Budget deficit will have a negative impact on the banking system
By Md. Zillur Rahaman
For the new financial year 2023-24, the Finance Minister has announced a budget of Tk. 7,61,795 crores, out of this, the Annual Development Program (ADP) has been estimated at 2.63 lakh crores.
At the same time, the revenue estimate is Tk. 5 lakh crore. In this, the overall deficit will be Tk. 2,61,785 crores which is 5.2 percent deficit in Gross Domestic Product (GDP).
To meet the budget deficit, the Finance Minister expects to borrow Tk 1,02,490 crore from foreign sources and the government has to raise the remaining Tk 1,55,395 crore from domestic sources and out of this, Tk 1,32,395 crore will be taken from the banking system and the remaining Tk 23,000 crore will be taken from the non-bank system like sale of savings bonds. If the government borrows this Tk 1,55,395 crore from the banking sector, it will have a negative impact on the private sector's credit flow.
Meeting the government's budget deficit with loans from the banking system is called the Crowding Out Effect in economics. It is an economic situation when increased interest rates lead to a decrease in private investment spending so that it reduces the initial increase in total investment spending.
Sometimes, the government adopts an expansionary fiscal policy stance and increases its spending to further stimulate economic activity. This results in an increase in interest rates. Increased interest rates affect individual investment decisions. A high degree of crowding out effect that can lead to lower returns to the economy.
With higher interest rates, the cost of funds for investments increases and affects their acceptance in the debt financing system. This eventually leads to lower investment and affects the initial growth effect of total investment expenditure. It is usually the initial increase in government spending that is financed by using higher taxes or by borrowing from the government.
The banking sector is the backbone of the country's economy. Holder and bearer of the country's currency circulation. Economy is the driving force of development.
The country's economic market was in turmoil for two or three years under the influence of an invisible force, the COVID-19. The Russia-Ukraine war started last year, fue to the rise in oil prices and the dollar crisis across the world, the prices of daily commodities have skyrocketed and people's lives have been affected in many ways.
Starting from Europe and America, many countries in the world are going through economic crisis, Bangladesh is no exception. This has a serious impact on the country's import, export and foreign exchange reserves. Banks are also suffering from liquidity crisis. Many banks are unable to sanction and disburse any new loans. To say that every bank's investment and foreign trade department is slow. Its negative far-reaching effects have started to be felt in the banking sector.
The bank integrates the economic resources of a country, provides financial support, care, advises, and intellectual advice to achieve the structural development of the entrepreneur's future dreams. It contributes greatly to the development of the country's economy.
Again, in the case of foreign trade, it gives recognition to the international market by guaranteeing the payment of the price. Enriches the business sectors of the country. It is said that the industrial business sector of the country and the banking sector of the country are closely related. However, the banking sector of this country has faced many setbacks at different times.
The banking sector was in turmoil even before the COVID-19 outbreak. The renewed Russia-Ukraine war has intensified the crisis. Last year, there was a rumor on social media that if a bank goes bankrupt, even if the customer has crores of deposits, the customer will get only 1 lakh. This causes extreme panic among the customers.
Without looking at the alternative, many customers withdraw money from the bank and that money is now not fully returned to the banking system. This has further intensified the liquidity crisis in the banking system.
After that, before the end of this panic, the government's labyrinthine decision to implement "Nine Six" came againIt is said that the bank will accept deposits from customers at the rate of 6 percent and invest at the rate of 9 percent.
On the one hand, the government is saying that the free market economy but it is not on the banking system, and absolutely it is a two-pronged policy! Economists have been critical of imposing nine-six decision, ignoring the market system from the start. Whereas private banks used to invest in general loans at a rate of 12 to 14 percent.
There, from April 1, 2020, all banks have been forced to bring down the interest rate on loans to 9 percent. It is drought on die! Many people say that these nine and six measures of the government are to give extra benefits to a few people. However, it was better to postpone its implementation due to the crisis of Corona epidemic.
Many expected that Russia Ukraine war would end the matter, but that hope was shattered! The government said it would lower the price of daily commodities, increase investment, keep inflation below 6 percent but currently over 9 percent, and consumers fed up with continued price pressures.
In fact, the banking sector was in a state of turmoil even before the outbreak of the COVID-19. The banking system is deteriorating after the renewed Russia-Ukraine war. Many domestic productions have stopped due to COVID-19, import and export has been complicated by the dollar crisis due to the impact of the Russia-Ukraine war.
All in all, the problem in the banking sector is becoming more pronounced. Moreover, no action was taken against the loan defaulters due to COVID-19. As a result, no loan was recovered as expected. Due to this, the banking sector of the country has accumulated huge amount of defaulted loans.
According to the latest data of Bangladesh Bank, defaulted loans increased by Tk 10,964 crore from January to March this year. At the end of March of this year, the total loan in the banking sector in the country was Tk 14,96,346 crore and out of this defaulted loan was Tk 1,31,620 crore, i.e, now 8.80 percent of the bank loan is defaulted.
Last December, defaulted loans were Tk 1,20,656 crore or 8.16 percent, which is a worrying figure for the country's economy and banking sector. Moreover, according to the media, Bangladesh has the second highest non-performing loan rate among South Asian countries at 8.80 percent. Sri Lanka is at the top and the rate is about 11 percent of the country's total debt. Nepal has the lowest default rate at less than 2 percent.
Bank officials say that the banking sector is currently facing a severe liquidity crisis. As a result, many banks are struggling to meet the demand for loans and import costs. Meanwhile, if the government borrows from commercial banks at higher rates to meet the budget deficit, the liquidity crisis will increase.
As a result, the private sector will be deprived of the desired loans. Due to which the bank loan interest rate will have a negative impact. According to the economic survey released with the budget, the rate of private investment compared to GDP in the current fiscal year is 23.64 percent, which was 24.52 percent in the previous fiscal year. Due to the dollar-crisis, reduced imports, lower production etc., private investment has already reduced considerably.
Still, the finance minister said private investment would grow to 27.4 percent in the new fiscal year, a dream and contradicting the budget speech. However, there are more such illusory expectations. For example, bringing inflation down to 6 percent, which is now more than 9 percent, while no plan to control inflation has been reflected in the budget.
The banking system is already in a fragile state. The responsibility of implementing the stimulus package announced by the government during the COVID-19 period also fell on the banking system. Many customers of these incentives have also defaulted on their loans. In short, the banking system is under a lot of pressure due to the mountain of bad debt, the push to implement the single interest rate, the far-reaching impact of Covid-19 and the severe impact of the Russia-Ukraine war.
The bank's operating profit has already started to decline. If the government takes the budget deficit money from the banking system, the flow of private credit will decrease drastically.
This will have an impact in various sectors including import, export, employment, supplementary duty collection. Because macroeconomic indicators are interlinked and deterioration of one affects the other.
As a result, the unemployment rate may increase. To deal with this situation, it is very important to provide special incentives to create new entrepreneurs.
Emphasis should be placed on domestic market-oriented industries instead of relying solely on exports. To meet the budget deficit, the dependence on the banking system should be reduced and as an alternative, money should be raised through short-term bonds from the capital market.
The writer is a Banker and Columnist