The government has increased its reliance on bank financing in recent months as revenue collection struggles to keep pace with spending, while private sector credit growth remains at one of its lowest levels in decades.

According to the Bangladesh Bank (BB), outstanding bank loans to the government rose 24.45 percent in September compared with a year earlier, reaching Tk 5.65 lakh crore.

By contrast, loans to the private sector increased by just 6.29 percent year-on-year to Tk 17.56 lakh crore, down slightly from 6.35 percent in August. In September 2024, private sector lending stood at Tk 16.52 lakh crore.

This marks the slowest pace of expansion in at least 20 years, showing how businesses are holding back on fresh investment amid high borrowing costs, uncertainty ahead of the national election, and subdued consumer demand.

Towfiqul Islam Khan, additional research director at the Centre for Policy Dialogue (CPD), said the government currently has "very lean" fiscal space because revenue collections have repeatedly missed projections.

Official figures show that the National Board of Revenue (NBR) fell short of its collection target for the 13th consecutive year in the last fiscal year.

NBR's overall receipts reached Tk 3.7 lakh crore in FY25, leaving a shortfall of Tk 92,626 crore against the revised target.

In the July-September quarter of FY26, the revenue board's collection rose 20 percent to Tk 75,554 crore, according to provisional data. However, it missed its quarterly target of Tk 99,900 crore, leaving a shortfall of more than Tk 24,000 crore.

From July to October, revenue collection grew 15 percent year-on-year to Tk 103,400 crore, but the gap against the target remained around Tk 33,300 crore, according to the NBR.

With limited funds from savings instruments and little scope for external borrowing, Khan said the government has been forced to rely more heavily on the banking system.

"For now, the banks have become the only option," he said.

Khan also noted that the high level of government borrowing limits the central bank's ability to reduce policy rates to stimulate private investment, as inflation remains elevated.

The Bangladesh Bank (BB) has kept its policy rate at 10 percent since October 2024, aiming to bring inflation down to 6.5 percent by next June. The 12-month inflation rate stood at 8.02 percent in October.

Recently, BB Governor Ahsan H Mansur said the central bank would consider cutting rates once inflation falls below 7 percent.

"Inflation is tied to the overall money supply, not just private sector credit growth," Khan said, which means an aggressive rate cuts could worsen price pressures.

Businesses are facing higher lending costs at a time when sales and investment plans are slowing, he added.

The economist noted that although the government is curtailing project expenses, prolonged delays ultimately raise overall costs and can undermine project viability.

"The government is in a limbo. Unless domestic revenue improves and public spending becomes more efficient, the debt position will continue to deteriorate," he said.

These concerns were also mentioned in the latest monthly economic outlook from the General Economics Division (GED) of the Planning Commission, released last week.

The GED review noted that the state's growing dependence on bank borrowing must be reduced through stronger revenue mobilisation.

It also highlighted that sluggish private borrowing is influenced by cautious bank lending and heightened political and economic uncertainty.

Monzur Hossain, a member of the GED, said slow private borrowing has broader implications for the economy because private investment is the main driver of job creation, while government borrowing can have a crowding out effect.

He added that investment decisions rarely depend on a single factor, but high lending rates make expansion more difficult. Past credit data had been inflated due to money laundering disguised as loans, a practice that no longer occurs.

Besides, he said several banks currently struggle with insufficient liquidity to support new lending.

Ashikur Rahman, principal economist at the Policy Research Institute (PRI) of Bangladesh, said private investment appetite remains muted, reflected in import data for capital machinery and industrial raw materials.

Although letters of credit (LCs) for these items rose slightly in July-September, this followed steep declines last year, showing that overall investment plans remain subdued.

According to the central bank, LC openings for capital machinery in July-September grew 23 percent year-on-year to $472 million, compared with $384 million in FY24, down 41 percent from $651 million a year earlier.

LC openings for intermediate goods rose 1.59 percent, up from a 7.22 percent decline in the previous fiscal year, while industrial raw materials increased 5.73 percent, slightly higher than the 4.66 percent growth previously.

Rahman added that banks have become more selective due to mounting non-performing loans (NPLs), making them hesitant to extend new credit.

He expects this cautious approach to persist for at least another six months.

The economist dismissed the idea that government borrowing is crowding out private lending, arguing that firms themselves are borrowing less.

"Banks are lending to the government because it is safe, and the government needs funds because its revenue is weak. For the moment, this is not creating a major problem," he said.