Heavy bank borrowing to be counter-productive

The government’s designs to fund a large chunk of next fiscal year’s budget by borrowing heavily from the banking sector will leave the pandemic-stricken economy in a tight spot, said the Centre for Policy Dialogue yesterday.

The exercise will crowd out the private sector from funding, which can be counterproductive for a recovering economy.

The CPD came up with the remark at a discussion styled “An Analysis of the National Budget for 2020-21”.

Finance Minister AHM Mustafa Kamal on Thursday in his budget speech said the government would borrow a record Tk 84,980 crore from banks, which is about 45 percent of the total deficit financing for the next fiscal year.

The majority of the businesses, ranging from cottage to large, are now in dire straits due to the ongoing economic fallout emerging from the pandemic, said Fahmida Khatun, executive director of the CPD.

“The businesses will have to take loans from the banking system. But the excessive bank borrowing by the government will narrow the credit space for them.”

Besides, the stimulus packages worth more than Tk 100,000 crore will have to be implemented largely by banks.

So how would banks be able to fund the government’s enormous bailout efforts and also lend to the state?

If the government borrows heavily from them, banks will face a difficult situation in implementing the packages, Fahmida said.

The government had initially set a borrowing target of Tk 47,364 crore to manage its deficit financing for this fiscal year, but it was later forced to raise the target to Tk 82,421 crore.

Also, the government has estimated that the private investment to GDP ratio would double to 25.3 percent in the upcoming fiscal year — a farcical projection, by all accounts.

A staggering Tk 802,330 crore will be required to achieve that projection.

“The private investment ratio to GDP for the upcoming fiscal year is unrealistically high compared with that in fiscal 2019-20 at a time when the economy is burdened with significant underutilised production capacity,” the CPD said.

Mustafizur Rahman, a distinguished fellow of the CPD, raised questions over the high bank borrowing, saying the target is opposite the government’s appetite to give a boost to private investment.

Besides, the finance minister had committed to forming a banking commission while delivering his budget speech for fiscal 2019-20, Mustafizur said. Kamal had also said actions would be taken against the habitual defaulters.

But what transpired during the fiscal year was the exact opposite. The central bank earlier allowed banks to reschedule defaulted loans by way of taking 2 per cent down payment from delinquent borrowers, Mustafizur said.

“This has decreased defaulted loans in the banking sector for the time being. But, the programme will not bring any solution,” he added.

Fahmida said the government should emphasise on mobilising foreign loans and grants to manage its deficit financing.

If the government can implement the foreign-funded projects of the annual development programme swiftly, more foreign loans and grants will be bagged, she said.

As per the budgetary target, the government will mobilise Tk 80,017 crore in foreign loans and grants and Tk 20,000 by selling national savings instruments in fiscal 2020-21.

The government could widen the borrowing target from the savings tool as well, Fahmida said.


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