Central bankers said some Treasury bills and bonds, used for government borrowing from the banking sector, remain unsold because banks are insisting on raising interest rates.
The government borrowed Tk 66,724 crore from the banking system in the first 11 months of the outgoing fiscal year. This amount could please companies and bankers because the government borrowed only about 40% of its revised target from banks and there will be no crowding out of the private sector.
But the situation changed within a few days as the government borrowed an additional Tk 35 billion from banks in the first 13 days of June, an amount more than half of what the government had borrowed in the last 11 months. Of this amount, the central bank has borrowed at least Tk 15 billion.
Central bank officials said the bank does not buy government treasury bills and bonds directly, so there is no point for authorization. Instead, the Bangladesh Bank lends to the government using tools such as ways and means, advances and overdrafts – tools used to manage mismatches in the government’s emergency cash flows.
Ways and Means Advances are temporary loans provided by the central bank to the government to fill short-term gaps between revenues and expenditures. On the other hand, an overdraft is used when the limits of the ways and means provided have been exceeded, providing emergency financing at higher interest rates.
Borrowing may push inflation further
Although these tools are necessary to avoid immediate financial turmoil, their use can have significant implications, experts said.
Ihsan Mansour, a former economist at the International Monetary Fund, criticized the central bank’s current lending approach to the government, likening it to effectively printing money.
He said that no matter how the government borrows — whether through transfer of ownership, advances in Ways and Means, or overdraft — the central bank ends up printing money, leading to similar macroeconomic effects.
The economist also warned that if the government continues to borrow money by printing it from the central bank, this will undermine the effectiveness of contractionary monetary policy.
He added that this practice may hinder efforts to reduce inflation, attributing part of the current inflationary pressures to the central bank’s printing of money in the previous fiscal year.
The economist warned that if the current trend of borrowing from the banking sector continues, lending rates may rise further, putting commercial banks under more pressure.
He said that reducing inflation requires real implementation of contractionary monetary policy rather than simply announcing it as such.
“Contradicts monetary policy”
Mustafa Mojiri, former chief economist at Bangladesh Bank, takes a similar view. Whatever tools the central bank uses to lend to the government amount to a liquidity injection and thus run counter to contractionary monetary policy.
“So it is natural that there will be some impact on inflation,” he told TBS. “Since there are many other factors for inflation, it is difficult to say how much of the impetus comes from the liquidity injection.”
Mugiri said the central bank was forced to lend money to the government because most banks were facing a liquidity crunch and weak deposit mobilization.
According to central bank data, the government took new loans worth Tk 81,702 crore from commercial banks through treasury bills and bonds over 11 months and repaid Tk 14,978 crore, with net borrowing reaching Tk 66,724 crore as of May, which is 27%. Lower compared to the same period of the last fiscal year.
However, the government plans to borrow Tk 89,211 crore in June as per the revised budget target.
The Central Bank indicated that government borrowing from the banking sector was relatively low until May of the current fiscal year, but it has increased significantly since early June.
So far, the government has borrowed over Tk 1 lakh crore from the banking sector, with borrowing rising by about Tk 35,000 crore in the first 13 days of June alone. Of this amount, at least Tk 15,000 crore has been borrowed from the central bank.
The revised Budget for FY24 increased the banking sector borrowing target by Tk 23,540 crore over the initial budget, which has now been set at Tk 1,55,935 crore.
A central bank policymaker said that by the end of May, the government had begun repaying some of its debts to the central bank. But borrowing has increased since early June, with the government withdrawing repaid funds and taking out new loans from the central bank.
Another senior central bank official explained that no new money was being printed for lending purposes.
Banks are not keen on bills and bonds
Central bankers said that some Treasury bills and bonds, used for government borrowing from the banking sector, remain unsold because banks insist on raising interest rates.
For example, the central bank on June 23 auctioned treasury bills of three months to one year to raise Tk 10,800 crore, but it ended up being Tk 5,731 crore as banks were demanding higher returns.
Currently, interest rates on Treasury bills have risen from a maximum of 8.60% at the beginning of the fiscal year to 12%, and interest rates on Treasury bills have increased from 9.10% to 12.75%.
The official explained that the central bank’s decision to lend is affected by the need to regulate interest expenses.
Moinul Islam, a former professor at Chittagong University and an economist who was honored with the Ekushey Padak Award, told The Business Standard that the government’s large borrowing from the banking sector in a single month could lead to “crowding out”.
The economist suggested that the government should aim to increase the tax-to-GDP ratio in the next fiscal year. Achieving this target could ease pressure on the government to borrow heavily from the banking sector.