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Government securities market size has ballooned with its borrowing rising by Tk 375 billion in the first eight months of this fiscal.
The development indicates the government's spendthrift expenditure despite its austerity stance.
Officials and money-market analysts have said the government borrowing from the financial sector through issuing securities keeps rising because of growing budget-financing shortfalls for less-than- expected level of revenue incomes.
But government's growing dependence on bank borrowing to meet budget deficits further tightened the existing liquidity pressure on commercial banks. As a matter of fact, the scope of getting formal credits from the banking sector for the private sector is squeezing.
According to statistics available with the central bank, the outstanding balance of government securities stood at Tk 5.27 trillion at the end of February 2024 from Tk 4.89 trillion recorded in FY'23.
The outstanding balance of government securities in previous four fiscal years (FY'22, FY'21,FY'20 and FY'19) was Tk 3.89 trillion, Tk 3.19 trillion, Tk 2.80 trillion and Tk 1.99 trillion respectively.
Seeking anonymity, a Bangladesh Bank official said government's domestic borrowing is on the upturn significantly because of widening budget-financing deficit for not getting expected level of revenues.
On the other hand, the central banker said, the government has issued special bonds since January last for settling accumulated arrears to independent power producers and fertiliser suppliers that also contributes to the debt rise.
"I think it (the volume of government securities) will continue growing unless the revenue-mobilisation target is reached," the official added.
According to the BB, commercial banks have so far received special bonds worth around Tk 160 billion, which is around 40 per cent of the piled-up government securities in this fiscal.
A delegation of Bangladesh Chamber of Industries (BCI) led by its president Anwarul Alam Chowdhury Parvez recently met the BB governor when they raised concerns over growing inflow of formal credits into government securities.
Talking to the FE writer, Mr Parvez said the cost of formal credits continues to rise while the industries face difficulties in opening LCs (letter of credit) in banks amid the ongoing forex dearth.
Simultaneously," he said, the commercial lenders have largely been making their investment in government securities riding on higher yields instead of their regular lending activities.
"And it may squeeze the scope of getting credits by the private sector. Look at the data of private-sector credit growth, it is on the downturn," the chamber chief said about the financing dilemma.
The private-sector credit growth dropped to reach 9.95 per cent in January from December's count of 10.13 per cent. The growth was over 14 per cent in August 2023, the central bank data showed.
Managing director and chief executive officer of Dhaka Bank Emranul Huq says government's increased bank borrowing further tightened the existing liquidity stress in banks. "As the credit demand from the banking sector is on the downturn, the liquidity stress is not visibly seen yet."
Alongside depletion of private sector's credit appetite, he said, the infrastructure financing, post-import financing and offshore financing have gone down significantly in recent times, allowing the banks to invest in risk-free government instruments.
According to the banker, the average deposit growth in banks was 13 per cent while the average credit growth was only 6.0 per cent.
Not only the banks, large and medium corporate depositors have now been diverting their funds into state securities to get handsome returns of over 11 per cent in short terms whereas most banks are offering less than 10 per cent, according to him.
As the supply of foreign currencies continues rising, mainly through export and remittance receipts, the experienced banker says, there is a sign that credit demand will start increasing in coming months because the election-related fears or concerns are over.
"The government needs to be very watchful in increasing market of government securities because prolonged decline in credit demand could hamper overall economic growth," he adds, on a note of caution on the downside risk.