As the government aims to gear up its borrowing from the banking system in the Fiscal Year (FY) 2019-20, the private sector may feel the pinch as the banks are already in deep liquidity crisis.
After years of low borrowing from banks as a way of financing budget deficit, the proposed budget aims a 53.30 percent jump next year from this year’s actual loan uptake. The overall budget deficit will be Tk1,45,380 crore, which is 5 percent of GDP.
Bank borrowing would make up 32.57 percent or Tk47,364 crore of the total deficit. The next year’s deficit is projected to rise slightly to 5 percent from this year’s 4.9 percent.
But the banks are already running dry and private credit growth has stagnated, this would mean a crowding out effect for the private sector. As funds shrink further, interest rates would rise, leading to higher business cost.
With more money coming from the banks, the proposed budget sees lesser need for collecting money from sales of high interest bearing national savings certificates. The proposed budget envisions 18 percent or Tk27,000 crore of the deficit to be financed from sales of savings certificates.
However, in the ongoing fiscal year, the sale of savings certificates was high. Until May this year, some of it exceeded the target by over 66 percent.
By keeping the need for savings certificate sales low, the finance minister tried to keep debt repayment liability low in the next budget. But as history indicates, the government’s only recourse would be sale of savings certificates to finance its deficit, if it fails to borrow from the banks.
Foreign financing is projected to meet 44 percent of the deficit. This means the government has to garner 47 percent more foreign assistance from the pipeline.
But given the persisting problems with project implementation, such as slow procurement and frequent change in project directors, it is anybody’s guess whether such big push in offtake of foreign assistance is possible.
And if that does not occur, the government will have to fall back on either bank borrowing or on savings certificates again.
The government’s borrowing from banks already started to pick up in FY19 from the negative zone in FY18 due to a huge shortfall in revenue income and low offtake of foreign financing.
The bank borrowing jumped by 231.6 percent up to December of FY19, compared to the same period of the last year, Bangladesh Bank data shows.
When the banking sector is going through a liquidity crisis, such jump in government borrowing could cause difficulties for private sector businesses to get loans by pushing the interest rate up.
Despite government’s intense effort to bring down interest rates to a single digit, it went up to 10 percent plus in the past several months. The liquidity crisis is now evident through call money trend, which surged from 2.17 percent in July to 4.75 percent in April.
The excess liquidity of the banks fell sharply to 25.92 percent in March this year, from 29.13 percent in the same period in the last year.
The private sector investment stood at 23.4 percent of GDP in FY19, which was short of the targeted 25.1 percent set in the 7th five-year plan that ends this year.
Meanwhile, the Centre for Policy Dialogue (CPD) has said rising deficit amid low foreign financing and huge shortfall in revenue collection is putting pressure on the banking sector.
“The liquidity crunch in the banking sector reduces the scope for banking-borrowing as a source of deficit financing,” the report also said.
The think-tank apprehended that there are risks of financial crowding out of private borrowing amid increased government borrowing, which ultimately have adverse effects on private investment.