main regulators of investment growth in the country, has fallen to the lowest point in the history of Bangladesh at 4.72 percent.

The total loans disbursed by banks to the private sector stood at Tk 18.54 trillion at the end of March, while the figure was Tk 17.19 trillion in March 2025.

This indicates that bank lending to the private sector grew by 4.72 percent in March this year compared with the same period last year.

However, stakeholders say that the real growth is negative when interest rates are taken into account, as private-sector credit growth is calculated including interest adjustments.

In March 2025, banks disbursed loans at an average interest rate of 11.96 percent. The average interest rate on deposits was 6.24 percent, and the average spread between loan and deposit interest rates was 5.73 percent.

A Bangladesh Bank official said that loan balances are calculated with interest. As a result, even if actual lending does not increase, the addition of interest can still raise the overall balance slightly.

“The 4.72 percent growth in private sector credit is actually the lowest in the country’s history. There has never been such low growth before,” the official said.

Even during the investment slowdown caused by the COVID-19 pandemic in 2020, private sector credit growth remained above 7.5 percent in June, the final month of the 2020-21 fiscal year.

The monetary policy for the second half of the 2025-26 fiscal year (January–June) set a target of 8.50 percent private-sector credit growth, while actual growth stood at 4.72 percent up to March.

Meanwhile, the central bank has tightened private credit by raising interest rates to control inflation, although the expected benefits have not been observed.

According to the Bangladesh Bureau of Statistics (BBS), overall inflation stood at 9.42 percent on a point-to-point basis in May.

The decline in private sector credit growth indicates reduced investment in the business sector.

It also suggests a slowdown in new industrial setups and expansion, which may ultimately affect investment and employment.