Heavy bank borrowings driving Bangladesh economy towards turmoil, warn analysts

  • Abdur Rahim Harmachi, Chief Economics Correspondent bdnews24.com
    Published: 2020-01-20 01:43:56 BdST

The ongoing trend of government borrowing heavily from the banking sector is steering Bangladesh’s economy towards a perilous state, economic analysts have warned.

The government has already exceeded its net lending target from the banking system for the current fiscal year by racking up more than Tk 480 in debt in the first half (July-December).

It marks the biggest borrowing spree by the government in the country’s history.

Bangladesh Bank also revised its monetary policy midway through the fiscal year on Sunday, raising the public sector credit target to 37.7 percent from 24.3 percent set in July last year.

Addressing the revised monetary policy, Agrani Bank’s Chairman Zaid Bakht said: “The government has borrowed a lot from banks in the last six months and the public sector credit will increase in future. The central bank has therefore raised the lending cap.”

The government’s spending target invariably exceeds its projected revenues leading to borrowings from domestic and foreign sectors to balance the deficit. The government accordingly identifies its credit sources and limits at the start of the fiscal year before announcing it in the annual budget.

Deviating from these limits in turn hampers the government’s cash flow and credit management.

The budget for fiscal year 2019-20 set out a Tk 5.23 trillion spending plan against a revenue target of over Tk 3.81 trillion. The government is balancing a part of the Tk 1.85 trillion deficit with domestic loans with the budget setting a borrowing target of Tk 773.63 billion, of which Tk 470.36 billion would come from banks.

But the government has already borrowed Tk 480.13 billion – a move that has drawn flak from ABM Mirza Azizul Islam, a former financial adviser to the caretaker government.

“Revenue income is low while the sale of savings certificates has also stalled. The only way out for the government is bank loans. It has been forced to borrow from the banking sector in order to run the country,” he told bdnews24.com.

The country’s banking sector has been in bad shape over the last few years. The amount of bad debt has shot past Tk 2.5 trillion.

In November last year, the credit growth in the private sector slumped to 9.87 percent while the sale of savings certificates saw a 73 percent drop from July to November. Exports and imports fell by 6 percent and 5.25 percent respectively between July and December.

The government generally encounters a financial crunch towards the end of the fiscal year. But the government has been embroiled in a financial crisis from the start of FY20.

“Overall, the economic crisis is deepening. The government’s financial system has almost collapsed. The entire financial sector is going through a worrying time,” said Azizul.

Under the circumstances, he also cast doubt on the government achieving its goal of 8.2 percent GDP growth in FY20.

Ahsan H Mansur, the executive director of Policy Research Institute, believes that the country’s economy is in a ‘very bad’ state.

“The situation with revenue collections is not good. There has only been a 5 percent growth whereas the target was 40 percent. There aren’t many signs that the situation will improve over the next six months.”