Heavy government borrowing crowds out private investment: Report
Business Report :
Bangladesh’s growing reliance on the banking system to finance its fiscal deficit is increasingly crowding out private sector investment, according to a report by the General Economics Division (GED) under the Planning Ministry. The report highlights that while private sector credit growth fell to a historic low of 6.35 percent in August, net credit to the public sector increased by 16.59 percent, reflecting the government’s dependence on banks to fund fiscal spending amid a shortfall in tax revenue.
The GED said the slowing growth of private credit signals a reluctance among businesses to invest and expand. High interest rates, cautious lending practices, political uncertainty, and economic volatility are discouraging firms from borrowing for productive purposes. Reduced private sector credit directly affects investment, industrial output, and job creation, raising concerns about future economic growth.
The report noted that Bangladesh Bank’s tight monetary policy, aimed at controlling inflation, has helped moderate price rises. Inflation fell to 8.48 percent in June from 9.05 percent in May and stabilized around 8.36 percent in September, but this came at the cost of limiting private credit availability. The high government borrowing has also contributed to a crowding-out effect, leaving less liquidity for businesses to invest and expand.
Deposit growth in the early months of the current fiscal year has remained moderate and fluctuating, primarily due to high inflation eroding household purchasing power. However, strong remittance inflows and government initiatives, including cash transfers through bank accounts, have bolstered liquidity.
The GED report pointed to a mixed macroeconomic outlook. On the positive side, rice prices have fallen, providing relief to households, while foreign exchange reserves have risen, and revenue collection has improved. Exchange rates remain stable, providing some cushion for import-dependent industries. On the other hand, a slowdown in exports and subdued private credit growth signal challenges for industrial and service sectors.
Looking ahead, the GED expressed cautious optimism. Election-related activities in the coming months are expected to boost consumer and business confidence. Still, the report stressed that achieving a sustainable economic recovery requires stimulating private investment, striking a balance between controlling inflation, and creating a favorable environment for businesses. Analysts warned that continued reliance on bank borrowing by the government could restrict credit for private businesses, potentially slowing industrial growth, employment generation, and long-term economic expansion.