Bangladesh Bank wants government to avoid banks for domestic borrowing

The central bank says the government needs to look to non-banking sources for domestic borrowing to reduce inflationary pressure

Under pressure over falling liquidity in the banking system and runaway inflation, the Bangladesh Bank has asked the government to prioritise non-banking sources of domestic borrowing.

The advice comes at a time when the flow of funds from the central bank to the government is increasing and the heightened cash flow in the market is fuelling inflation, putting more pressure on the finances of people struggling with high cost of living.

In its latest report on the government’s domestic borrowing, the central bank analysed the loans taken from banks, financial institutions and national savings certificates in the July-November period of FY23.

“Maybe the central bank doesn’t want bank loans to flow to a particular place. It wants the banks to achieve the private sector lending target,” said Professor Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue.

The government already started borrowing less than before from savings certificates due to high interest rates, he said.

Prof Mustafizur suggested the central bank itself can be a good source of domestic borrowing.

“In that case, the central bank will have to print more money. If the government can use this loan properly, it won’t affect inflation much.”

Economist Ahsan H Mansur, however, thinks the Bangladesh Bank is fuelling inflation by printing more money to lend the government.

“And increased government borrowing from the banks is creating a liquidity crisis in the banking system.”

The central bank report published last Sunday, however, lacks the mention of alternative domestic borrowing sources for the government.

Although central bank officials suggested savings certificates can still be a way out for the government from borrowing from the banking system, the International Monetary Fund wants the government to cut sales of the savings certificates to reduce borrowing costs.

The global lender said in its recent country report on Bangladesh’s approved request for $4.7 billion loans that reliance on saving certificates has resulted in high government borrowing costs.

Officials have shown a positive approach towards the IMF’s advice, which leaves the government fewer choices for borrowing.

Meanwhile, families under inflationary pressure are drawing more money from the banks than depositing while the trend of encashing savings certificates has increased.

The sales of large amounts of dollars to banks that were in supply crunch caused money to flow from the market to the central bank, creating a liquidity crunch. Now banks are borrowing from each other to meet the demand for cash.

The government set the domestic borrowing target for FY23 at Tk 1.46 trillion, including Tk 1.06 trillion from the banking system and Tk 350 billion from savings certificates.

Government domestic borrowing from the banking system increased during July-November of FY23 compared to the same period of FY22.

It borrowed Tk 320 billion, or 30 percent of the target, from the banking system in the July-November period, up from around 20 percent of the target in the same period last fiscal year.

On the other hand, net non-bank borrowing followed slower growth during July-November of FY23 compared to the same period of FY22 owing to reduced net sales of savings certificates, the central bank said in the report.

During July-November of FY23, net sales from the national savings schemes fell by Tk 16.16 billion against an increase of over Tk 10 billion in the same period last financial year.

“Considering the ongoing inflationary pressure in the economy, the government will have to attach a big emphasis on borrowing from the non-banking sources in the coming days,” the Bangladesh Bank said.