Govt to rely more on bank borrowing in meeting budget deficit, pvt sector may take the hit

The government intends to finance Tk137,500 crore out of its budget deficit projected at Tk251,600 crore for fiscal year 2024-25 through borrowing from the banking sector while decreasing its foreign loan target to Tk90,700 crore.

In FY24, the government's bank borrowing target was Tk132,395 crore while its foreign loan goal was Tk102,490 crore.

According to the budget proposal for FY25, presented before the parliament today by Finance Minister Abul Hassan Mahmood Ali, the government will rely more on bank borrowing than foreign loans in meeting its budget deficit in the upcoming fiscal year.

Analysts are sceptical about the government's ability to achieve the projected revenue targets set at Tk545,400 crore, up from Tk5 lakh crore set for FY24. They warn that if the government does not exercise fiscal discipline, the actual borrowing from the banking sector could exceed the budgeted amount. 

Despite the finance minister highlighting inflation control as the government's primary objective in the budget speech, the government's increased borrowing from the banking sector could likely constrict the flow of loans to the private sector and also spur inflation, say the analysts.

Salehuddin Ahmed, a former governor of the Bangladesh Bank, told TBS that if the government borrows more from the banking system, financing for private businesses and investments will decline given that the liquidity flow in the banking sector is low and people are reluctant to keep deposits.

He said, "Printing money or borrowing from the banking system negates the effectiveness of a contractionary monetary policy. Therefore, the government must rationalise its expenditures. It should increase project implementation and seek loans from foreign sources on easy terms. Unnecessary development activities must be avoided. 

"Many buildings have been constructed in the education and health sectors that are not being utilised effectively. Such expenditures should be curtailed. The business environment needs to be improved. For this, emphasis must be placed on eradicating corruption and ensuring good governance."

Towfiqul Islam Khan, senior research fellow of the Centre for Policy Dialogue, told TBS, "The government's financial capacity is currently not good. Therefore, borrowing is inevitable. More important than the increase in debt is where the government plans to borrow from. Due to various factors such as inflation and rising bank interest rates, the sale of savings certificates will not increase significantly. Foreign loans are dependent on project implementation. As a result, the only easy option is to borrow from the banks."

He also said, "If bank borrowing is high, it will drive inflation. On the other hand, the liquidity situation in the banking sector is not good. This raises concerns about the contraction of loans to the private sector, leading to the risk of 'crowding out.'

"In such a situation, the government must place greater emphasis on resource mobilisation. It is crucial to consider where the additional resources are being collected from and ensure that those who are more capable are contributing. The government should also scrutinise to whom tax exemptions are being granted. There is no justification for providing exemptions to the wealthy outside the general populace."

He emphasised stopping tax evasion, prioritising expenditures, and eliminating waste, corruption, and the purchase of overpriced goods.