The government now wants to depend more on foreign loans to meet the deficit in the upcoming budget in a clear shift from the existing practice of borrowing from domestic sources, including the banking system.
High foreign loan inflow during the pandemic year has led to the change in the policy, prompting the government to set a high borrowing target from foreign sources, according to budget documents drafted by the finance ministry.
When the banking sector remains awash with excess liquidity, the low borrowing target from the banking system may ultimately benefit private sector borrowers helping them get loans at a low cost. On the other hand, small savers may be affected by dwindling deposit rates, say industry insiders.
The excess liquidity in the banking sector stood at Tk1.98 lakh crore in March as private sector credit growth remained sluggish at 8.79% in March, far below the monetary target of 14.8% set for the current fiscal year.
The government borrowing has already slowed during the pandemic year, causing a drastic fall in interest rates of government bonds and bills.
Low demand from the government prompted the central bank to suspend the auction of long term treasury bills and bonds in recent months.
The inflow of foreign funds has already crossed the monetary target set by the Bangladesh Bank as the government got foreign aid to manage the pandemic-led crisis.
In the upcoming budget for the fiscal 2021-2022, the government is planning to set the bank borrowing target at Tk76,748 crore, 6.2% down from the revised budget target for the current fiscal year, according to the budget draft prepared by the finance ministry.
The new target is 9% lower than the main budgetary ceiling.
In the new budget, the government will increase its finance dependency on foreign sources, slashing the bank borrowing target, which was the opposite in the current budget.
Earlier, the government had slashed its bank borrowing target in the fiscal 2017-18 due to high sale of savings certificates.
The target of foreign financing will be Tk97,680 crore in the new budget, 39.69% higher than the current budget target.
The government will set a high borrowing target from foreign sources as foreign loan inflow is already high during the pandemic year, the finance ministry mentioned in its budget draft.
The inflow of foreign funds already crossed the monetary policy target set by the Bangladesh Bank in February as the government got additional funding support from external sources to manage the pandemic crisis.
The foreign financing will meet up to 2.8% of the budget deficit for the upcoming budget.
The total budget deficit for the new budget has been projected to be Tk2.12 lakh crore which is 13.5% higher than the revised deficit of the current budget, according to the budget draft.
The government's shifting dependency on bank borrowing will keep the banking sector liquid, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
He said it will be good if the government borrows low as the banking sector needs to be liquid amid this uncertainty during the pandemic crisis.
Although demand in the private sector is still low, it may pick up anytime if confidence recovers.
Moreover, if import picks up and remittance inflow slows, liquidity will shrink fast, he pointed out.
The low bank borrowing of the government will benefit private sector borrowers as they will continue to get low-cost loans, he added.
Currently, most banks are offering loans at a 7% lending rate, which is far below the government fixed 9%.
But small depositors who are getting negative returns from their bank deposits will be affected for the time being, Mahbubur said.
The excess liquidity in the banking sector stood at Tk1.98 lakh crore in March as private sector credit growth remained sluggish at 8.79%, far below the monetary policy target of 14.8% set for the current fiscal year.
Soon after the single digit rate came into effect last year, banks were rushing to invest in government treasury bills and bonds. As yields of long-term bills and bonds were above 9%, banks preferred risk-free investment in these instruments instead of lending to the private sector. Higher borrowing of the government from the banking system pushed the yield rate up.
However, the situation has changed this year as the interest rate of T-bills and T-bonds fell drastically amid the government's low borrowing.
Some banks are offering loans even at around 5% lending rate.
Low demand from the government prompted the central bank to suspend the auction of long-term treasury bills and bonds in recent months.
The interest rate of short term treasury bills and bonds has come down to below 1% from above 6% last year, according to central bank data.
When private sector credit demand remained sluggish, the low government borrowing target in the new budget will further reduce the interest rates of government bonds and bills, said Jamuna Bank Managing Director and CEO Mirza Elias Uddin Ahmed.
The low interest rate on government bonds and bills will severely affect banks' profits as banks keep their SLR portion invested into those investment tools, he said.
Statutory Liquidity Ratio or the SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash with the central bank.
The government's overall borrowing from the banking system is currently negative, which means there is no borrowing.
"The government borrowing from banks remained deliberately slow in the current fiscal year mainly due to rapid growth of borrowing from the non-bank sources, especially through the issuance of national savings certificates," said the Bangladesh Bank in its review report on government borrowing.
In the new budget, the government will set a borrowing target from savings certificates at Tk38,374 crore, 7.43% higher from the ceiling of the current fiscal year.