Government's bank borrowing in the first half of fiscal 2020-21 amounted to just 2.59% of full-year target, while private sector credit growth has cratered
In recent weeks, the private sector does not have much of a demand for loans from banks and neither does the government, in what can be viewed as a wholly uncomfortable situation the lenders find themselves in.
In the first six months of fiscal 2020-21, the government’s net borrowing from the banking system stood at Tk 2,203.85 crore, which was only 2.59 per cent of the target set for the full year, according to data from the central bank.
Last fiscal year, the government borrowed Tk 72,246 crore from the banking system.
With the view to steering the economy away from a steep downturn, the Bangladesh Bank rolled out a vastly expansionary monetary policy for fiscal 2020-21 in July last year, which flooded the market with liquidity.
At the end of November, excess liquidity in the banking sector stood at about Tk 1.95 lakh crore, which is the biggest in at least recent years.
That month, private sector credit growth stood at 8.2 per cent, which is the lowest in recent years and 6.6 percentage points lower than the 14.8 per cent target set for fiscal 2020-21, as businesses put their investment plans on hold amid the fear of a second wave of coronavirus cases.
In such a situation, the government’s borrowing from them would have helped. But that too has waned extraordinarily.
The government’s bank borrowing dropped this fiscal year mainly due to the record amount of foreign aid from the World Bank, Asian Development Bank (ADB) and the International Monetary Fund (IMF) to avert any economic fallout from the global coronavirus pandemic, said Zahid Hussain, a former lead economist at the World Bank’s Dhaka office.
The ADB on May 7 last year approved $500 million for Bangladesh as budget support for a project titled “Covid-19 Active Response and Expenditure Support Programme”.
Then on May 13, the Manilla-based lender approved an additional $100 million in the "Covid-19 Response Emergency Assistance Project" for health sector development.
The World Bank has quickly disbursed the previously promised $250 million in budget support to Bangladesh to help the country deal with the impact of the pandemic.
The agency also approved an additional $100 million for a health sector project.
Besides, the Asian Infrastructure Investment Bank (AIIB) provided $250 million in budget support to Bangladesh in the preceding fiscal year.
Meanwhile, the IMF has approved $732 million as emergency assistance to Bangladesh.
Lower development spending from the government’s fund amid the pandemic is another reason for the drop in bank borrowing, according to Hussain.
Between July and December of last year, the government borrowed Tk 33,594.88 crore from the banks and repaid Tk 31,391.03 crore.
As a result, the net borrowing stood at Tk 2,203.85 crore.
The government has many accounts with the BB and typically borrowed against treasury bills and bonds through those accounts if needed, said Habibur Rahman, executive director of the BB.
When the government’s money is deposited into these accounts, it is shown as being repaid, he added.
The government had not stopped or reduced borrowing from the banking system but changed its strategy, said Abdul Halim Chowdhury, managing director and chief executive officer of Pubali Bank.
“It is borrowing more from the central bank than from banks.”
The higher sales of national savings certificate this fiscal year in the face of low interest rates on deposits at banks is another reason for the drop in government bank borrowings.
Most of the banks are collecting deposits at less than 4 per cent while the government is offering up to 11.3 per cent interest against the national saving tools.
Sales of savings instruments soared more than three times from a year earlier to Tk 19,044.9 crore in the first five months of fiscal 2019-20.
The government has set a target of borrowing Tk 20,000 crore against savings certificates for fiscal 2020-21, meaning the amount would be reached less than halfway through the year.
Hussain, however, forecasts government’s bank borrowings to increase in the second half of the fiscal year as the state’s revenue generation is not picking up.
In the first four months of the fiscal, the National Board of Revenue collected Tk 66,555 crore, up just 1.1 per cent year-on-year. The amount is Tk 20,445 crore short of the target for the four months of fiscal 2020-21.