Govt to rely more on banks to finance budget deficit

The government is going to rely heavily on the banking system to finance the budget deficit for the next fiscal year — a move that analysts say could potentially crowd out the private sector from the loan market and eventually slow investment growth.

Finance Minister AHM Mustafa Kamal is set to place the Tk7.60 lakh crore budget for FY24 in parliament on 1 June. 

The budget deficit is estimated to be Tk2.60 lakh crore, of which Tk 1.36 lakh crore is targeted to be sourced from the banking system, according to a finance ministry document obtained by The Business Standard. 

According to Finance Division officials, the government will borrow 28% more than the target of the current fiscal year from the banking system to meet the budget deficit in the next financial year. 

The bank borrowing target for the current financial year is Tk1,06,334 crore. In April, the government borrowed Tk29,697 crore from the banking system, the highest in a single month in the fiscal year so far. 

According to the Bangladesh Bank, from July to April in FY23, the government borrowed a total of Tk82,057 crore from the banking system, and around 80% of this fund was provided by the central bank.

Finance division officials said the government has to increase bank borrowing due to lower revenue collection and increased demand for funds for project implementation and public procurements. 

The Finance Division estimates that the government's interest expenditure on savings certificates may decline by a third. 

Economists see it as a disincentive for small savers. 

The sale of savings certificates in the next financial year might be curbed further as the Finance Division expects around Tk24,000 crore from savings instruments, which is 31% less from this fiscal's target.

The estimated budget deficit of FY24 will be 5.2% of the gross domestic product (GDP) and equal to the total allocation in the annual development programme (ADP) for the next fiscal year.

Salehuddin Ahmed, the former governor of the Bangladesh Bank, told TBS that the deficit projection seems acceptable, but not desirable given the growing trend in internal and external debts. 

If waste could be reduced, the amount of borrowing could be minimised, he said.

"Bangladesh Bank is giving loans to the government. Deposits in banks have declined. When businesses need credit, more government borrowing from banks will reduce the flow of credit to the private sector," the former central bank governor said.

Criticising the initiative to reduce borrowing from savings certificates, he said, "Common people keep money in banks and savings instruments. Bureaucrats are reducing the interest on savings certificates with the old so-called argument of reducing the government's interest expenditure, which is unacceptable considering the overall development policy."

Mahbub Ahmed, former senior secretary of the Finance Division, told TBS that if the government borrows Tk1.36 lakh crore from banks, there is a risk that the 33% growth expected in the private sector investment in the next financial year will not be met.
Instead of deficit financing from domestic sources, emphasis should be given to increasing low-interest financing from foreign sources, Mahbub Ahmed said. 

To meet the budget deficit of the next fiscal year, a target of borrowing around Tk1 lakh crore from foreign sources may be set, which is only Tk4,500 crore more than the target for the current fiscal year's Tk95,458 crore.