Bank borrowing—not a relishing sight

Borrowing by the government from the banking system, in the case of Bangladesh, is more of a double-edged sword. It cuts both ways.
If it borrows heavily, the financial market feels the pinch in the form of what is widely called, the crowding-out effect. The private sector, which is considered the main engine of economic growth, does not get enough of funds from the banking system when the government starts devouring the same in large volumes.
Hence when the government borrows less, all concerned, including private sector people, should have reasons to be happy. This should also make the government policymakers happy for any heavy bank borrowing on the part of the government triggers criticism for reasons of possible shortage of fund for the private sector and inflationary pressure that such borrowing might create on the economy.
But neither the government nor the private sector, it seems, is enjoying the current situation in relation to the bank credit flow.
The lending rates now being offered by the banks are much lower than before. Yet the private sector lending has remained on the lower side. The private sector credit growth is now estimated at 13 per cent as against the annual target of 15.5 per cent.
However, there was a time when the private sector lending used to overshoot the target by two to three per cent despite higher lending rates. In some areas, the lending rates even ranged between 16 to 17 per cent.  
The troubled political climate has left a negative impact on the overall business and investment climate, which has led to lower demand for bank funds in recent months.  Moreover, some big clients have taken recourse to cheap foreign borrowing.
The situation has improved marginally during the last couple of weeks following the cessation of political hostility, thanks to three major city corporation polls. But uncertainty remains. Many tend to believe that the lull in political troubles could be temporary and those might make a comeback after sometime.
However, despite all the political troubles, the government that until recently blamed the opposition BNP for causing enormous damage to the economy seems confident of achieving more than 6.0 per cent growth this fiscal. Some important government leaders have rather trashed the World Bank's lower growth projection saying all the earlier projections made by the Bank proved incorrect.
Interestingly, the government's domestic resource mobilization from both tax and non-tax sources until the first eight months of the current fiscal had been well below the target. Yet its borrowing from the banking system remained unusually low. What is the catch?
At least three factors have worked well for putting the government to such a comfortable position. The first and foremost has been the slump in oil prices in the international market. The government did not have to provide that much of fund to the state-owned Bangladesh Petroleum Corporation (BPC) as subsidy for oil marketing operation.
The other factor, the unwanted one, is the slow implementation of the annual development programme (ADP) of the government. This is, however, more or less a routine development. Until the third quarter of every fiscal the rate of execution of ADP does remain at a low level. But in the final months, the pace of implementation goes up notwithstanding the fact that the size of the original ADP is trimmed in every third quarter of the fiscal year.  The poor rate of execution of the development programmes, thus, leaves some amount of money for the government to meet other exigencies.
The most important reason that has saved the government from being less dependent on bank borrowing this fiscal has been the surge in the sales of its savings tools. The government had projected to mobilize funds worth Tk 90 billion through the sale of savings tools. However, going by the high demand for the tools, estimates are that the sale of the same might shoot up to Tk 270 billion by the end of the current fiscal.
The reason for high demand for the government's savings tools is the higher yield offered for the same compared to that of fixed deposits with banks. The banks have been forced to lower both deposit and lending rates because of the decline in demands for funds from the private sector.
But the government is not supposed to relish the higher sales of its savings tools since it has been adding to the interest payment burden on it (government). The interest payment alone is the single largest expenditure of the government's revenue budget--- 18.4 per cent.
The lower bank borrowing would have been a very happy sign if the government could mop up enough resources from both tax and non-tax revenue sources and arrange sufficient soft loans to meet the resource gap for implementation of the development projects. Such developments have been eluding the government for long.
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