August 17, 2023
DHAKA – The government has started the fiscal year with the resolve to borrow less from the central bank to fund its budget deficit as it looks to rein in the runaway inflation to a tolerable level ahead of the polls.
In July, which is the first month of the fiscal year, the government did not borrow from the central bank; rather, it returned Tk 9,354 crore, according to data from the Bangladesh Bank.
“Borrowing from the central bank fuels inflation, so we plan to do less of that this year,” said a finance ministry official involved with the proceedings.
In July, inflation stood at 9.69 percent, down 10 basis points from the previous month on the back of a drop in non-food inflation, which is mostly fanned by new money entering the economy.
“Food inflation is due to supply side issues but non-food inflation is almost always for demand side issues and we are targeting this to bring down overall inflation,” he said.
The government would instead be training its focus on borrowing for commercial banks to make up its deficit financing of Tk 261,785 crore this fiscal year. Of the sum, Tk 132,395 crore would be coming from the banking system, as per the finance division’s projections.
More borrowing from commercial banks means less funds available for the ordinary people and the private sector, so lesser chances of inflation edging up.
Last month, the government’s borrowing from banks stood at Tk 5,531 crore was borrowed from banks, according to data from the BB.
So, overall, the government’s net borrowing from the banking system declined by Tk 3,823.3 crore in July from the previous month.
“We will try not to borrow from the central bank for as long as inflation stays high,” said another finance ministry official on the condition of anonymity to discuss sensitive deliberations.
The government has targeted to keep inflation within 6 percent this fiscal year.
At the same time, the government is also trying to bring down its costs to minimise its funding requirement, The Daily Star has learnt from finance ministry officials with knowledge of the matter.
For instance, in the months leading up to the polls in 2018, there would be frequent meetings of the Executive Committee of the National Economic Council, in which a flurry of projects was approved.
Last month, there was just one Ecnec meeting, and there hasn’t been any so far this month. It is unlikely that there would be one this month at all, according to officials involved with the meetings.
“Borrowing less from the central bank is the right decision but I have my doubts that the government will be able to comply with it,” said Ahsan H Mansur, executive director of the Policy Research Institute.
For that to happen, the interest rate must be allowed to rise further and the savings growth has to be substantial.
“It will be extremely challenging as they will have to change the way they do business. If the deposit growth does not go up much, it will become impossible to stick to this policy,” said Mansur, also a former chairman of Brac Bank.
Zahid Hussain, a former lead economist of the World Bank’s Dhaka office, is unwilling to read too much into July’s lower central bank borrowing.
“I think it’s a seasonal effect – expenditure pressure is less in July,” he said.
Besides, revenue collection goes up in June and those are deposited to the government’s account; with that surplus, the government manages the next few months’ expenses.
“It’s too early to say if there has been any policy shift from the government’s part based on just July’s data.”