The government will have to borrow 33% more from banks in the next fiscal year mainly to meet inflated demands of subsidies and debt servicing.

The amount will be above Tk1 lakh crore in the coming fiscal year – a projection that revives the old fear of leaving the private sector with less amount to borrow and pushing inflation higher.

Global commodity price hikes have already enhanced the subsidy bills for fuels and fertilisers in the current fiscal year and are set to grow further in the next beginning in July. The increases cannot be offset by revenue income growth, requiring the finance ministry to ask for more loans from banks.

The ministry has estimated bank borrowing at Tk1,01,818 crore in the budget for the fiscal 2022-23, which is 18.60% higher than the revised target for the current financial year.

In the FY22 budget, the ministry set a target of borrowing Tk76,452 crore from banks. Despite a 15% increase in revenue collection in the first nine months of the ongoing fiscal year, Finance Division officials have fixed the bank borrowing target at Tk87,288 crore in the revised budget to meet increasing expenses on government subsidies.

In a meeting of the council for the coordination of fiscal, monetary and exchange rate policies held last Sunday with Finance Minister AHM Mustafa Kamal in the chair, Bangladesh Bank Governor Dr Fazle Kabir termed the bank borrowing target in FY22 revised budget "very abnormal".

"I think it will not be right to borrow so much from the banking system," he noted.

The central bank governor advised Finance Secretary Abdur Rouf Talukder to stick to the bank borrowing target set in the original budget for FY22.

In reply, the finance secretary said cheques that the government will issue in June will be encashed in July-August. At that time, the government's balance in its account stays negative. That is why bank borrowing is needed to pay different government bills.

Dr Zahid Hussain, former lead economist at World Bank's Dhaka office, said banks are currently facing a liquidity crisis, and the call money rate has risen to 5%.

If the money supply increases to meet a huge demand for loans from the government, it will further stoke inflation, he noted.

"There is not much of a tradition of borrowing by printing money in Bangladesh and it is not good. Zimbabwe has always done this, and so has the Sri Lankan government," he pointed out.
 
Why more loans from banks?

The next year's budget outlay has been estimated at Tk6,77,864 crore, while the deficit has been projected at Tk2,44,864 crore. The revenue collection target has been set at Tk4,33,000 crore.

Although the estimated budget size for the new fiscal year has increased by 12.29% as compared to the original budget of the current fiscal year, the total budget deficit is going up by 14.06%. In other words, the budget deficit is ticking up because revenue mobilisation is not growing in keeping with government expenditure.

Dr Rashed Al Mahmud Titumir, a professor at the Department of Development Studies of the University of Dhaka, told The Business Standard that as long as the government cannot maximise its revenue collection from direct income tax coming out of its reliance on VAT, the budget deficit will continue to widen.

"The easiest way for the government to meet this deficit is to take out loans from banks. But it will be a matter of great concern if the bank loans are spent on things, such as salary, allowance or interest payments," he said.

Despite the increase in the budget deficit, the government's expenditure on the Annual Development Programme has not risen in proportion. Revenue collection has not swelled to the desired level but deficit financing is soaring owing to a rise in salaries and allowances of government employees, loan instalments and subsidies.

Salary and allowance payments in the next fiscal year will cost Tk76,412 crore, Tk80,275 crore in interest payments and Tk82,745 crore in subsidies, incentives and cash loans. The total expenditure in these three sectors will amount to Tk2,39,432 crore, which is 35.32% of the budget.

For the first time in the country's history, revenue collection went into the negative territory when all economic activities were halted after the pandemic-led lockdown had come into force in FY20.

At that time, to meet regular expenditure, including salaries and allowances, the government had to borrow Tk79,268 crore, which was 2.8% of GDP though the following year the rate dropped to 0.90%.

For a decade, the government's dependence on bank borrowing had been declining. In FY15, the government borrowed only Tk514 crore from banks, and a year later, its bank borrowing turned negative. In that year, the government repaid Tk8,389 crore more than the loans it took from the banking sector.

In FY17, the government borrowed more than 1% of GDP amounting to Tk 29,479 crore from banks.

