Govt’s borrowing from BB intensifies liquidity crunch in commercial banks

Editorial Desk :
The government’s reliance on borrowing a substantial amount of funds from the Bangladesh Bank has intensified due to the liquidity crunch faced by commercial banks, hindering their ability to meet the state’s financing requirements. In the current fiscal year, from July 1 to May 10, the government has borrowed Tk 67,906 crore from the central bank, a significant increase compared to Tk 31,403 crore borrowed in the previous fiscal year. However, this practice of borrowing from the central bank, which injects money into the market, can have adverse effects on inflation and the balance of payments (BoP).

The injection of funds has led to a rise in the volume of notes and coins in circulation. Consequently, the initial borrowing of Tk 67,906 crore by the government may eventually lead to a total amount of Tk 339,530 crore. The additional money in the hands of the public will generate greater demand for goods, thereby driving up prices. Although inflation slightly decreased to 9.24 per cent in April after reaching a seven-month high of 9.33 per cent in March, it still remains higher than the 6.17 per cent recorded in February of the previous year.

Furthermore, injecting such a large sum of money will have a negative impact on the balance of payments. As money circulation increases, the demand for goods and services rises, resulting in higher imports. Over the past few months, the country has experienced a downward trend in foreign exchange reserves due to insufficient export and remittance earnings to offset the surge in import bills driven by elevated global commodity prices. The reserves currently stand at $30.34 billion, compared to $42.20 billion in May of the previous year, representing a year-on-year decrease of 28 per cent.

The government has also borrowed Tk 10,654 crore from commercial banks between July 1 and May 10, bringing its overall borrowing from the banking sector to Tk 78,560 crore. The borrowing target for FY23 is set at Tk 106,334 crore. As the fiscal year approaches its end, it is expected that borrowing will increase in the last two months to meet the government’s expenditure requirements.

Chaotic nature of the government began exposing itself and we see no hope for peaceful change. We see no intention in the government to come out of the past trap of lies.