Govt can’t stop borrowing from banks

The government's borrowing from the banking sector has escalated in recent days on the back of a revenue shortfall due to a collapse in economic activities from the coronavirus-induced protracted shutdown.

Until May 12, the government borrowed Tk 78,300 crore, which has already surpassed its revised full-year bank borrowing target of Tk 72,953 crore, according to provisional data from the central bank.

The government had initially set a borrowing target of 47,364 crore in its fiscal budget for 2019-20, but it later revised the ceiling.

The ongoing tempest on the economy has mainly forced the government to borrow more money from the banking sector, said a Bangladesh Bank official requesting anonymity.

The central bank now provides a good portion of the borrowing by using its reserve or high-powered money as banks are unable to provide loans to the government due to their liquidity crunch.

Such high-powered money usually creates inflation during a normal situation, but there is little risk of inflationary pressure right now, said Zahid Hussain, former lead economist of the World Bank's Dhaka office.

Almost all economic activities have been brought to a halt since the last week of March when the government declared a countrywide shutdown.

So, commoners and businesses may not keep spending as before, meaning the multiplier effect of the new broad money may not be as much.

Another reason for the spike in government borrowing from the banking sector is the implementation of the massive stimulus packages amounting Tk 95,619 crore announced by the prime minister to soften the blow of the global pandemic.

The central bank will have to release a large amount of reserve money to help the government tackle the deficit financing and implement the stimulus packages in tandem, according to Hussain.

This move is not unusual at present: the central banks of other nations are providing reserve money to the government with the view to giving relief to their commercial banks.

For instance, the Bank of England, the UK's central bank, had to embrace the monetary financing of government to fund the immediate cost of fighting coronavirus.

The BoE has agreed to a Treasury demand to directly finance the state's spending needs temporarily. The move allows the government to bypass the bond market to borrow from the central bank until the COVID-19 pandemic subsides.

If the reserve money is not used properly in the productive sectors, the country may face inflationary pressure or mismatch in the balance payments in the long run, Hussain said.

The increasing trend of the reserve money even may pose a threat to the stability of the overall financial sector unless the authority concerned gives the utmost attention to using the fund, he added.

The ongoing recession has also brought down the net investment in the national savings tools, which also compelled the government to borrow more from the central bank.

Net investment in the savings tools decreased 75.24 per cent year-on-year to Tk 7,643 crore in the first seven months of the fiscal year.

Investment in the savings tools initially declined due to the strict rules and regulation imposed by the government.

Although the statement of the latest investment for the savings tools could not be prepared due to the ongoing shutdown, the amount appears to have declined because of the economic crisis, said a central bank official.

The revenue shortfall is another reason behind the escalation of government borrowing.

In the first nine months of the fiscal year, the tax authority logged in Tk 165,007 crore, showed the preliminary data of the National Board of Revenue (NBR).

The NBR sat on a shortfall of Tk 56,000 crore until March from its target of Tk 221,145 crore and the task of narrowing down the gap is likely to widen in the months to come as the collapse of economic activities will hit overall collection further.

The government has set a borrowing target of Tk 7,000 crore from banking sources this month, but the figure increased to Tk 10,000 crore on May 12.

The amount will only increase as two more auctions for government borrowing will be held in the rest of the month, said a central bank official.

A major portion of the funds will have to be provided by the central bank to the government in the form of reserve money in the days ahead.

Of the total borrowing amount of this year, the government has taken Tk 6,000 crore from the central bank by using the way and means advances.

Besides, it has taken an additional amount of Tk 2,900 crore from the BB by using the overdraft drawing facility.