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Dhaka Tribune

Deficit financing: Higher bank borrowing to jeopardize the sector

According to the Bangladesh Bank (BB) data, private sector credit growth plunged to 8.82% in April

Update : 12 Jun 2020, 10:49 PM

The government’s plan to depend highly on bank borrowings to manage the budget deficit will leave an adverse impact on the banking sector, experts say.

With a 6% deficit projected, Finance Minister AHM Mustafa Kamal on Thursday presented a proposed budget of Tk568,000 crore for 2020-21 fiscal year.

Kamal broke the traditional golden rule of a 5% deficit in a bid to meet the extra burden of funds caused by the Covid-19 pandemic, which halted the economic activities of the country.

In the wake of the countrywide shutdown, tens of thousands of people lost their jobs and fell under the poverty line, posing a threat to the government’s poverty alleviation success in the last decade.

To feed these people and rescue the economy, the government has already announced bailout packages and in the budget, it further offered a fund of Tk10,000 crore to fulfil emergency requirements to tackle the Covid-19 pandemic.

In the given context, the proposed budget estimates a deficit of Tk190,000 crore, of which 44.7% or Tk84,980 crore is to be borrowed from the banking sector which is already facing pressure to disburse money under the bailout packages.    

Out of the total deficit, Tk80,017 crore will be financed from external sources, while Tk109,983 crore from domestic sources. Of the domestic sources, Tk84,983 crore will come from the banking system and Tk25,000 crore from savings certificates and other non-bank sources.

The higher borrowing target raised the question of whether the ailing and vulnerable banking sector has the ability to provide the fund, or what will happen if it is done.

The Covid-19 crisis already squeezed the availability of funds as depositors withdrew money from banks, while the new deposits stopped as people’s income dropped due to the pandemic.

“The capacity of banks will depend on the country’s economic recovery from the present situation and the overall business activities. On the other hand, the availability of funds depends also on the investment recovery and disbursement,” Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank told Dhaka Tribune. 

So, there will be pressure on the banking sector as the government has set a target of 8.2% GDP and attaining this will keep the economy vibrant. To keep the economy active, banks have to play a role to provide credit support, said the banker.

On top of that, Advanced Deposit Ratio (ADR) will be under pressure as people are withdrawing money while new deposits are not being made due to income fall, said Rahman. 

In the given situation, it may squeeze cash flow to the private sector, he added.  

One of the multiple impacts of high bank borrowing by the government to meet a budget deficit is that it will deprive the private sector of credit.

“The present status of the banking sector is not comfortable and taking such a huge amount from the ailing banking sector will further reduce the credit flow to the private sector. It will be a big blow for the sector,” Ahsan H Mansur, chairperson of Brac Bank told Dhaka Tribune.

To attain 8.2% GDP growth, the government needs 18% to 20% private credit growth, where in reality it is down to 8%, which is not a good sign for the economy, said Ahsan, also an executive director at Policy Research Institute.

According to the Bangladesh Bank (BB) data, private sector credit growth plunged to 8.82% in April.

Meanwhile, another economist opined that the higher borrowing from the banking sector would jeopardize the banking sector.

“In the present scenario of the banking sector, government borrowing of about Tk85,000 crore will jeopardize the sector. Private sector people will face trouble in getting loans,” AB Mirza Azizul Islam, a former advisor to the caretaker government told Dhaka Tribune.

The sector is already in a dire state marred by the skyrocketing non-performing loans and irregularities, said the economist.

Now, the question is how to meet the deficit financing target. Economists are suggesting to look at the external sources.

“Beyond the domestic sources, the government should seek loans from the external sources such as World Bank, IMF, and ADB as Bangladesh currently enjoys a robust debt sustainability index as the public-debt-to-GDP ratio is around 34%,” Khondaker Golam Moazzem, research director of CPD told Dhaka Tribune.

On top of that, Bangladesh should take advantage of the decision of the G20 to provide low-income countries with funds at zero or low interest to combat Covid-19 pandemic, he suggested.

Gross foreign aid requirement will be around $11.1 billion and the current commitments in view of Covid-19 may not be enough.

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