Deficit financing: Govt borrowing beyond monthly auction

The government is increasingly borrowing from the banking system going beyond the regular monthly calendar of auctions.

Primary dealers (PDs) said the government had borrowed money six-times over the past six months, hurried and unusual in recent years.

This signifies that the public sector is failing to finance its widening budget deficit as a result of poor revenue mobilisation.

The government usually borrows through short-term and long-term debt instruments to finance its budget deficit.

The dealers said that such types of auction create troubles for managing their funds as they get notice within a day or two.

The average amount that the government borrowed from the banking system in such a hurried manner was Tk 20 billion during the last six months beginning from January last.

The government also held such an unplanned auction on Monday last to borrow Tk 30 billion through short term bills.

The primary dealer banks who participated in the bidding told the FE this time government has borrowed through the 14-day bill instrument leading to the hike in yields.

Treasury chiefs working for different primary dealers said this type of borrowing is boon to those who have surplus fund but this is a problem for those who have liquidity crunch.

"Actually this time almost all banks under liquidity pressure and holding of such quick bidding creates problems for us," the head of treasury at a privately-owned bank told the FE.

He said the government should have predicted its borrowing needs accurately.

He noted the government may even pursue calendars of three or more months so that the financial institutions can better manage their funds.

"I've seen in Indonesia that they have been maintaining six-month calendars for borrowing through the treasury bills and bonds."

Head of treasury of BRAC Bank Shaheen Iqbal said long-term planning is good because it allows them to forecast the fund.

On Monday's auctions, he said, "We had adequate fund on the day. That's why, we didn't face any trouble."

Another treasury head of a private bank told the FE that as the yield is rising meaning the market has liquidity shortage.

In the meantime, the government treasury management at the finance division acknowledged they have been borrowing in such a manner to foot the bills of the Annual Development Programme (ADP).

He argued the government treasury cannot become bankrupt and a certain balance in the national exchequer must be maintained.

The 91-day T-bill yield rate increased by nearly 82 per cent to 6.67 (anualised) in June over the same period in 2018, that of 182-day T-bill jumped by 59 per cent and 364-day T-bill by 57 per cent during period under review.

The yield rate of long term T-bond also increased.

The yield of 2-year T-bond increased by 57 per cent in June over the same period last year. The yield of 5-year T-bond enhanced by nearly 35 per cent and that of 10-year T-bond rose nearly 14 per cent during the period under review.

However, the total financing to the budget in terms of GDP increased to over 3.0 per cent during July-March 2018-19 against nearly 2.0 per cent during the same period in 2017-2018, according to Bangladesh Bank data.

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