The government's dependence on bank loans dropped at that time, but its interest expenses were on the rise because of a huge jump in sales of savings certificates at high interest rates. Later, the government imposed tough conditions on investments in savings certificates. But the government's reliance on bank loans continued to grow owing to its inability to secure low-interest foreign loans.

Will the private sector be crowded out?

The Finance Division is formulating the next fiscal year's budget by setting a target of raising private investment to 24.9% of GDP.

This will require around Tk11 lakh crore investment in the private sector. Therefore, a 15% growth in private sector credit flow has been projected.

Economists and businessmen believe that if the government itself borrows such a huge amount, the goal of private investment will not be achieved as credit flow to the private sector will turn to a trickle.

Rizwan Rahman, president at Dhaka Chamber of Commerce and Industry, said small and medium enterprises were hit the hardest by the pandemic. But stimulus loans that they got were much lower than they needed.

In this situation, if the government's bank borrowing surges to such a great extent, SME entrepreneurs will suffer the most, he noted.

The industrial sector is seeing gradual  turnaround from Covid-induced losses. They now need additional money to cover costs of business operation, expansion, raw materials and capital equipment, he continued.

In this situation, he thinks that if the scope of private sector loans shrinks, business recovery will hit a stumbling block.  

The banking system has always been eager to lend to the government as there is no procedural complexity in government loans, Rizwan Rahman also said, fearing that the private sector will suffer if the government's borrowing goes up.

Ahsan H Mansur, chairman at Brac Bank and executive director at Policy Research Institute, told TBS that deposit growth is not good at present. It does not look like it is going to be good in the next fiscal year either.

"People's savings are declining owing to rising inflation, which may continue next year. In this situation, if the government borrows so much in the new fiscal year, the private sector can be crowded out," he added.

But in the meeting of the council for the coordination of fiscal, monetary and exchange rate policies, the finance secretary said despite the 14.8% growth target for three consecutive years, private sector credit growth has been hovering between 8% and 9% for the last two years. It grew by 10.87% till February of the current fiscal year. If this trend continues, it will be possible to meet the target at the end of FY22.

Md Jashim Uddin, president at the Federation of Bangladesh Chambers of Commerce and Industry, fears that private investment growth and credit flow to the sector will slow down.

The international market situation is very volatile. In this case, there will be no new investment, he also said.

Gas rationing has also started in the country, and prices of gas and electricity may go up further in the future. In this situation no one will be interested in new investments, Jashim Uddin added.

Low-interest bank loans not rising

Although economists and businessmen have focused on low-interest foreign borrowing to maintain the credit flow to the private sector and reduce government's interest expenses, the target for financing from foreign sources to meet the budget deficit in the new fiscal year is not going to exceed the current fiscal year's budgetary target.

The foreign loan target for FY23 has been set at Tk1,03,046 crore, which is only 1.8% higher than the target for the current fiscal year.

However, even if it gets foreign loans as per the target, Bangladesh will not be able to spend foreign loans owing to its poor implementation capacity. Every year there is a demand to reduce the share of foreign debts from the Annual Development Programme and increase allocations from government funds.

The target for foreign debts in the current fiscal year was Tk1,01,226 crore, which is being reduced to Tk80,212 crore in the revised budget.

Economists and businessmen say the way government spending is rising, the focus should be on raising low-cost foreign loans, rather than going for high-interest domestic loans.

But the government cannot take advantage of low-cost foreign loans owing to tough conditions of global lenders and a lack of efficiency in implementing such loans, they said.

Ahsan H Mansur said the government's decision to reduce borrowing through sale of savings certificates is positive. But if it takes more loans from banks, its interest expenses will increase a lot. So the government should go for more foreign loans.

In the coordination council meeting, Finance Secretary Abdur Rouf Talukder said the ADP size has increased by more than 9.5%, but foreign aid has grown only 5%. "In this situation, if we spend $4-5 billion a year from the $50 billion foreign loans that are in the pipeline, the pressure on the budget will come down."

Economic Relations Division Secretary Fatima Yasmin in the meeting said foreign loans are still more affordable, considering interest rates. But foreign-funded projects do not begin because of some complications. That is why the government needs to pay commitment fees. Many projects are not completed even though repayment periods start.

More projects can be taken up if the use of foreign loans increases, she added.