Govt repays more than it borrows from banks to tame inflation

Illustration: TBS

The government is repaying more than it is borrowing afresh from the banking sector in a bid to tame inflation ahead of the upcoming general elections.

According to central bank data, in the first three months of the current fiscal year, the government repaid Tk3,778 crore to banks. The government's net borrowing from the banking sector stood at Tk3.90 lakh crore at the end of September, compared to Tk3.94 lakh crore at the end of June.

In the first three months of FY23, the government's bank borrowing rose by Tk10,500 crore. During the entire financial year, the borrowing increased by Tk1.19 lakh crore.

The Bangladesh Bank seeks to control inflation by tightening the money supply. To achieve this goal in the current fiscal year, it is taking steps such as reducing government debt and increasing the policy rate and lending rate.

Mezbaul Haque, spokesperson for the central bank, said, "We are not giving fresh (printed) money to the government. Instead, the government has increased borrowing from banks."

He commented that these actions are aimed at controlling inflation.

Ahsan H Mansur, executive director of the Policy Research Institute, appreciates the government's move to reduce borrowing from the banking sector.

"The government and the central bank are now on the right track. If the government had taken such steps in the last financial year, inflation would not have increased so much. Although belated, the policies being taken now to control inflation are right," he told The Business Standard.

The economist said at the beginning of the financial year, the government's demand for money was not very high. However, it seems that the authorities are now in a contractionary mood in both monetary and fiscal policies.

"The government is trying to control inflation in view of the upcoming elections so that they can show that they are successful in controlling inflation. For this reason, the government has to reduce the expenditure," he added.

According to central bank data, between July and September, the government borrowed Tk25,709 crore through Treasury bills and bonds from banks and paid back Tk29,487 crore to the Bangladesh Bank. During the period, the government, however, borrowed Tk4,647 crore from non-bank financial institutions, insurance companies, and individual investors.

As per bankers, the central bank has sold $3.75 billion from reserves so far this fiscal year. As a result, about Tk41,250 crore has gone from the country's money market to the central bank's vaults. Apart from this, liquidity stress has started due to government increasing borrowing from banks and repaying central bank loans.

Due to these reasons, the tendency of banks to borrow through the interbank call money market and repo from the central bank to carry out their regular operations has increased, they added.

Given the current situation, Ahsan H Mansur said liquidity stress is normal, adding, "If liquidity faces stress, the demand for dollars also decreases. As a result, the pressure on the dollar exchange rate will ease somewhat." Interest rates on Treasury bills rise 

In the last financial year, the central bank supplied fresh money in the market by buying government Treasury bills and bonds itself. However, the monetary authority has come out of this trend in the new financial year. Instead, Treasury bills and bonds are being sold to banks. As a result, the demand for money in banks has increased. In accordance with the rules of the economy, the interest rate has also increased.

Asked why the Treasury bill rate is rising, a senior central bank official said, "Our policy rate has gone up by 75 basis points. If this rate increases, it will affect the interest rate on Treasury bills. Along with this, the cost of funds for banks has increased as the interest rate on deposits has increased."

Additionally, the central bank is not making devolvement as before. That is, not buying Treasury bills on their own. All are selling to banks. As a result, the interest rate on Treasury bills has increased a lot, he explained. 

While 91-day Treasury bills were sold at 7.45% in the first week of October, the latest auction on 9 October offered a maximum of 9.25% against Treasury bills of the same duration, central bank data said. Interest rates on Treasury bills with other durations have also increased.

Commenting that many individuals and institutions are investing due to the increase in interest rates, the official said in the current month, several individuals and institutions outside banks have invested about Tk500 crore in Treasury bills. One of the reasons for this is that there are limits to investing in savings certificates. But there is no limit to investing in Treasury bills.

When asked whether the increase in the interest rate of the Treasury bill will increase the rate of the six-month moving average rate of the Treasury bill (SMART), this official said, "To comment on it, we have to wait till the end of the month. Because only two auctions of Treasury bills have been held in October, there are a few more auctions this month. If they also have higher interest rates than they do now, the SMART rate will increase. If the SMART rate increases, banks' lending rates will also increase.

Considering the situation, this official commented that the SMART rate may increase by the end of this month.