Heavy bank borrowing exposes NBR’s incapacity to match fast growth

The country’s money market has been under stress for the last one year. Some banks may have enjoyed a modicum of ease, but most others could not emerge out of the situation. The case of non-bank financial institutions (NBFIs) is even worse.

There are two reasons behind it - lack of confidence and liquidity crisis. Against this backdrop, the government has opted to borrow heavily from the banking sector. At the same time, it continues to depend on non-bank borrowing, such as upon high-interest bearing savings certificates. 

Taking money from banks and non-bank sources simultaneously, to meet routine expenditure or fund large projects, points to the public finance weakening, mainly stemming from poor performance on the revenue front.

Revenue earnings look set to miss the budgetary target due to weakness and failure of the National Board of Revenue, leaving no option for the government but to borrow from banks and the public.

When the government resorts to bank borrowings, one needs to look at the break-down — how much it takes from scheduled banks and what portion from the central bank. The ratio is not known to us. 

I think the government might have taken much of its loan from the central bank to avoid pressure on banks whose liquidity position is not strong enough to meet the huge loan requirements of the government. The government must be aware of the fact that huge public borrowing from banks would impact rates of interest and limit scope of bank finance for the private sector, given the slow deposit growth.   

But heavy government borrowing from the central bank is not a good option as well, because it has downsides, like inflationary pressure in the near future.

The NBR needed to go through a whole set of reforms, which it overlooked. In fact, no reform has been made in VAT administration, while automation remains far away because of lack of commitment of the NBR.

Revenue mismanagement was always there, which has worsened further. So, meeting annual revenue target remains difficult like before. 

The revenue agency is not capable of meeting the funding needs of a fast-growing economy like Bangladesh, which needs to bankroll large infrastructure projects to keep up the pace of growth and facilitate the private sector.

Ahsan H Mansur is Executive Director, Policy Research Institute