The decline in government borrowing requirements, coupled with heightened interest from banks, has led to a reduction in interest rates on treasury bills and bonds.
Consequently, commercial loan interest rates are expected to decrease, creating an environment conducive to private sector investment, according to financial experts.
Economists attribute this trend to two key factors.
Firstly, the latest monetary policy has refrained from raising the policy rate, thereby preventing an increase in lending rates.
Secondly, the government’s reduced borrowing has driven treasury yields lower, ensuring banks have sufficient liquidity to extend loans to private enterprises.
Former World Bank chief economist Zahid Hussain noted that treasury yields have dropped significantly in recent weeks, prompting banks to reconsider their investment strategies.
"Previously, banks reaped risk-free profits from treasury investments. However, with yields falling, profit margins are shrinking, incentivising banks to explore private sector lending, despite its inherent risks. Yet, if these loans fuel excessive consumption instead of investment, inflationary pressures could mount. On the other hand, if capital is allocated effectively, GDP growth prospects will be enhanced," he observed.
Former president of the Dhaka Chamber of Commerce and Industry, Shams Mahmud, highlighted that Bangladesh Bank’s recent short-term measures had initially placed some strain on the private sector.
"However, their benefits are now becoming evident. Keeping the policy rate unchanged was a prudent move, and the declining treasury yields indicate that the central bank is executing its policies effectively. If gas and electricity supply issues are resolved and law and order stabilises, private sector entrepreneurs could initiate new investments after the upcoming Eid," he stated.
Data from Bangladesh Bank reveals that treasury yields, which had peaked at approximately 12%, have now declined to 10%.
Treasury bills and bonds are short-term financial instruments issued by the government, typically maturing within a year.
Considered low-risk investments, they offer assured returns backed by government guarantees.
Over the past few years, commercial banks have channelled surplus liquidity into these instruments, reducing the availability of loans for the private sector.
Government borrowing from commercial banks significantly curtailed private sector credit growth during the 2023-24 fiscal year, a trend that has persisted into the current fiscal year.
As of the first six months, private sector credit growth stood at a decade-low of 7.28%.
Concurrently, imports of capital goods and intermediate industrial products plummeted, with letters of credit (LC) openings for capital machinery dropping by 34% and settlements declining by 27% compared to the previous fiscal year.
Furthermore, GDP growth for the first quarter (July-September) of the current fiscal year stood at a mere 1.81%, a sharp decline from 6.4% during the same period last year.
Amid these concerns, economists have urged the government to prioritise revenue collection over excessive reliance on bank borrowing.
They caution that excessive government borrowing crowds out private sector credit, hampering investment and economic growth.
Senior economist and former caretaker government adviser Mirza Azizul Islam warned that several commercial banks are facing liquidity constraints.
"If the government continues borrowing heavily from banks, the private sector will suffer, reducing investments and employment generation, thereby exerting downward pressure on economic growth. Instead, the government must enhance revenue collection to mitigate fiscal deficits," he advised.
In response, the government has taken steps to curtail expenditure, cancelling several non-essential projects.
This fiscal prudence has resulted in a downward revision of the borrowing target from commercial banks.
The initial target for bank borrowing to cover the fiscal deficit stood at Tk1.37 trillion, which has now been revised down to Tk990 billion.
Bangladesh Bank data indicates that, as of 30 January, the government’s outstanding bank debt stood at Tk4.88 trillion, up from Tk4.74 trillion on 30 June.
This means that in the first six months of the fiscal year, the net bank borrowing amounted to only Tk135.71 billion.
According to central bank officials, although overall deposit growth remains modest, stronger banks continue to attract deposits, with many customers shifting funds from weaker institutions.
At the same time, private sector credit demand remains subdued, further augmenting liquidity in the banking sector.
With reduced government borrowing, banks may be compelled to take on slightly higher risks in search of better returns through private sector lending.
Mutual Trust Bank Managing Director and CEO Syed Mahbubur Rahman affirmed that most banks currently possess ample liquidity.
"Private sector credit demand has been relatively low, prompting banks to invest heavily in treasury bills and bonds. However, with the government now borrowing less and focusing on expenditure control, banks are likely to channel more funds towards private sector lending as demand rises," he stated.
