Friday 3, February 2023

Private sector may face a debt deficit

News Desk: The high government bank borrowing target earmarked in the proposed budget for the financial year 2022–23 created fear among economists that the private sector would face credit shortage as a result.

Finance minister AHM Mustafa Kamal proposed to borrow Tk 1,06,334 crore from the country’s banking system in FY23 to meet the budget deficit worth 5.5 per cent of the gross domestic product.

The finance minister made the projection on the back a whopping 133 per cent increase in the government bank borrowing in the revised budget for FY22.

Economists noted that the government borrowing from banks increased significantly in recent years, posing serious challenges to the private sector investment.

Accelerating the private investment hovering about 24 per cent as ratio of the gross domestic product is essential to strengthen the economy ahead of the nation’s graduation from the least developed country status in 2026, according to former caretaker government adviser Mirza Azizul Islam.

Besides, private investment should get preference over public investment for a better recovery of the economy from the Covid pandemic fallout, former Bangladesh Bank governor Salehuddin Ahmed said.

Mirza Azizul said that the contribution of private investment to the GDP was always higher than public investment.

According to the budget document, the FY23 bank borrowing target is 14 per cent higher than the revised target in the FY22 budget and 39 per cent higher than the original target.

The escalation of the bank borrowing by 133 per cent in the FY22 revised target was attributed to poor revenue generation and a policy shift.

Since FY19, the finance ministry has grown dependent on banks for borrowing instead of saving certificates to cut the pressure of interest payment on the domestic front.

It has to pay higher rate of interest on saving certificates than on borrowing from banks, said Finance Division officials.

Economists said that trade-off between interest payment liability and bank borrowing cost was not a suitable option.

Scopes for higher revenue generation and tapping more foreign loans at low interest rates are suitable options to keep the private sector credit flow uninterrupted, they said.

Former World Bank Dhaka Office lead economist Zahid Hussain, however, said that the current government was not able to explore the much needed suitable options to meet its budget deficit.

Inadequate reform in the revenue administration and lack of automation put the government in a challenged to augment higher revenue mobilisation, he noted.

The country’s overall tax-GDP ratio is one of the lowest in South Asia while its growth has remained stagnated for the past one decade.

Economic Relations Division officials said that the commitment of foreign loans from bilateral and multilateral lenders in the pipeline reached over $51 billion for the lack of project implementation capacity of the ministries and divisions.

In its reaction to the budget, the Federation of Bangladesh Chambers of Commerce and Industry expressed concern over the projected bank borrowing in FY23 starting from July 1.

FBCCI president Md Jashim Uddin suggested that the government should explore low-cost foreign loans for deficit financing.

He said that the bank borrowing target might slow down the private sector credit growth which was on the rise in recent months because of a higher demand for industrial raw materials against the backdrop of the post-Covid recovery efforts.

The latest Bangladesh Bank data showed that the country’s private sector credit growth in April rose to 12.48 per cent but remained less than the BB monetary policy target of 14.8 per cent for FY22.

The higher private sector credit growth was also attributed to the hike in the prices of industrial raw materials on the global market because of the Russia-Ukraine war since February.

The finance ministry’s short-term forecast showed that the government borrowing from banks would continue in the coming years.

The ‘Medium Term Macroeconomic Policy Statement for FY23–FY25’ projected no decrease in bank borrowing as about Tk 1,14,800 crore would be borrowed in FY24 and Tk 1,28,940 crore in FY25.

Ali Reza Iftekhar, former chair of the Association of Bankers, Bangladesh, said that the high government borrowing always risked the banks go dry.

Banks having liquidity shortage faced more problems, he said.

Local commercial banks have been supplying credit to the government in a formal way since the late 2000s.

The government introduced projection in the budget to avert criticisms by economists that bank borrowing without projection created problems for banks in fund management, said a senior official of the Finance Division.

The Bangladesh Bank prepares a roster in the first month of the financial year, elaborating government plans on borrowing, and the roster is sent to the commercial banks so that they can participate in treasury bills and bonds which are the major tools for the government to borrow from banks.


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