Government borrowing from commercial banks surges 400% in fiscal 2023-24

The government repays Tk 60 billion instead of borrowing from central bank in the immediate past fiscal year

The government borrowed more than Tk 1 trillion from the commercial banking system in the just concluded fiscal year, almost five times the amount from the previous fiscal year.

According to data published by Bangladesh Bank on Wednesday, from July 2023 to June 2024, the government took as a loan roughly Tk 1.74 trillion from commercial banks. At the end of the previous fiscal year, this borrowing was Tk 218.19 billion.

However, in this fiscal year, instead of taking any loans from the central bank, the government repaid Tk 64.56 billion. As a result, the net borrowing of the government during this period stood at Tk 942.81 billion, which is less than the target for the last fiscal year. In the revised budget for that fiscal year, a net borrowing of Tk 1.56 trillion was stated, which has been questioned by an economist regarding its justification.

In the 2022-23 fiscal year, the government borrowed nearly Tk 980 billion from the central bank. Economists have argued that borrowing by printing money led to increased inflation, which is why the government did not prefer this method of borrowing.

As a result, in August of that fiscal year, the government began borrowing from commercial banks.

Economists say borrowing less than the target is good for the economy. But borrowing more from commercial banks will impact the private sector, which could be detrimental as entrepreneurs might find it difficult to obtain bank loans, which is not favourable for the economy.

Saiful Islam, acting spokesperson of Bangladesh Bank, told bdnews24.com: “Borrowing from commercial banks creates some pressure on the private sector. However, it is also necessary for the government to borrow to finance developmental activities.”

He emphasised the importance of analysing the actual demand for loans in the private sector, saying, “Many businesses have currently reduced their borrowing from banks.”

Jahid Hossain, a former economist at the Dhaka office of the World Bank, told bdnews24.com, "Borrowing from commercial banks is creating a certain level of liquidity pressure, raising the call money rate from 8.50 percent to 9.50 percent."

"Therefore, the impact of government borrowing was not felt as strongly in the last fiscal year," he said, noting that the private sector's demand for loans was low due to lower exports.

"Banks are choosing treasury bills and bonds as reliable investments because when the government takes money, it is safe and the interest rate is higher. The interest rate on treasury bills and bonds was not high before, but in the last one and a half to two years, the rates have reached their highest levels."

Sharing his thoughts with bdnews24.com, Ahsan H Mansur, executive director of the Policy Research Institute, or PRI, said: "It is good that the government has not borrowed from the central bank. However, it is also necessary to review why such a high bank borrowing target was set in the revised budget.

"The government has borrowed a lot from commercial banks. As a result, the private sector will be somewhat affected."

Mohammad Hatem, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association, or BKMEA, said: "The interest rate on bank loans is increasing, which is causing difficulties for businesses. The governor of Bangladesh Bank has assured that the interest rate on bank loans will not exceed 15 percent, but the current rates are higher, so many companies are not borrowing as much as they used to. Many are worried about making a profit while repaying loans at 14 percent interest.”

According to the central bank, the growth of bank loans to the private sector fell below 12 percent in 2023.

A report published in May showed that private sector credit growth was 10.35 percent, down from 9.9 percent in April, 10.49 percent in March and 9.96 percent in February.

In 2022, private sector growth was between 13 and 14 percent.

Conversations with central bank officials revealed that Bangladesh Bank sold $12.69 billion from foreign exchange reserves to banks in the last fiscal year. In return, the central bank received Tk 1.40 trillion. As a result, many banks are currently facing liquidity shortages.

Bangladesh Bank is also continuously providing liquidity support to commercial banks to offset shortages. According to data from the central bank, on Monday of this week, commercial banks borrowed Tk 172.75 billion from the central bank.

INVESTMENT IN TREASURY BILLS AND BONDS

The interest rate on government treasury bills is now 12 percent, and on bonds, it is 12.80 percent, which is a record high.

Mansur of PRI believes the government's borrowing is driving the interest rates on treasury bills and bonds.

According to the Bangladesh Bank report, investment in treasury bills was Tk 662 billion in June 2020, which has risen to Tk 1.41 trillion by the end of June 2024.

In 2020, investment in treasury bonds was Tk 2.83 trillion. By the end of June 2024, it has reached Tk 5.49 trillion.

Emranul Huq, managing director of Dhaka Bank, said: “Treasury bills and bonds are high-interest and risk-free sectors. Therefore, banks have now increased their investments in these sectors.”