Monday | 13 January 2025 | Reg No- 06
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Monday | 13 January 2025 | Epaper

Govt focus on bank money: Would it turn away private demand for credit?

Published : Saturday, 23 November, 2019 at 12:00 AM  Count : 228
Haradhan Ganguly
Where lies the critical hurdles for private investment for not being near to target for long is still remaining unexplored and at this how far much talked about the recent government's borrowing from banks would crowd out private sector is a quantitative comprehension that World Bank raised in its last "Bangladesh Development Update-Tertiary Education and Job Skills" though without giving any data on the latest liquidity position of commercial Banks particularly the state owned commercial banks (SOBs).

The question rises that the government borrowed nearly TK.280 billion from the SOBs in more than 100 days of the current fiscal year (FY) to meet the budget deficit, partially. This news was made by a national daily on 29 Oct, 2019, referring Bangladesh Bank. Meanwhile, the government's aggregate net bank borrowing stood at TK.276.34 billion, which was more than 58 per cent  of the total target, as of October 21 of FY 19.

Nearly unmoved state of private investment is being attributed by more multi-dimensional issues that warrant more insight exploration. Since private investment has been facing institutional and market based hindrances entrenched in for long.

Whatever it might be, we try to see at this whether government this much reliance on bank money will have any crowding out effect on private investment due to declining of liquidity of the banks or so to say SOBs. Has there been any evidence of turning away private sector demand for bank credit due to shortage of loanable funds or facts are others to be shied away. Exploring this is necessary; otherwise it would be an oversimplification of quantitative analysis of setting up a causal relation between a stagnant private investment and dwindling bank money due to going more in government pocket. Even World bank and CPD here used the word "may" in saying the possibility of crowding out effect. That means, there are other ramifications determining the bank credit of private sectors.

Our growth achievement is demand dominated being touted by invigorated remittance and export earnings as being influencing variables. But other internal factors are constantly influencing the shaping of demand. Suppose according to World Bank, total government expenditure increased to 14.8 per cent of GDP in FY19, 0.5 per cent age points higher than the previous year. Current expenditures raised by 38.5 per cent due to increased payments on subsidies, staff pay and allowances, employment related social transfers and higher interest payments on saving instruments (NSCs).

In the revised FY 19, budget, BDT 212 billion in cash loans and subsidies were planned, almost 250 per cent  higher than FY18. The Bangladesh Power Development Board (BDBP) is expected to be the largest recipient of the cash loans at BDT 92 billion, as the government continues to provide high-cost electricity at subsidized rates. Next comes higher imports of LNG also resulted in a subsidy of BDT 45 billion in FY19.

This escalating government expenditures in the form of subsidies ultimately where to go? Higher staff pay and allowances and employment related social transfers ultimately end up invigorating internal demand for goods and services to be responsive for private sectors to come up with larger scope of investment. High off government expenditures would shake off private investment getting out of its sterility is a basic tenet of Keynesian approach that is still a silent guide to our financial sector management, market and public and private investment. But juxtaposing Keynes, the father of modern economics and state capitalism, we get a conflicting state of our investment scenario.

Vis-�-vis of growing public expenditures, we see declining private sector credit growth not due to constrained banking sector liquidity but for other weaknesses entrenched inherently in private sector investment. Private sector credit growth fell from 16.9 per cent in FY18 to 11.3 per cent in FY19. In no way this declining is blamed for to be attributed to dearth of bank money due to government's snatching away.

Desertification in private investment has been enduring for long. For short analysis, starting from FY14, it was 22.0 per cent and now FY19 it is 23.4 per cent far behind of the target of 7th Five year plan. On the other public investment is now 8.2 per cent starting from 6.6 per cent in FY14. Government's hefty investments on mega projects, shooting up expenditures as subsidies, pays and allowances and on social safety net programmes fail to rise up private investments. Though there created a dynamic demand function for goods and services both in rapidly urbanized economy and in an ever expanding informal economy in rural sectors. A conflicting with Keynesian approach.

 John Maynard Keynes is still apposite to our demand induced growth driven by dynamic private sector investment. His focuses on the forces which determine the volume of effective demand, an insufficiency of which leads to unemployment and an excess of which causes inflation makes Keynes as one of the great economists of all time. This comment of Dudley Dillard, Professor of Economics, university of Maryland holds good in the beginning of fast passing 21st century.

Keynes says, when private investment is seen non-dynamic and lagging behind far more, government must come to fore to invest more in infrastructural upliftment and social sectors. It will create demand for goods and services and at that time private sector will see a wider market waiting for their investment. In this way private sector will go through a dynamic phase.

Rising public investment will stimulate private sectors in a way of creating wider market demands for dynamic investment to see opportunity for wider employment and it will again raise demand for goods and services and demand for further investment. Through a multiplier effect economy will proceed on to a full employment stage. Full employment stage is debatable. But a lured private investment boom brings in wider avenues of employment opportunities. Our financial sector bosses hold to Keynesianism.

Pressuring banks to limit lending rates at 9 per cent are taken as immediate cause of declining private sector credit growth and US dollar sales by Bangladesh Bank to moderate the exchange rate, rising non-performing loans (NPLs), government directives to cap deposit rates at 6 per cent  and prevalent double digit interest rates of NSCsare held together by World Bank to be the threat to liquidity crunch of state owned commercial banks (SOBs). This multilateral World body thought bank deposit growth was weakened by a government directive to cap deposit rates at 6 per cent and deposit came down to 9.9 per cent in June 2019 from 10.3 per cent a year ago.

But we have information on falling trend in sales of national savings certificates. In the first quarter of this fiscal year, sales of four popular savings instruments was TK 90 billion , a 59.4 per cent  decline compared to that of the same period a year earlier. A national daily gave this information on 29 October 2019, quoting official version. There seems to be taken a trade- off between bank deposit and sales of NSCs. But falling trend of NSCs sales and falling bank deposit contradicts the prevalent long trends and World Bank's findings. Rather falling trend in sales of NSCs along with a shortfall in revenue collection has pushed up government to more bank borrowing.

 But that does not have any crowd out effect on private sector bank loan demand. Any such evidence of turning away has not come to happen. Rather government's focus on more bank borrowing will help smoothen SOBs functioning particularly at the moment of private sector's declining demand for bank credit. Otherwise SOBs credibility or accountability to depositors will have to face challenges.

Of the total, the government borrowed TK 256.88 billion from the scheduled banks or SOBs using treasury bills (T-bills) and bonds and the remaining TK 19.46 billion from central bank. Loan from scheduled banks will not add fuel to inflation. It is just transfer of money from project to project. But loan from Bangladesh Bank will accentuate inflationary pressure and it matters to be worried about. Since BB has no money of its own. It will just resort to printing taka.

But falling trend of NSCs and if it is continued, is a sign of breath taking solace to government, Since non-marketable instruments are being dragged out for long falling banks in vulnerable non-competitiveness. Shyness of private investment warrants more exploration to find out its root causes since it has been staying behind target during 7th five year plan period. Now we are at the threshold of 8th. It needs insight addressing far from government's focus on bank money.

Writer, a retired Professor, now a freelance contributor and secretary, United Nations Association of Bangladesh (UNAB)




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