Liquidity Crunch and Government Borrowing Push Bangladesh 91-Day T-Bill Yield to Historic High

Bangladesh's financial sector is navigating a period of intense pressure, as evidenced by the 91-day treasury bill yield climbing to a historic peak of 12.10% in recent auctions conducted by the nation's central bank. This new high surpasses the 12.02% observed just a fortnight ago and represents a notable ascent from rates around 10% recorded a few months prior (April 2025). This escalating yield reflects considerable liquidity strain within the banking system and an increased reliance by the government on domestic funding.

 

Several interconnected factors are contributing to this significant rise. Firstly, commercial banks are contending with increasingly stringent liquidity conditions. This situation is partly attributable to a surge in non-performing loans (NPLs), which reached an unprecedented Tk 345,765 crore by the close of 2024. Furthermore, there's a clear trend of depositors shifting funds from financially weaker institutions to more robust banks, intensifying the liquidity crunch for the former.

 

Secondly, the central bank's methodical reduction of liquidity support mechanisms is a key influence. The cessation of the 28-day repurchase agreement (repo) facility and the impending discontinuation of the 14-day repo from July are compelling banks to manage their cash reserves with greater prudence and to lean more heavily on deposit-based funding. This diminished access to short-term central bank financing reduces banks' incentive to invest in lower-yielding government securities, thereby driving up the rates they demand.

 

Thirdly, the government's growing dependence on internal borrowing to finance its budget deficit is a major component of the issue. With tax revenue collection expanding by a mere 2.76% during the first nine months of FY2024-25, falling considerably short of the revised target of Tk 463,500 crore, the government is increasingly turning to the banking sector for funds. The adjusted budget for FY2024-25 sets the net bank borrowing target at Tk 99,000 crore. As banks face their own liquidity challenges, the government finds itself needing to offer more attractive interest rates to secure the necessary capital, pushing T-bill yields higher.

 

Finally, persistent elevated inflation, despite a slight moderation to 9.05% in May 2025 from 9.17% in April, remains a concern. The Bangladesh Bank's restrictive monetary policy, with the policy rate set at 10.00% since February 2025, aims to mitigate inflationary pressures. However, this tight money supply environment inherently leads to higher borrowing costs across the economy, including for government debt instruments.

 

The continued upward trend in T-bill yields will inevitably inflate the government's interest payment obligations, potentially diverting resources from crucial development initiatives. Addressing the fundamental liquidity challenges within the banking sector and bolstering revenue generation are imperative steps to stabilize the yield curve and foster broader macroeconomic stability.