The interim government of Bangladesh has fallen into a severe financial crisis. Three major factors have created this situation: declining revenue collection, rising repayment obligations for loans taken by the previous government, and increasing prices of goods and services due to inflation. To overcome this crisis and to meet its planned operational expenditures, the government is having to rely on loans. Amid financial distress, the government has adopted austerity measures. Spending on development projects is extremely low. Despite this, government borrowing from domestic sources continues to rise, while credit flow to the private sector is declining. As public-sector borrowing increases, total domestic credit flow has risen only slightly. These findings come from a report prepared by the central bank based on updated economic indicators.
Meanwhile, an IMF report has advised reducing public-sector borrowing and increasing credit flow to the private sector. The IMF has described the continuous decline in private-sector credit as alarming.
According to the central bank report, during July–August of the current fiscal year, public-sector credit grew by 1.79 percent. Private-sector credit did not increase — instead, it decreased by 0.03 percent. Thus, private-sector credit flow was negative during the first two months of the fiscal year. Although imports in the private sector have increased, slowdowns in exports, industries, and business activities have prevented growth in credit demand. This slowdown has persisted for several years. The student–public uprising last July worsened the situation, and its effects continue to linger.
Only 28 percent of the country’s total domestic loans go to the government sector, while 72 percent go to the private sector. Although loans for gas and fuel imports fall under public-sector borrowing, most of the consumption occurs in the private sector—meaning the actual private-sector share is even higher. Out of the total domestic debt of Tk 23 lakh crore, Tk 17.5 lakh crore belongs to the private sector and Tk 5.5 lakh crore to the government. Even though private-sector credit flow has decreased, total domestic credit flow increased by 0.36 percent solely because public-sector borrowing rose. However, as public-sector borrowing is used mainly for routine expenditures, it has little impact on production or employment.
The government is taking loans primarily to cover its planned day-to-day expenditures. In the event of a natural disaster or unforeseen emergency, unplanned government expenses will rise sharply, which could lead to even higher borrowing. The central bank report identifies three main reasons behind rising public-sector borrowing:
1. Revenue collection is not meeting targets.
2. The previous Awami League government took large short-term and long-term loans from domestic and foreign sources, which it could not repay due to shortages of dollars and taka. Loan tenures had to be extended repeatedly, increasing both interest and penalty payments. The current government is repaying those loans to maintain the country’s financial reputation and keep the economy functioning.
3. A combination of heavy inherited debt repayment obligations and extremely low revenue collection has created an acute financial crisis.
The government is now primarily operating using low-interest loans from international development partners. At times, the crisis becomes so severe that it has to borrow newly printed money from the central bank. Although such borrowing is temporary, the government repaid Tk 3,105 crore of this printed-money loan during July–August. Due to liquidity shortages in the banking sector, the government is not borrowing from banks; instead, it has repaid Tk 2,517 crore of previous bank loans.
In contrast, during July–August, the government borrowed about Tk 64,000 crore from the non-banking sector and used it to repay loans from the central bank and commercial banks. However, interest rates in the non-bank sector are higher—between 11 and 11.75 percent—compared to 5 to 10 percent in banks. Most of these loans came from savings certificates and non-bank financial institutions.
To repay foreign debts, the government is purchasing dollars at high prices. Payment delays have also increased the interest burden. As a result, the cost of foreign debt servicing has risen further.
According to the report, inflation remains above 8 percent. For nearly three years, inflation hovered between over 9 percent and above 11 percent. Prolonged high inflation has pushed up prices of goods and services. Meanwhile, declining incomes among low-income groups have forced the government to expand its social safety net, further increasing expenditures.
The government’s primary source of income is revenue collection. Long-standing economic slowdown and recent protests related to the National Board of Revenue’s reform program have hindered revenue collection. However, compared to July–August of the previous fiscal year, revenue collection increased by 21 percent this year. During the same period last year, revenue actually declined by more than 2.5 percent.
In July–August of the current fiscal year, the revenue target was Tk 61,026 crore, but only Tk 54,423 crore was collected—a shortfall of Tk 6,577.26 crore, or about 11 percent. During the same period last year, revenue collection amounted to Tk 45,005.16 crore.
The review shows that government expenditures have increased across all sectors, but income has not grown at the same pace, resulting in a major budget deficit. To cover this deficit, the government is borrowing. However, the government’s domestic loan market is shrinking because liquidity shortages in banks, economic slowdown, high inflation, and reduced household income have limited domestic loan supply.
According to the report, as of the end of August, bank deposits grew by only 1.44 percent—insufficient to ease liquidity pressures. Deposits increased primarily because of a rise in fixed-term deposits. While this indicates improvement in long-term liquidity, the decline in current deposits signals reduced business activity.
The report also states that rising bank deposits have increased domestic assets, and higher inflows of dollars have boosted foreign assets. Together, these have raised the country’s domestic and foreign assets, resulting in a 0.33 percent growth in money supply.
