The government's growing dependence on debt to meet the budget deficit is going to inflate interest payments further.
The amount set aside in the new budget for paying interest on public debt is Tk4,766 crore higher than that of the revised budget for the outgoing fiscal. The revised target for interest payments in the current 2020-2021 fiscal year has been set at Tk63,823.
A statistical analysis of the last five fiscal years' budgets, however, shows that the allocation for interest payments in the proposed budget for the forthcoming fiscal is almost double the amount earmarked for the same purpose in FY17. Expenditure on interest payments in that financial year was Tk35,691 crore.
One of the major reasons behind the increase in interest-related expenses is the sale of interest-bearing savings certificates above the target, say analysts.
Even though the government set a target to collect Tk20,000 crore from this sector in the current financial year, Tk33,000 crore worth of savings tools were sold in the first nine months of the fiscal.
Because interest rates on bank deposits have plummeted, investors are now turning to savings certificates as an alternative and safer investment. Even though the government is discouraging investment in savings certificates in many ways, sales are not coming down.
On the other hand, the government had to borrow from banks at high interest rates in the pre-Covid period. There was a demand for loans in the private sector as economic activities were going on as usual.
For all these reasons interest payments on public debt have almost doubled over the last five fiscal years, analysts observe.
Asked about this, Dr Salehuddin Ahmed, former governor of the Bangladesh Bank, told The Business Standard that since revenue would not increase that much, the government has had to prepare a debt-dependent budget. This will naturally push up interest payments, he observed.
Referring to the fact that the debt to GDP ratio in Bangladesh is lower in Bangladesh compared to many other countries, he, however, said there is nothing to worry about the increasing interest expenses. "The government needs to make sure that the money it borrows is spent prudently and the people benefit from this economically."
He further said that since the amount of debt cannot be reduced and the cost of interest will also increase, the option the government is left with is to cut the cost of running the administration, especially to stop waste of public money.
"Besides, the cost of project implementation is increasing due to irregularities and corruption. The government has to rein in this. Then, it will not feel so much pressure to pay interest and repay loans."
Dr Mahfuz Kabir, research director of the Bangladesh Institute of International and Strategic Studies (BIISS), came up with similar opinions.
He told The Business Standard, "The government would be under pressure to pay interest when it will pay attention to increasing employment opportunities and income during the pandemic period. It may have to revise down expenditure targets in many areas."
According to him, the government can reduce this pressure in two ways. First, it can take out long-term loans from abroad on easy terms and low interests. Secondly, it may issue long-term bonds (like Islamic bonds Sukuk) for project implementation without taking high-cost loans from banks or savings certificates.