Staff Correspondent:

Government borrowing from commercial banks has increased by 74% in the current fiscal year primarily due to low private sector credit growth and plans to reduce its debt to the central bank as part of a contractionary monetary policy.

According to data from the Bangladesh Bank, the government borrowed Tk78,832 crore from commercial banks by selling Treasury bills and bonds between July and 20 February, compared to Tk45,231 crore during the same period a year ago.

Currently, the government’s outstanding borrowing from commercial banks stands at Tk3.97 lakh crore.

However, the government has repaid Tk62,000 crore of its borrowings from the central bank over the first eight months of FY25, through loans from commercial banks.

As a result, the government’s outstanding borrowings from the central bank have decreased by around 40%, falling from Tk1.56 lakh crore in June 2024 to Tk94,042 crore.

Zahid Hussain, former lead economist at the World Bank’s Dhaka office, that the government is currently repaying its debt to the central bank by borrowing from commercial banks as part of the contractionary monetary policy.

By repaying the central bank’s debt, its balance sheet is being compressed, correcting the previous unusual expansion, he said.

This trend is reducing the growth of reserve money. Although inflation has been declining for the last two months, a direct reduction in government debt at the central bank has yet to be observed, he added.

Commenting on the potential inflationary pressure had the government not increased borrowing from commercial banks, the economist said, “Without the increased borrowing, the money supply would have been significantly higher.”

“With banks holding excess liquidity, they would have granted more loans to the private sector, and if misused, this could have led to inflation. However, broad money growth has decreased due to low private sector credit growth,” he added.

When asked about the increase in government borrowing from private banks, a central bank policymaker said that private sector credit growth has significantly slowed. In addition, deposits from weaker banks have been transferred to stronger ones, resulting in an overall increase in the liquid funds held by banks.

Treasury bills and bonds have become an attractive investment for banks due to the lack of demand for private sector loans, the official said. Banks are favouring these investments because of the government guarantees, which minimise risk.

Often, the government raises several times the amount of treasury bills and bonds that banks bid for, causing interest rates – now above 12% – to gradually decrease.

According to Bangladesh Bank data, private sector credit growth in December 2024 fell to 7.28%, a decrease of 38 basis points from November. The growth dropped to a 3.5-year low of 7.55% in November, the lowest since May 2021, continuing a gradual decline from 10.13% in July.

This growth is well below the central bank’s target of 9.8% for the first half of FY25.

Central bank data shows that the government’s net borrowing from the banking sector increased by Tk16,832 crore as of 20 February in the current fiscal year, compared to Tk12,555 crore during the same period last year. This marks a 34% rise in net borrowing from the banking sector year-on-year.

According to the revised budget for the current fiscal year, the government plans to borrow Tk1,17,000 crore from domestic sources, with Tk99,000 crore from the banking sector and Tk18,000 crore from the non-banking sector. As of now, the government has borrowed 17% of its banking sector target in about eight months.

The government’s net borrowing from the banking sector stood at Tk4.91 lakh crore as of 20 February, compared to Tk4.74 lakh crore at the end of June 2024.

Bangladesh Bank seeks to control inflation by tightening the money supply. To achieve this, it is taking steps such as reducing government debt and increasing the policy and lending rates.

Commenting on the government’s borrowing from banks, Zahid Hussain said, “Given the current macroeconomic situation, the government should reduce its borrowing target from the banking sector, which would require reducing expenditures. If Tk15,000-20,000 crore less is borrowed, private sector credit will see a slight increase.”