Prolonged liquidity crisis posing challenges to economic stability

Md Sha Alam

Economists are raising alarms over the growing preference of banks to lend to the government, as indicated by the rising interest rates on treasury bills and bonds. This shift in lending patterns is driven by the perceived profitability and safety associated with government borrowing amidst the current financial climate.
The government's fiscal strategy for the 2024-25 financial year includes a deficit budget amounting to Tk 2 lakh 56 thousand crore. To fund this deficit, Tk 1 lakh 60 thousand 900 crore will be sourced internally, with Tk 1 lakh 37 thousand 500 crore of this sum to be borrowed from the domestic banking sector. Economists caution that this borrowing trajectory could lead to an increase in overall bank loans to the government by the end of the financial year.
Bangladesh's banking sector continues to grapple with a prolonged liquidity crisis, now nearing its second year. The situation has reached a critical juncture, with several banks relying heavily on the central bank for liquidity support amid mounting challenges.
At least twelve banks across the country have become dependent on injections from the central bank to maintain liquidity, underscoring the severity of the crisis. In response, the central bank has resorted to injecting cash into these banks, including through monetary expansion measures such as printing money. Adding to the complexity, the government's fiscal strategy for the 2023-24 financial year has led to heightened reliance on bank loans to fund a deficit budget, exacerbating liquidity pressures within the banking system. Dr. Ahmed Khan, an economist, commented on the dual challenge facing the central bank. "Beyond the imperative of controlling inflation, ensuring sufficient credit flow to the private sector has emerged as a paramount concern. However, the prevailing liquidity crunch and mounting non-performing loans (NPLs) have hindered new investments and business expansions," he stated.
In the latter half of the fiscal year 2023-24, Bangladesh Bank set a target of 10 percent growth in private sector credit, which was surpassed with an increase of 10.35 percent by May. Bank officials, however, caution that this growth is largely attributed to accrued overdue loans and unpaid interest, rather than fresh credit for new ventures.
As Bangladesh Bank deliberates its new monetary policy, officials indicate a likelihood of maintaining the current credit growth target for the private sector. This cautious approach aims to stabilize the banking sector while fostering an environment conducive to economic recovery and sustainable growth.
Amidst ongoing efforts to address the liquidity crisis and stimulate private sector investment, stakeholders remain vigilant about the impact of policy decisions on economic stability and financial health.
Dr. Ahsan H. Mansur, an economist, commented on the situation, stating, "The rising interest rates on government securities are attracting banks due to their perceived safety and returns. However, this trend poses a risk of crowding out private sector borrowing, potentially limiting access to credit for businesses and hindering economic growth."
Echoing similar concerns, Dr. FahmidaKhatun, another economist, emphasized the need for balanced fiscal policies. She remarked, "While government borrowing is essential to finance development initiatives, excessive reliance on bank loans could squeeze credit availability for private enterprises. This imbalance could impede private sector investment and job creation." The interest rate on government treasury bills has surged to 11.80 percent, reflecting heightened demand from banks seeking secure investment options amidst economic uncertainties.