Recently, the Bangladesh Bank’s (BB) gradual reduction of injecting high-powered money into the economy through government securities has provided relief amid the current high-inflation environment.

Banking experts have attributed this shift to several factors, including improved liquidity within commercial banks and their cautious lending practices during an election year.

Primary dealer (PD) banks have increasingly participated in auctions to acquire risk-free assets like treasury bills and bonds.

Based on statistics provided by BB, in April 2023, the government secured a loan of Tk 344.68 billion from the banking industry using government securities. It is important to highlight that the central bank supported a substantial portion of the government’s monetary requirements from its internal reserves, reaching 47% (equivalent to Tk 160 billion), essentially generating fresh capital.

However, the percentage of loans extended by BB to cover the government’s revenue shortfalls decreased to 26% (Tk 75.05 billion out of Tk 293.97 billion) in May, only to rebound to 41% (Tk 113.71 billion out of Tk 275.04 billion) in June.

July saw the government borrowing Tk 382.54 billion from the banking sector, with the central bank contributing 36% or Tk 137.19 billion.

In the first week of the current month, the government borrowed Tk 97.47 billion from the domestic banking sector, with only 12% (Tk 11.75 billion) of this being facilitated through the devolvement mechanism.

The Central bank has supported the government in managing budgetary deficits and alleviating liquidity pressure on commercial banks since the third quarter of the previous year.

However, this devolvement practice has been gradually declining recently, thanks to increasing participation by PD banks in auctions.

The official highlighted the improving liquidity situation among banks, which has empowered PDs to offer more competitive rates in auctions.

This newfound liquidity has also contributed to a decrease in the interbank call money rate, an indicator of liquidity.

Market insiders attribute the change to various factors, including import restrictions, higher import costs, global and domestic economic volatility, and election-related uncertainties, all leading to a significant drop in private-sector credit demand.

Banks are exhibiting caution in lending during an election year, driving them to invest in secure government securities, a trend that seems to be gaining traction.

Experts have noted that PDs favor short-term instruments like 91-day treasury bills primarily due to their profitability.

This is driven by an advantageous ALS (assured liquidity support) mechanism through which PDs receive 85% of the fund against 91-day T-bills at the REPO rate of 6.50%.

A senior executive from a private bank suggests that some PDs might have received unofficial directives from BB to participate in auctions at the central bank’s recommended rates.

This could be due to the liquidity constraints faced by certain banks that haven’t experienced significant improvements.