Borrowing from banks doubles

The government borrowed a staggering amount from banks last fiscal year mainly due to the ongoing economic crisis brought on by the coronavirus pandemic, a development that is poised for a macroeconomic imbalance in the country.

The government's borrowing increased 109 percent year-on-year to Tk 72,246 crore in FY 2019-20, which is all-time high given a single year.

Revenue collection had faced sluggishness since the inception of last fiscal year, which also compelled the government to borrow heavily from banks.

The situation got much worse since April after the government enforced a nationwide shutdown to tackle the spread of the coronavirus.

Against the backdrop, the government borrowed Tk 29,020 crore from banks and non-banks in the last quarter of FY20 to meet its expenditure, according to data from the central bank.

The massive government borrowing from banks has already dealt a big blow to the private sector as lenders consistently showed a reluctant attitude towards disbursing loans to the arena, experts said.

The private sector credit growth stood at 8.86 percent in May, down from 12.16 percent a year ago, show BB data.

The government had initially set a borrowing target of 47,364 crore in its budget for fiscal 2019-20, but the poor revenue collection forced it to increase the ceiling to Tk 82,421 crore to meet the deficit financing.

The National Board of Revenue (NBR) logged Tk 188,500 crore in the July-May period of last fiscal year, down 2 percent from Tk 193,202 crore a year ago.

The NBR is yet to release the revenue generation data of FY20, but it is likely that the collection would be less than the previous year's receipt of Tk 223,892 crore.

The high borrowing will persistently continue this fiscal year as the government will be unable to fulfill the gigantic revenue target given the ongoing economic fallout, said Ahsan H Mansur, executive director of Policy Research Institute of Bangladesh.

The government should have taken required measures, including reforming the tax administration, process of tax collection, strengthening the automation system and amending the required laws, he said.

"The government is getting into a sinkhole due to its negligence in taking the timely initiatives," he said.

The country's private sector, which plays a pivotal role in generating employment, is now paying a price because of the high bank borrowing, said Mansur, also a former top official of the International Monetary Fund.

On the whole, banks mobilise nearly Tk 110,000 crore in deposits per year, of which nearly 80 percent will have to be given to the government in the form of loans as per the latest budgetary target for the government borrowing.

The government has set a bank borrowing target of Tk 84,980 crore for this fiscal year.

Banks will be also happy to provide the loans by way of investing their excess funds in treasury bills and bonds given the existing economic turmoil, said Mansur, who is the chairman of Brac Bank.

T-bills and bonds are considered government securities, which are used to borrow funds from both banks and non-banks.

The interest rate on the government tools traditionally ranges from six percent to nine percent.

The private sector is now going through a tough time due to the pandemic, so banks have adopted a go-slow policy to disburse loans to the arena, said Mansur.

The high government's bank borrowing has given a scope to invest their fund in the securities, which are highly risk-free, according to him.

Talking on the issue, Zahid Hussain, former lead economist of the World Bank's Dhaka office, said the public debt to GDP ratio has been on the rise in recent months, which will have a negative impact on the country's sovereign credit rating.

The ratio now stands at 40 percent, up 34 percent two years ago, he said.

If the government continues the high borrowing, the country's macroeconomic management rating of the global competitiveness index will be weaker in the days to come, he said.

The World Economic Forum prepares the report every year.

"Credit demand from private sector was also low last fiscal year. Despite the fact that banks had not lowered the interest rate on their lending products before April when the government imposed an interest rate cap of nine percent," Hussain said.

The government had also taken several initiatives last fiscal year to curb the high investment in savings certificates, which forced it to borrow more fund from the banking sources, according to him.

Meanwhile, Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said the economy may blast off after the second half of this fiscal year, which would create a huge credit demand for the private sector.

"The government should borrow major portion of its target from the central bank in order to give a breathing space to banks, such that they will provide the required loans to businesses," he said.

Last fiscal year, the government borrowed Tk 10,441.45 crore from the central bank and Tk 61,805 crore from commercial banks.

The outstanding government borrowing from the banking sources stood at 180,342 crore after the end of last fiscal year.