Govt extensively banking on domestic borrowing

Net government borrowing from domestic banks and nonbanks for deficit financing ballooned over 72 per cent in the first seven months to January of this fiscal year (FY 2023) year on year.

Economists raise fears of crowding-out effect on private-sector credits-although needs there are yet limited under the shadows of global and local economic slowdown.

Officials have said the significant rise in the net domestic borrowing by government to meet its fiscal requirement was mainly because of less-than-expected collection of tax-and non-tax revenues.

As the crowding-out effect looms in form of distributing more funds to the public sector, the capacity of the banks to lend to the non-public areas is shrinking and thus the access of the private sector to formal credits is getting squeezed.

The total net government borrowing from domestic sources during the July-January period of this ongoing fiscal stood at Tk 427.17 billion, up 72.26 per cent from the corresponding period a year before when the figure was Tk 247.98 billion.

Government borrows to finance deficit budget mainly from two internal sources: banks and nonbanks.

Its net borrowing from the banking system amounted to Tk 390 billion, up from Tk 102.81 billion registered in the same period of previous fiscal. In terms of non-bank financing, the government borrowed Tk 37.16 billion in the period under review--down from Tk 145.17 billion in the same period of previous fiscal.

According to official statistics, the government revenues earned from the NBR, non-NBR and non-tax-revenue sources fell short of the target in the first six months of this fiscal (FY'23). The overall revenue target is Tk 4.33 trillion for this fiscal, but until December 2022, it had earned around Tk 1.61 trillion--down by Tk 555 billion from the half-yearly revenue target.

Chairman of the Policy Exchange of Bangladesh Dr M. Masrur Reaz says the fiscal pressure continues mounting because of the lower revenue earnings that prompted the government to borrow more from the domestic sources.

As part of the ongoing government austerity measures under the current volatile macroeconomic situation following the Russia-Ukraine war, he notes, the government tightened the opening of LCs (letter of credit) to save the forex reserves.

As a result, the volume of LCs dropped by around 40 per cent. It means the government cannot receive a large volume of revenue in the form of customs duty and other forms of duties. On the other hand, the government skipped continuing and taking fresh less-priority development projects, considered the single-largest revenue source.

"So, the government revenues from NBR, non-NBR and non-tax sources are falling. But the government needs funds to finance the budget. That's why the government domestic borrowing keeps mounting," he said.

Responding to a question, Mr Masrur said it would cast crowding-out effect on the funds but it would not be too adverse as the demand for funds from the private sector is less under the current context of business.

Dr Zahid Hussain, former lead economist of the World Bank, says as the government borrows more money from the banking system, the banks take it as an opportunity to earn more through investing in risk-free instruments like treasury bonds and treasury bills.

"But there is still a liquidity stress in the banking system. If the government continues borrowing more funds from the banks, it would create crowding-out effect," the economist predicts.

Government's net borrowing from the banking system consists of borrowing from the central bank and scheduled banks. From banking system, government borrows mainly through ways and means like advances, overdraft, and issuance of Treasury Bills and Bonds.

On the other hand, government borrowing from non-banking domestic sources includes savings instruments introduced by the Department of National Savings and government T-Bills and Bonds held by nonbank financial institutions, insurance companies, individual investors and so.

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