The interim government's repayment strategy, involving borrowing from commercial banks to repay loans taken from Bangladesh Bank (BB), reflects a significant shift in fiscal management. While this approach aims to curb inflation by avoiding money printing, its implications for the broader economy warrant closer examination.
In the first six months of the 2024-25 fiscal year, the government repaid Tk 54,500 crore to BB by borrowing Tk 69,000 crore from commercial banks. Consequently, the net borrowing from commercial banks stood at Tk 14,600 crore during this period. This marks a notable departure from the previous fiscal year, when net bank borrowing was in the negative territory at Tk 3,286 crore.
This policy shift has been driven by several factors, including a halt in development activities, increased foreign loan assistance, and higher revenues from the sale of savings certificates. Additionally, the government's overall revenue collection remains stable. However, such reliance on commercial banks for borrowing raises concerns about private sector credit availability and its impact on the economy.
Economists have long advised against excessive government borrowing from commercial banks due to its potential to crowd out the private sector. A liquidity crunch in many banks has already made it difficult for entrepreneurs to access loans, stifling private investment and business growth. The increased borrowing by the government, as reflected in the rise of its loan balance in commercial banks from Tk 3,18,441 crore in June 2023 to Tk 3,87,497 crore in December 2024, exacerbates this challenge.
While the government's decision to stop money printing to control inflation is commendable, it is not without trade-offs. Dependence on commercial bank borrowing may stabilize inflation but risks hampering private sector activity, which is vital for economic growth and job creation. The private sector, already struggling with reduced access to credit, could face further constraints as banks prioritize lending to the government over businesses.
Moreover, while the government's repayment to BB reduces the money supply, it does little to address the structural issues that contribute to high inflation. A balanced approach, combining fiscal discipline with targeted monetary policies, is crucial to ensure sustainable economic stability.
The government's borrowing target of Tk 1,37,500 crore for the current fiscal year underscores the importance of prudent debt management. While borrowing is an essential tool for financing deficits, it must be managed in a way that does not undermine private sector growth or exacerbate liquidity challenges in the banking sector.
Moving forward, the government must explore alternative financing strategies, such as tapping into foreign grants and loans, enhancing tax revenue collection, and prioritizing efficient public spending.
Such measures would reduce dependence on domestic borrowing while fostering a more conducive environment for private sector growth.
Economic stability requires striking the right balance between fiscal needs and growth imperatives. The interim government must remain vigilant to ensure its policies support long-term economic resilience without sacrificing private sector vitality.
