Meeting deficit financing: Govt borrowing from banks may go thru the roof

The government's target for borrowing from the banking system in the next fiscal year is set to surpass the Tk 1 lakh crore mark for the second consecutive year amid the twin difficulties of raging inflation and shrinking foreign reserves.

To meet the deficit financing, the target may exceed Tk 1.25 lakh crore in the coming budget for the 2023-24 fiscal year, according to finance ministry officials. In the current fiscal, it is Tk 1.06 lakh crore.

The target is expansionary and it may fuel inflation, Zahid Hussain, a former World Bank lead economist, told The Daily Star.

The inflation that has shot up to 9 percent has not subsided in the current fiscal due to the government's massive borrowing from the central bank, said Hussain.

From July 1 to May 10 of the current fiscal year, government borrowing from the banking system was Tk 78,559 crore, of which Tk 67,905 crore was from the central bank.

"If the aim is to reduce inflation from 9 percent to 6 percent, the government has to borrow less from the central bank," said Hussain.

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The budget for the next fiscal is estimated to be Tk 7.61 lakh crore, said finance ministry officials. The deficit in the budget will be below 5.5 percent of the GDP (Gross domestic product) and about 3 percent of the deficit will be met through domestic borrowing, they added.

The total domestic borrowing is likely to be over Tk 1.50 lakh crore, they said.

"If the aim is to reduce inflation from 9 percent to 6 percent, the government has to borrow less from the central bank."

— Economist Zahid Hussain

In addition to banking system, the government also borrows from non-banking domestic sources such as the savings instruments. Government borrowing from savings certificates is around Tk 40,000 crore in the current fiscal.

However, the government targets borrowing around Tk 25,000 crore from savings certificates in the next fiscal year, according to finance ministry officials.

The target has been lowered as sales of savings certificates have fallen due to imposition of new conditions, including submission of income tax return and a new ceiling of Tk 50 lakh for the total amount of money a person can invest.

According to Bangladesh Bank data, the net sale of savings certificates in nine months (from July 22 to March 23) has dropped by Tk 4,161 crore.

Net sale is calculated by deducting the payments of principal amounts from the gross sale.

Also, the IMF's $4.7 billion loan programme, approved earlier this year, has set a condition for reducing sales of savings certificates, said finance ministry officials.

That is why the government plans to borrow more money from banks, they said.

Zahid Hussain said the IMF condition is logical as the government expenditure on interest payment has grown out of proportion.

The government's interest payment may exceed Tk 1 lakh crore in the next fiscal. It is Tk 80,375 crore in the current fiscal.

The impact of the government's borrowing on the economy will largely depend on how it will borrow from the banking system, said Hussain.

"If the government borrows more from the central bank than the commercial banks, it will have an adverse impact on inflation. Besides, it will also chip away at the Bangladesh Bank initiatives to tackle the dollar crisis," he said.

He said that the inflationary pressure and strain on foreign reserves will decrease considerably if the government borrows more from the commercial banks.

"Withdrawing funding from low-priority projects in the next fiscal can be another way for the government to reduce government borrowing from banks," said Hussain.