Bangladesh govt back to borrowing from Cenbank amid cash crunch

Faced with an urgent need for cash to cover everyday expenses, the government has resorted to borrowing again from the Bangladesh Bank. The move stems from the severe cash crisis, caused by greater expenses than income amid a dwindling revenue stream.

The central bank has been providing temporary liquidity support to the government's daily transaction account by generating high-powered money, also known as printing money, carrying the risk of fuelling inflation, which reached nearly 10% in October.

The government has been borrowing through its two accounts – Ways and Means Advances, and Overdraft – as the cash crisis worsened since the central bank stopped printing money through a devolvement process amid huge criticism. Devolvement is when the Bangladesh Bank itself purchases treasury bills and bonds instead of selling to commercial banks.

However, borrowing money through these accounts is akin to printing money.

An overdraft occurs when there is not enough money in an account to cover a transaction or withdrawal, but the bank allows the transaction anyway.

Ways and Means Advances (WMA) is a mechanism used to provide temporary lending facilities for temporary mismatches in the cash flow of the government's receipts and payments.

Gov is borrowing more than its limits

The finance ministry has set the limit at Tk8,000 crore for overdraft and Tk8,000 crore for WMA but the government already exceeded the limit in both accounts indicating a severe cash crisis.

The government's borrowing from both accounts crossed Tk18,000 crore on 6 December against the combined ceiling of Tk16,000 crore, according to Bangladesh Bank data.

Dr Ahsan H Mansur, an economist and executive director of the Policy Research Institute (PRI), told TBS that the government's borrowing through overdrafts and WMAs is another way of printing money, which risks fuelling inflationary pressures.

The government has 116 accounts with the Bangladesh Bank through which it conducts various transactions. At the end of the day, the Bangladesh Bank checks the government's balance through the overdraft and WMA accounts. If the government is in a negative balance, the Bangladesh Bank provides cash support by generating new money.

The borrowing amount is adjusted within 30 days from the government's receipts. The Bangladesh Bank charges 5.75% for lending in WMA and 6.75% for overdraft when the treasury bills rate is above 10%. So, borrowing through overdraft and WMA is less costly for the government than borrowing through treasury bills and bonds.

In the devolvement process, the Bangladesh Bank generates new money against the government's treasury bills and bonds. In this case, the Bangladesh Bank itself purchases treasury bills and bonds instead of selling to commercial banks.

The central bank has stopped printing money through the devolvement process since August to curb the money supply to ease inflationary pressure. In FY23, the central bank printed Tk88,000 crore new money to provide deficit financing support to the government.

The government borrowing from commercial banks increased substantially after the central bank stopped printing money. From July to December of FY24, the government borrowed Tk31,868 crore from commercial banks through treasury bills and bonds when the borrowing declined by Tk16,000 crore in the same period of last fiscal year, central bank data shows.

The government's huge borrowing shot the interest rate to above 10% for short-term treasury bills and bonds and above 11% for long-term bills and bonds when the rates were 7% to 8% six months back.

A senior executive of the Bangladesh Bank said despite huge borrowing, the government experienced a financial crisis because of a deficiency in daily revenue rather than expenditures, compelling it to immediately borrow funds from the central bank.

Commercial banks and exporters have also been feeling the pinch of the government's cash crisis. Exporters are experiencing delays in payment release of their cash incentive against exports when commercial banks are facing a liquidity crisis due to the government's high borrowing.

Tight liquidity will slow down business 

Describing the current money market situation, Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told TBS that banks are in a tight liquidity position due to high government borrowing and policy rate hikes by the central bank. 

He said the interest rate for short-term treasury bills and bonds crossed 10% when the lending rate remained almost the same. As a result, banks will prefer to invest in treasury bills and bonds instead of lending to the private sector, which will slow down private sector business expansion.

Banks have been experiencing delays in the release of cash incentives for exporters. The Bangladesh Bank generally disburses cash incentive funds quarterly. But now it is delaying disbursement by one and half months since June, Mahbubur Rahman said.

When contacted, a top official of the central bank said applications for cash incentives have piled up but the central bank is delaying disbursement due to not getting funds from the government amid the ongoing cash crunch.

Meanwhile, the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) recently wrote to the finance ministry to disburse the pending Tk4,000 crore in cash incentives kept for exporters within December.

The BKMEA letter also mentioned that the sector is grappling with pending claims exceeding Tk4,000 crore in cash assistance from the Bangladesh Bank, which is causing severe financial distress to the sector.