Govt's higher borrowing may impact pvt sector credit flow, warns GED

The General Economic Division (GED) of the Planning Commission has warned that increased public sector borrowing from commercial banks may be crowding out the credit flow to the private sector.

The government's economic think-tank noted that public sector borrowing from commercial banks had risen significantly in recent months, primarily due to sluggish revenue collection and suspension of direct lending from the central bank.

The remark was made in the May issue of "Economic Update and Outlook" released by the GED on Saturday.

The paper notes that inflation eased slightly in April compared to March, mainly due to a drop in food prices. However, it adds that, as in March, food items -- particularly rice and fish -- remained the main drivers of inflation in April.

To cushion the impact of potential food supply shocks amid rising food costs, the GED recommends maintaining an adequate strategic buffer stock, especially of rice.

In light of the government's constrained fiscal capacity and the growing financial burden of subsidies, the publication recommends prioritizing targeted social safety net programmes in the national budget for the next fiscal year.

The GED recommended expanding school feeding initiatives, food-for-work schemes, open market sales, and guaranteed employment programmes to better support poorer households in a fiscally sustainable manner.

The GED also said the external sector strengthened with a significant increase in remittances and stable exchange rates, though export growth showed a slight dip in April. The GED found a notable shift occurred in public sector borrowing, with government borrowing from commercial banks rising sharply to Tk 985.79 billion by mid-April -- a 60 per cent increase compared to the same period last year.

The paper attributed it to sluggish revenue collection and suspension of direct financing from the central bank.

Consequently, the heightened reliance on commercial bank borrowing might have constrained credit availability for the private sector, it added.

The paper said that deposit and private sector credit grew more in April, indicating a gradual recovery path of economic activities and investments.

"Efforts to increase revenues and reduce the reliance on bank borrowing by the government are crucial for fiscal sustainability and boosting investment," the paper explained.

The GED noted that the National Board of Revenue (NBR) recently introduced the Medium- and Long-Term Revenue Strategy, aiming to raise the tax-to-GDP ratio to 10.5 per cent by FY2034-35.

However, before implementing this strategy, it may be essential to conduct a thorough review of past reform efforts to understand the factors behind their limited success.

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