Two factors have caused inflation to go up to a record high of 9.94% in May - the highest in 11 years. One is government borrowing from the central bank and the other is bank deposits declining, with more money outside the banks than in, economists believe.
Government bank borrowing from Bangladesh Bank has increased at the end of the fiscal year, indicating that money is streaming out of the central bank's vault. Again, due to a variety of issues, including inflation, bank deposits are declining. As a result, money held outside of banks is fast rising and when more money enters the market economy, inflationary pressures also rise.
Bangladesh Bank will announce the first monetary policy for the upcoming fiscal year on June 18, amid the rising inflation.
According to economists and bankers, inflation is rising due to increased import costs, which is worsened by the government's borrowing from the banking sector to cover its budget deficit.
Dr Ahsan H Mansur, Executive Director of Policy Research Institute of Bangladesh (PRI), told Dhaka Tribune that money outside of the banking system increased due to a lack of deposits and also because of loans the government took from the central bank.
Due to low-interest rates and inflation, people have been forced to reduce their bank deposits. On the other hand, in this fiscal year the government has taken a huge amount of bank loans - the money which has entered the market is now causing inflation to rise, he also added.
Regarding printing and money in the vault, the former IMF economist said the central bank gives one money by printing Taka from its vault, which is actually the same thing because this money from the vault was taken by the government and removed from the market earlier, which is now entering the market as government borrowing.
M Masrur Reaz, Chairman, Policy Exchange of Bangladesh, said that the increase in money circulation outside bank deposits could be attributed to three major factors. The rise in out-of-pocket expenditure because of inflation might force people to save less and withdraw more from their accounts.
On the other hand, the country observed Ramadan and Eid, during which traders and consumers withdraw enormous sums of money from banks for business and consumption.
The third aspect is that the local currency has devalued by more than 25% in the last year. It seems likely that many people will invest in US dollars in order to have higher returns.
Money outside the bank
In economic jargon, cash outside the banking system is described as legal tender in the hands of members of the public, which has increased in bulk in recent months in Bangladesh, as seen by the currencies in circulation.
According to the most recent Bangladesh Bank (BB) statistics, the amount of money stored outside the banking system increased by more than 11% Year On Year (YoY) in April 2023, reaching Tk2,63,000 crore. According to data, April volume is up by Tk8,705 crore over the previous month's Tk2,54,000 crore.
According to official figures, the amount of money withdrawn from banks reached Tk270,000 crore in December 2022.
Since then, it had declined to Tk263,000 crore, Tk257,000 crore and Tk254,000 crore in the following months of January, February and March respectively.
Government bank borrowing
According to central bank data, the government borrowed Tk13,015 crore from banks in May alone, far above the Tk7,663 crore borrowed in the previous ten months combined.
Its borrowing from the central bank stood at Tk71,610 crore at the end of May, compared to Tk2,146 crore at the same time in the last fiscal year.
Data shows that the government borrowed Tk92,288 crore from the banking system - the central bank and scheduled banks - in the first 11 months of the current fiscal year, accounting for 82.68% of the total target for the fiscal year (FY23).
The government's bank borrowing at this point in the previous fiscal year was merely Tk32,515 crore.
The government's bank borrowing target for FY23 was Tk1,11,608 crore, but for FY24 the government set a target of Tk132,395 crore from the banking system.
Earlier, in 2021 and 2022, the central bank absorbed excess liquidity from the banking system through seven-day and 14-day BB bills.
Then in 2022 and 2023, Bangladesh Bank started selling dollars because of the dollar crisis.
As a result, a huge amount of Taka is accumulated in Bangladesh Bank's vault, which is again coming to the market as the government's bank borrowing.
