Govt’s local borrowing negative in Jul-Dec as ADP implementation slows

The government repaid more loans from banks and savings certificates than it borrowed in the first six months of the current fiscal 2023-24.

Economists believe the borrowing declined as a result of a significant reduction in public expenditure in the development budget and efforts to minimise money flow to the market to control inflation.

According to Bangladesh Bank data, the government's net borrowing from the country's banking sector was Tk7,846 crore negative as of 27 December from 1 July of 2023 although it has a target to borrow Tk1.32 lakh from the sector in FY24.

In the first six months of FY24, the government borrowed Tk27,952 crore from the commercial banks and repaid the Bangladesh Bank Tk35,789 crore in the period. The net government borrowing from the banking sector was Tk26,097 crore in the July-December period of 2022.

The MD of a private commercial bank told The Business Standard that the government's borrowing decreased as it significantly reduced all kinds of development expenditure ahead of the parliamentary elections that were held on 7 January.

As the government reduced development expenditure, it repaid more loans taken previously from the central bank, he said.

When the central bank extends loans to the government, it effectively injects new money into the economy, potentially driving up consumer prices and contributing to inflation, he said.

"As the government has been trying to contain surging inflation, it declined its borrowing from banks during the period," said the senior banker.

In the previous FY23, the government borrowed Tk1.24 lakh crore from the banking sector, with Tk98,826 crore borrowing from the central bank and Tk25,296 crore from the commercial banks.

A former finance secretary of the government, who preferred not to be named, told TBS that the government's borrowing from banks was low during the period as it wanted to spend less in the development budget ahead of the national elections.

"A 14% increase in tax revenue collection during the period helped the government depend less on the bank borrowing to meet its expenses," he said.  

He, however, said it is not very unusual that the government's development expenditure was less in the first half of a fiscal year. "It is very likely that the government expenditure will increase in the second half of the fiscal year which will eventually force it to borrow more from the banking source," the former finance secretary said.

Like from banks, the government's net borrowing from national savings certificates has also shown a negative trend. In the first five months of FY24, the government's net borrowing stood at a negative amount (-3858 crore taka) although the government set a target to collect Tk18,000 crore from the sector. The government's net borrowing from the sector was negative too in the previous FY23 (standing at -1610) crore taka).

The Implementation Monitoring and Evaluation Division has a target to spend Tk2.74 thousand crore for the implementation of ADP in FY24. However, in the first five months of FY24, Tk46 thousand crore or only 17% of the ADP was implemented.

A senior official of the Bangladesh Bank, while talking to TBS, also attributed the government's challenge to reduce surging inflation to its less borrowing from the banking sector.

"Recently, the central bank has raised the policy rate, one of the lending tools to banks, to 7.75%, a significant rise from 6% a year ago. Besides, banks have lifted the 9% cap on interest rates on loans. At present the interest rate of banks' loans is around 12% which further reduces the flow of money in the market," he explained.

The central bank wants to reduce inflation to 8% by June 2024. The latest updated data shows inflation stood at 9.49% in November. Besides, the inflation average for the last one year is 9.42%.

The head of the treasury department at a commercial bank told TBS, "Another significant reason for the government to reduce borrowing from banks is the liquidity crisis faced by banks. Many banks are still unable to maintain the prescribed targets for "Cash Reserve Ratio" and "Statutory Liquidity Ratio" as set by the central bank."

Bankers say that the government's borrowing from the commercial banks could worsen the existing liquidity crisis in the banking sector.

The excess liquidity in the banking sector dropped to Tk1.6 lakh crore in October from Tk1.7 lakh crore in September.