The Financial Express

Myth of low-cost government borrowing from banks

Mohammad Tareq | Published: January 17, 2020 20:27:46 | Updated: January 17, 2020 20:30:04

Myth of low-cost government borrowing from banks

The revenue of a government comes from tax and non-tax sources.  The government also has to borrow due to deficit budget that is commonly seen in most developing countries to meet the development commitments. In Bangladesh, like most other counties, the government borrows for the budget deficit or shortfall of revenue from banking sources by selling T-bills and T-Bonds. Moreover, it borrows from the central bank through Ways and Means Advance (WMA) and Overdraft loans. The WMA limit is set at Tk.40 billion and the interest rate is set at reverse repo rate. If the government borrows or wants to borrow more than Tk 40 billion, then it can borrow another Tk 40 billion at one per cent higher than the reverse repo rate. Any repayment by government to Bangladesh Bank is first applied to the overdraft loans and then to WMA. The limits of the government's short-term borrowing from the central bank have been raised by 50 per cent to avoid mismatch in cash management by the government. Recently, the WMA and overdraft limits have been increased to 60 billion.

Apart from the central bank, the government also borrows through T-bills and T-bonds. T-bills are short-term with less than one year maturity and are issued at discount price.  The current T-bills are of four types - 14-day, 91-day, 182-day and 364-day. The longer term bonds are called T-bonds. Currently, five T-bond are available; these are 2-year, 5-year, 10-year, 15-year and 20-year bonds. In the current financial year, the government has a plan to borrow Tk. 473.64, of which Tk 280.94 billion by issuing T-bonds and the remaining Tk 192.70 billion by T-bills. This is much higher than that of last financial year when it was Tk. 308.95 billion. The rate of interests are determined though auctions held at the central bank on behalf of the government. Table 1 shows the yields of T-bill and T-bonds. The interest rates are 7.23 per cent, 7.93 per cent and 8.12 per cent for 91-day, 182-day and 364-day T-bills respectively. And the 2-year, 5-year and 10-year T-Bonds' interest rates are 8.27 per cent, 8.97 per cent and 9.23 per cent respectively.

Moreover, government also borrows from the citizens though Sanchayapatra.  Currently, there are several Sanchayapatra schemes:   5-year Bangladesh Sanchayapatra with an interest rate of 11.28 per cent, 3-monthly Profit Bearing Sanchayapatra with 11.04 per cent, Family Savings Certificate with 11.52 per cent interest for five years, and Pensioner Sanchayapatra with 11.76 per cent rate of interest. Apart from these, other saving instrument are: post office savings general account at 7.5 per cent interest rate, post office savings-term account with 11.28 per cent, post life insurance with 4.2 per cent, US Premium Bond at 7.5 per cent, US Dollar Investment Bond at 6.5 per cent and Wage Earners' Development Bond at 12 per cent interest rate.

Borrowing from the central bank is the cheapest source at the moment. It is often argued that the government is borrowing at a low rate from banks and it is better to borrow from banks than from Sanchayapatra. However, this is not true. In fact, borrowing from banks is more expensive than from Sanchayapatra. Though the nominal rates of borrowing from banks through T-bills and T-bonds seem low, in reality it is not so, because of the tax advantage for these governmental debt instruments. Section 51 of the Income Tax Ordinance states that taxes at 5 per cent are to be collected upfront on interest or discount of government securities or government approved securities except T-bills and T-bonds.

The interest rate for a 364-day T-bill as mentioned earlier is 8.12 per cent. However, if the tax is counted, the rate becomes much higher i.e., 8.12 per cent (1-.375)-1 or 13 per cent which is much higher than 3 or 5 years Sanchayapatra or even Pensioner Sanchayapatra. Sanchayapatra holders pay 10 per cent tax at source which is a full and final settlement. Therefore, the actual interest expense for the government for 5-year Bangladesh Sanchayapatra is 10.15 i.e., 11.28 per cent (1-.1).  Therefore, it is a myth that borrowing from banking source is cheaper than borrowing from Sanchayapatra. Though nominal rate of interest for borrowing from Sanchayapatra is a more expensive, it becomes the opposite if the lost tax revenue is counted in the cost of fund calculation of the government.


Dr. Mohammad Tareq is an Associate Professor of the Department of Accounting & Information Systems, University of Dhaka.  mohammad.tareq@du.ac.bd

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