To cover the huge budget deficit, the government’s domestic borrowing is on the rise. Dependency on the banking sector, the main source of internal credit, tripled in the recently concluded fiscal year.
The sale of savings certificates, which is another source of government borrowing, decreased more than before due to tough conditions. This pressure on the central bank, which is obliged to give the government money at will, has increased.
Data released from the Bangladesh Bank (BB) shows that the government’s net borrowing was Tk72,749.52 crore in FY22. Of this figure, Tk41,345.62 crore came from scheduled banks and Tk31,403.90 crore from the central bank.
However in FY21, the government did not borrow from Bangladesh Bank, instead, it paid back Tk19,811 crore to the central bank.
Zahid Hussain, former lead economist of the World Bank Dhaka office pointed out that loans taken from the Bangladesh Bank are like printing money, and such a move increases inflation.
“Government borrowing from BB is like printing new notes in many cases. Because the central bank is obliged to give currency whenever the government asks for it. But currently, the central bank is supporting the US dollar in the market to tackle the ongoing crisis, as the liquidity of banks has decreased. Therefore, loans taken from Bangladesh Bank by the government could not affect inflation.”
“Had the banks not been in a liquidity crisis due to the dollar shortage, inflation would have been higher,” he added.
Data analysis shows that in the just concluded FY22, the government borrowed 83.34% of the revised target for borrowing from the country’s banking sector.
In the FY22 budget, the Finance Ministry had set a borrowing target of Tk76,452 crore from the banking sector, which was later revised to Tk87,287 crore to meet the country’s budget deficit.
However, this borrowing figure is around three times higher compared to FY21 which was Tk 24,292 crore.
Between June 30 2021 and June 30, 2022, the government also borrowed Tk7,015 crore from non-banking sources through a net issuance of treasury bills (T-bills) and bonds.
During the aforementioned period, the government had borrowed a total of Tk79,765 crore from domestic sources, excluding net sales of NSCs according to the central bank report.
In the last FY, the revised budget deficit was Tk2,04,500 crore, which was 5.1% of the gross domestic product (GDP). The deficit target was Tk2,14,681 crore and 6.2% of GDP in the proposed budget for FY22.
The actual budget deficit was Tk1,31,495 crore in FY21, which was 3.7% of the GDP.
Besides, the sales of saving certificates declined by half in the July to May period of FY22, compared to the same period of the previous year. the savings certificate sales were Tk18,157 crore in July-May of FY22, which was Tk37,386 crore in the same period of FY21.
For the current FY, the government has set a Tk1,06,334 crore target for bank borrowing, which is 2.4% of the GDP.
Economists do not look favourably on borrowing large sums of money from government banks at this high time of inflation. Ahsan H Mansur, executive director at Policy Research Institute (PRI) said: “Deposit growth is not good at present. It does not look like it is going to be good in the next fiscal year either.”
“People's savings are declining owing to rising inflation, which may continue next year. In this situation, if the government borrows so much in the new fiscal year, the private sector's credit flow may be disrupted.”
