Government borrowing from the banking system has become a matter of concern. Such borrowing is fuelling inflation. People of fixed-income group are passing through a difficult time. Because of lack of balance between income and expenditure, bank loan has become the only source of supplying money to the government. 

In four and a half months of the current fiscal year, the government has borrowed more than Tk 190 billion, out of which Tk 110 billion have come from Bangladesh Bank. The current fiscal years' borrowing target of the government was Tk 189.75 billion, which has already been exceeded. According to one estimate, if the government borrowing from the banking sector continues at the present rate, it may exceed Tk 300 billion by the end of the fiscal year. The government borrowing from the banking system during the first quarter has stood at Tk 1.25 billion per day. It is learnt that the central bank is printing money to meet the demand. The government is reportedly trying to borrow money even from outside the country.

There was a possibility of getting US$1.0 billion budgetary support from the World Bank. The government was also pursuing a $1.0 billion loan from the International Monetary Fund (IMF). The assistance from World Bank and IMF would be of immense value to Bangladesh at this difficult time. But these possibilities have stalled because of the corruption issue in respect of the Padma Bridge project. The government should sort out the matter with the World Bank as soon as possible. It is ridiculous to talk about financing two Padma bridges when we are finding it difficult to meet even the current liabilities. The finance minister has said that the government borrowing will not exceed 5.0 per cent of the GDP. Borrowing money is no solution. The government will have to reduce expenditure.

Most of the borrowing from the banking sector is being spent on subsidies. The subsidy is mostly going for fuel and electricity. Fuel subsidy is needed for increased import of fuel for the rental power plants. Subsidy for electricity is needed for buying electricity at a high price from the rental power plants set up without tender. The Power Development Board (PDB) was not a losing concern. The PDB now needs subsidy for buying costly power from the rental power plants and selling the same at a lower price to the consumers. The burden of subsidy is being shifted to the consumers by raising prices of electricity and fuel. The government should go for medium- term power projects to bring down the cost of power generation.

The country's foreign exchange reserves was US$9.6 billion on November 20 and it is expected to go down below $8.0 billion by next January after payment to the Asian Clearing Union. The foreign exchange reserve is going down because of excessive rise in import, slowdown in remittances, decline in foreign aid disbursement and sluggish exports. The value of taka is also likely to go down further. It may be noted that a $10 billion reserve is needed to cover the country's import bill for three months. This is a normal requirement. The fuel import cost may increase in the near future due to international price hike. The foreign exchange reserves will be under pressure to meet this demand. The interest rate earnings from the foreign exchange reserves are also going down because of turmoil in the European markets.

The government has advised different agencies to withdraw their deposits to meet expenditures. As a result, there is a rush for withdrawal of bank deposits. This is reducing the availability of funds for the call money market. The rate of interest in the call money market has gone up to 23 per cent from 6.7 per cent. The amount of call money has come down from Tk 5.0 billion to Tk 260-Tk 300 million. There is increasing demand for call money. At a time when the banks are facing a liquidity crisis, the government is urging them to invest more in the capital market. This is contradictory.
The International Monetary Fund cautioned that the increased government borrowing from the banking system would create further inflationary pressures. They suggested the central bank to tighten the monetary policy in order to contain inflation. According to the IMF, inflation had soared to a 13-year high of 11.42 per cent in October. The subsidy amount could be 3.4 per cent of GDP, if there is no move to make price adjustments shortly. The energy regulator on November 25 increased the bulk price of electricity for the third time this year by 33.57 per cent.
The government's fiscal coordination committee meeting on November 20 discussed the bank borrowing and subsidy issues. It was observed that bank borrowing should be reduced to lower the inflationary pressures. The total budgetary allocation for subsidy is Tk 204.77 billion, but the ministries are now seeking Tk 460 billion. The finance division projected that the probable requirement for subsidy may stand at Tk 350 billion, even after reducing the subsidy demand.

The coordination committee meeting found that sales of national savings instruments were lower than expected which resulted in a fall in non-bank borrowing compared to the target. This was due to lowering of interest rates on national savings instruments by the government. The meeting observed that non-NBR revenue collection was less than the target and foreign aid disbursement had also declined, which were the other reasons behind the rise in the government borrowing from the banking sector. The meeting laid emphasis on cutting both government and private sector credit to contain inflation. But credit disbursement to the private sector has already slowed down and there was hardly any scope for further reduction. The committee also discussed ways to ease pressure on the balance of payments situation.

The coordination committee also indicated that the government may increase the price of fuel once again, stop financing low priority projects and adopt drastic measures including staff cuts to ease the pressure on the budget. Fertiliser prices may go up to reduce the level of subsidy. The planning ministry will identify less important projects and stop financing them. The finance division estimates that the budget deficit may cross 6.0 per cent of GDP as against the target of 5.0 per cent. The overall situation will require a reduction in the size of the annual development programme (ADP). The planning commission will start this exercise soon.

Source: The Finance/ Bangladesh/ 28th Nov 2011