Bank loan

High government bank lending could affect private sector credit

The government’s lofty bank borrowing target set in the draft budget for the financial year 2022-23 has raised fears among economists that the private sector may face a credit crunch.

Finance Minister AHM Mustafa Kamal has offered to borrow Taka 1,06,334 crore from the country’s banking system in FY23 to cover the budget shortfall worth 5.5% of gross domestic product .

The finance minister projected on the back of a whopping 133% increase in government bank borrowing in the revised FY22 budget.

Economists have noted that government borrowing from banks has increased significantly in recent years, posing serious challenges to private sector investment.

According to former acting government adviser Mirza Azizul Islam, accelerating private investment, which accounts for around 24% of gross domestic product, is key to strengthening the economy before the country graduates from least developed country status. advanced in 2026.

Also, private investment should be given preference over public investment for a better recovery of the economy from the fallout of the Covid pandemic, former Bangladesh Bank Governor Salehuddin Ahmed has said.

Mirza Azizul said that the contribution of private investment to GDP was always higher than public investment.

According to the budget document, the FY23 bank borrowing target is 14% higher than the revised FY22 budget target and 39% higher than the original target.

The escalation in bank borrowing of 133% in the revised FY22 target was attributed to weak revenue generation and a shift in policy.

Since FY 2019, the Ministry of Finance has become dependent on banks to borrow instead of saving certificates to reduce interest payment pressure on the home front.

It has to pay a higher interest rate on savings certificates than on borrowing from banks, Finance Division officials said.

Economists said the trade-off between liability for interest payments and the cost of bank borrowing was not an appropriate option.

Opportunities to generate higher incomes and tap more foreign loans at low interest rates are appropriate options to keep the flow of private sector credit uninterrupted, they said.

The former chief economist of the World Bank office in Dhaka, Zahid Hussain, however, said the current government was unable to explore appropriate options needed to close its budget gap.

Inadequate tax administration reform and lack of automation have made it impossible for the government to increase revenue mobilization, he noted.

The country’s overall tax-to-GDP ratio is one of the lowest in South Asia, while growth has stagnated for a decade.

Economic Relations Division officials said foreign loan commitment from bilateral and multilateral lenders in the pipeline has reached more than $51 billion due to lack of project implementation capacity of ministries and divisions. .

In its reaction to the budget, the Federation of Bangladesh Chambers of Commerce and Industry expressed concern over the planned bank loans for FY23 from July 1.

FBCCI chairman Md Jashim Uddin suggested that the government should explore low-cost foreign loans for deficit financing.

He said the bank borrowing target could slow private sector credit growth which had been on the rise in recent months due to higher demand for industrial commodities amid post-Covid stimulus efforts.

The latest data from the Bangladesh Bank showed that the country’s private sector credit growth in April rose to 12.48%, but remained below the BB’s monetary policy target of 14.8% for l exercise 22.

The higher credit growth to the private sector was also attributed to higher prices for industrial raw materials in the global market due to the Russian-Ukrainian war since February.

Short-term forecasts from the Ministry of Finance showed that government borrowing from banks would continue in the coming years.

The “Medium Term Macroeconomic Policy Statement for FY23-25” did not foresee any decrease in bank borrowing as approximately Tk 1,14,800 crore would be borrowed in FY24 and Tk 1,28,940 crore in FY24. exercise 25.

Ali Reza Iftekhar, former chairman of the Bangladesh Bankers Association, said high government borrowing still risked drying up banks.

Banks that lack liquidity face more problems, he said.

Local commercial banks have been providing credit to the government formally since the late 2000s.

The government introduced the projection in the budget to avoid criticism from economists that bank borrowing without projection was creating problems for banks in managing funds, a senior finance division official said.

The Bangladesh Bank prepares a list in the first month of the financial year, making government plans for borrowing, and the list is sent to commercial banks so that they can participate in treasury bills and bonds which are the main government borrowing tools. from banks.