Cap on govt ODC loans to lower further

The ministry of finance (MoF) is likely to reduce the government’s borrowing further from the central bank through using the overdraft-current (ODC) tool in line with the suggestions of the International Monetary Fund (IMF), officials said.

The MoF has already put a cap on the government’s borrowing from the Bangladesh Bank (BB) through ODC limiting it to Tk 40 billion. The new limit will come into effect on April 01 next, according to sources.

bbBased on performance in the current fiscal year (FY) 2013-14 the limit would be lowered further in the FY 2014-15, mentioned the working paper of the 27th meeting of the MoF’s Cash and Debt Management Committee (CDMC) held on December 30 last.

The CDMC proposed imposition of the cap on ODC loans in its quarterly meeting held on October 23 last.

Afterwards the CDMC approved the new legal limit on October 30 last. The MoF then sent an instruction to the central bank’s department concerned.

Earlier, there was no cap or limit on the ODC loans. The government could borrow any amount of fund by using the tool.

The cap was put on ODC loans mainly to bring discipline in the government’s borrowing, Md. Sarwar Alam, Deputy Secretary of the MoF, told FE when contacted on phone Thursday.

When effective, the cap would help reduce the government’s capacity of taking loans by using the ODC tool and in that case the inflation rate would not go up, sources said.

The BB usually gives such loans to the government after issuing fresh currency notes, which pushes up the inflation rate.

The government had borrowed over Tk 200 billion in July, 2006 through overdrafts. At that time the BB had issued fresh currency notes to meet the government’s demand for funds borrowed.

The government’s borrowing through ODC stood at Tk 7.20 billion in December last against Tk 72.05 billion in June last.

During the last July-December period, repayment of loans under the ODC and the Ways and Means Advance (WMA was significant due to an improved cash position of the government and execution of a systemic borrowing plan, sources said.

The overdraft loan is a short-term credit. The interest rate against the loan is 6.25 per cent. Generally the tenure of the loan is one to two months.

The government can borrow from the BB through overdraft, when it requires more loans excluding the scheduled auction calendar for banks. The government usually takes loans from the banking sector by issuing treasury bills and T-bonds on scheduled dates on the auction calendar.

The government will not be able to borrow the Tk 40 billion through overdrafts, if the same amount of money remains outstanding.

After repayment of the amount, the government could borrow through ODC again, sources said.

Courtesy : The Financial Express.