For years, private sector lending was the primary source of income for banks in Bangladesh. They earned profits primarily through interest and commissions from loans extended to industries and service sectors. However, the scenario has changed dramatically. Government borrowing has now become the main driver of banks’ income and profit. Banks are increasingly lending to the government rather than to the private sector, significantly boosting their profits.
A large portion of these profits stems from investments in government treasury bills and bonds. Over the past year, interest rates on these instruments have ranged between 11% and 13%, rates unprecedented in recent history. Attracted by these high returns, banks are allocating a significant portion of customer deposits toward lending to the government. While this strategy has enhanced banks’ profitability, it has also nearly doubled the government’s expenditure on interest payments.
Rising Interest Costs and Public Burden
Experts warn that the government’s heavy reliance on high-interest loans is escalating costs at an alarming rate. To cover these increased expenses, the government is resorting to imposing additional taxes on the public. This, combined with rising inflation, is worsening the financial plight of ordinary citizens.
According to the Ministry of Finance, the government’s operational expenditure for the first quarter of the 2024-25 fiscal year was BDT 82,568 crore, of which BDT 42,388 crore—or 51%—was spent on interest payments. In comparison, during the same period in the previous fiscal year, interest payments constituted only 27.9% of operational expenditures. To manage this rising cost, the government has increased Value Added Tax (VAT) on 43 goods and services, including raising restaurant VAT from 5% to 15%.
Contractionary Monetary Policy and Its Impact
The soaring interest rates on treasury bills and bonds have been exacerbated by Bangladesh Bank’s contractionary monetary policy. To curb inflation, the central bank raised the policy interest rate (repo rate) from 5% to 10%, and the ceiling on loan interest rates jumped from 9% to nearly 16%. Despite these measures, inflation has not subsided; instead, it surged to an average of 11.38% in November.
Under this policy, private sector credit growth was targeted at 9.8% for July-December 2024. However, the actual growth fell to 7.66% in November. In contrast, government credit growth surpassed its 14.2% target, reaching over 20% during the same period.
Banks’ Rising Profits Amid Economic Strain
The gap between loan and deposit interest rates (spread) has widened due to the slower rise in deposit rates compared to loan rates. In June 2023, the average spread in the banking sector was 2.93%. By October 2024, it had climbed to 5.87%, boosting banks’ profitability at the expense of borrowers.
This shift is evident in the performance of individual banks:
Sonali Bank, once plagued by high non-performing loans and operational losses, achieved a record operating profit of BDT 5,634 crore in 2024. Nearly 45% of this profit came from treasury operations.
BRAC Bank experienced a 72% growth in operating profit in 2024, with much of its income derived from investments in treasury bills and bonds.
City Bank recorded a 70% increase in operating profit, reaching BDT 2,287 crore in 2024. Its investment in government securities nearly doubled within nine months.
Pubali Bank saw consistent improvement across all metrics, earning significant revenue from its treasury operations.
Overall, banks with sufficient liquidity have achieved record earnings from treasury investments. However, this has doubled the government’s deficit financing burden, highlighting the unsustainable nature of this approach.
Fiscal Challenges and Unsustainable Debt
The government’s total borrowing has ballooned over the years. In 2009-10, total domestic and foreign debt stood at BDT 2,76,830 crore. By October 2024, domestic debt alone had risen to BDT 9,41,581 crore, with foreign debt exceeding BDT 10 lakh crore. Servicing this debt now consumes nearly half of the government’s operational expenditure.
Interest rates on treasury instruments have risen sharply in recent years. For instance, the average interest rate on 91-day treasury bills climbed from 2.36% in December 2021 to 11.70% in December 2024—a 396% increase. Similar trends are observed across other treasury instruments.
Concerns Over Economic Imbalance
Economists have expressed concern over the unsustainable nature of this trend. Dr. Mustafa K Mujeri, former chief economist of Bangladesh Bank, stated that banks’ preference for government lending over private sector investment is distorting the economy. High-interest borrowing by the government and subsequent tax hikes are fueling inflation rather than addressing it.
The government’s focus has shifted from key objectives like inflation control and economic stability,” Dr. Mujeri said. He also criticized past mismanagement in the banking sector, where institutions were rescued from insolvency by printing money, leading to inflationary pressures.
The economic situation remains precarious, with rising debt, high inflation, and declining private sector investment signaling deeper structural issues in Bangladesh’s financial and economic landscape.
Dhaka/hkj
