The government’s reliance on domestic banking channels to finance its budget deficit has significantly exceeded official projections.
Recent data from Bangladesh Bank reveals that during the newly concluded fiscal year (FY26), the government borrowed a net Tk131,129 crore directly from commercial banks—surpassing both the initial fiscal targets and later revised limits set by the Ministry of Finance.
This rapid build-up of public debt has pushed the state's total outstanding bank liabilities to an all-time high.
Economists warn that this heavy borrowing risks crowding out private sector investment and complicating inflation management for the central bank.
The target for public bank borrowing was progressively adjusted throughout the fiscal year as tax revenue collections fell short of projections. However, final expenditures consistently outpaced these revised limits.
Treasury sources indicate that the shortfall in domestic resource mobilization, paired with rising debt-servicing costs on existing public liabilities, left fiscal planners with few alternatives but to rely heavily on commercial banking liquidity.
This latest round of borrowing has accelerated the growth of the government's cumulative domestic debt portfolio.
Over the course of just 12 months, the state's total outstanding banking liabilities expanded by nearly 24%.
This rapid accumulation of short- and long-term treasury instruments has fundamentally reshaped the balance sheets of domestic commercial banks, with a larger share of their asset portfolios now tied up in sovereign paper rather than private credit.
Monetary policy analysts point out that while borrowing from commercial banks avoids the direct inflationary pressures associated with "money creation" (printing currency via the central bank), it introduces other clear challenges to the wider financial ecosystem:
- The credit squeeze: As commercial banks channel significant liquidity into low-risk government treasury bills and bonds, the pool of available capital for private businesses shrinks. This dynamic typically drives up lending rates and limits credit for private industrial expansion.
- Banking sector fragility: With significant portions of commercial bank capital tied up in long-term government debt, the financial sector's flexibility to manage liquidity shocks or support private market credit demands becomes constrained.
Independent macroeconomists stress that continuing along this high-borrowing trajectory is unsustainable for a developing economy approaching LDC graduation.
They emphasize that the government cannot continue to look to commercial banks as a primary, unrestricted source of funding for fiscal shortfalls.
To address these imbalances, policy specialists suggest implementing deep structural reforms.
These include automating and expanding the domestic tax base to reduce deficit sizes, cutting non-essential administrative spending, and diversifying financing sources by accessing international capital markets or utilizing non-inflationary expatriate bond programs.
The final data for FY26 serves as a clear indicator of the ongoing mismatch between state revenue generation and public expenditure.
Relying on commercial bank credit to bridge this gap has provided short-term fiscal relief, but it places a heavy burden on the domestic financial system.
