Govt warned against borrowing spree

The Bangladesh Bank in a letter has warned the government against excessive bank borrowing. It also recommended austerity and reducing unnecessary non-development expenditure.
According to central bank statistics, in the first four months of the current fiscal year, the government's borrowing from banking system increased by 1,221 percent against that of 2010-2011 and stood at Tk 11,600 crore till October 27.
It rose to Tk 14,905 crore on October 31 -- Tk 3,305 crore only in four days.
The government aimed at borrowing Tk 19,000 crore over the current FY but 78 percent of the target was reached only in four months.
If the trend continues the private sector might face crowding out effect putting GDP growth at risk, Bangladesh Bank said.
Besides, the central bank borrowing is fresh money which pushes up inflation further by increasing money supply in the market.
Against the backdrop, BB Governor Atiur Rahman sent the letter to Finance Minister AMA Muhith last week, said an official of the ministry.
The central bank board last month decided to make the government aware of the danger of excessive bank loans.
In the current FY, expenditure on the subsidy and social safety net increased significantly, while the ministry failed to utilise foreign aid and borrowed extra amount from banks, the letter read.
It also said the monetary policy target could not be achieved due to such borrowing.
The central bank also warned that because of “lumpy payment” by Bangladesh Petroleum Corporation (BPC) Bangladeshi taka is getting weaker against US dollar.
The letter citing exchange rate said at the end of June 2011 the exchange rate with dollar was Tk 74.23 but Tk 76.14 on October 27, 2011.
All this add to inflation and create instability in the macro-economy.
The central bank governor said the risk created in the economy could not be tackled by monetary policy alone; coordination between the fiscal policy and the monetary policy is urgently needed.
The central bank has made 7-point recommendations, including limiting subsidy and giving subsidy only where it is inevitable, taking initiative to expedite release of IMF extended credit facility and World Bank's project loans.
BB recommended initiative for getting foreign aid at low interest rate from other sources and steps to expedite release of the project aids in the pipeline.
The central bank also said Euro denominated bond and Pound Sterling denominated bond for expatriate Bangladeshis should be released to reduce dependency on bank loans.
The BB also suggested introducing sovereign bonds if necessary.