Govt borrowing from BB may fuel inflation

The government has continued borrowing from Bangladesh Bank as commercial banks have been unable to come up with much-needed funds owing to a liquidity crunch. 

If the government consistently borrows from the central bank, it may fuel inflation, which has remained at an elevated level over the past one year.

Between July 1 and March 2 this fiscal year, the government borrowed Tk 50,043 crore from the central bank, according to the BB data. It borrowed Tk 31,403 crore in the entire fiscal year of 2021-22.

Borrowing from the central bank usually stokes inflationary pressure as it plays a vital role in creating money circulation, said Zahid Hussain, a former lead economist of the World Bank's Dhaka office.

The policymakers are now arguing that if the government borrows from commercial banks, the credit growth in the private sector will face trouble, which eventually shrinks the GDP growth, he said.

"So, the government should set its focus on whether it wants to fight inflation or give a boost to the growth," he said.

Given the ongoing stress in the macroeconomic arena, it is difficult for the government to fulfill both of the targets – containing inflation and promoting investment -- in tandem, Hussain said.

The Consumer Price Index (CPI) rose 8.57 per cent last month, a decrease of 14 basis points from 8.71 per cent in December, according to data from the Bangladesh Bureau of Statistics (BBS).

January's inflation figure was the lowest since August when consumer prices surged to a 10-year high of 9.52 per cent.

The country is now facing a dollar shortage, creating a tough situation over clearing import bills, he said.

"If you (policymakers) try to address the ongoing dollar shortage, the government should shy away from borrowing from the central bank," he said.

Bangladesh's foreign currency reserves slipped to a six-year low of $31.15 billion after the central bank cleared import bills to the tune of $1.05 billion with the Asian Clearing Union (ACU) on March 6.

This means the reserves have fallen by about 30 per cent from $44.14 billion recorded in March last year.

The current level of the reserves is the lowest since the financial year of 2016-17 when it stood at $33.49 billion.

The ACU, headquartered in Tehran, is an arrangement to settle payments for intra-regional transactions among member countries: Bangladesh. India, Bhutan, Iran, the Maldives, Myanmar, Nepal, Pakistan and Sri Lanka. The countries settle the bills every two months.

Hussain said the central bank now should give more focus to contain inflation. And containing government borrowing is important to tackle the existing high inflation, he said.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said government borrowing may increase further due to its dismal performance in mobilising revenue.

The government's total revenue collection stood at Tk 26,877 crore in January against a target of Tk 31,500 crore.

Between July and January of this fiscal year, revenue collection fell short of the target by Tk 17,266 crore. The target for moblising revenue was Tk 190,000 crore for the period.

Disbursement of foreign aid will also decrease this fiscal year, which may create additional pressure on the government, said Mansur, also a former official of the International Monetary Fund (IMF).

"But the government will have to contain its borrowing from the banking sources as per the IMF's suggestion," he said.

The government has set a bank borrowing target of Tk 106,334 crore for 2022-23.

Of the money that the government has taken from the BB in the last eight months, Tk 4,036 crore was used to repay commercial banks.

So, the government's net borrowing from the banking system stood at Tk 46,007 crore as of March 2.