The government is going to halve borrowing from savings certificates within three years to rein in interest payment, according to finance ministry officials.
To this end, the finance ministry is likely to impose more restrictions to discourage investment in savings certificates.
Although a reduction in borrowing from savings certificates could ease the government's interest payment pressure, economists fear the move may hurt the country's large middle class.
Since the interest rate on savings certificates is almost double that of bank deposits, middle-class people invest in risk-free savings certificates.
Many people, including pensioners, invest their entire savings here and make a living from it. The savers became interested in investing in savings certificates mainly due to fear of losses in the stock market and declining interest rates on bank deposits. As a result, investment in savings certificates has increased even during the Covid-19 pandemic.
The revised budget for the current financial year has set a target of borrowing Tk32,000 crore from this sector, which could increase by Tk3,000 crore in the next financial year. And the reliance on low-interest foreign loans will go up by restraining investment in savings certificates in the next two fiscal years.
In the last financial year, the government has spent about Tk70,600 crore on interest payments.
In the revised budget of the current financial year, the allocation for interest expenditure has been fixed at more than Tk71,000 crore. In the next financial year, it will increase to more than Tk80,000 crore.
Of this, more than Tk73,000 crore will be spent on repaying interest on internal loans including savings certificates.
Finance ministry officials say such a huge amount of interest expenditure is creating an imbalance in the budget as revenue is not increasing at the desired level. Although a large part of the budget is supposed to be spent on development to boost economic growth, the expenditure on management is increasing due to interest expenditure. In fiscal 2024-25, operating profit is planned to be reduced to the size of the budget and a large portion of government expenditure will be spent on development.
According to the finance ministry, over the last decade, 26% of the total deficit financing has come from foreign sources, while the remaining 74% has come from domestic sources.
According to the finance ministry's plan, 45% of the deficit financing will be met from foreign sources in FY2024-25, which will reduce the risk of crowding out in the domestic market.
Professor Mohammad Abu Eusuf, of development studies at the University of Dhaka, said in addition to simplifying the financial management of the government, the government had introduced savings certificates to encourage the common people to be interested in personal savings.
"In recent times, restrictions have been imposed on savings certificates. If the government imposes more austerity in this regard, the tendency of people to save will decrease," he added.
The economist said that if there are savings in hand, people can spend in any major disasters. And if there are no savings, the government has to come forward with help. Considering these aspects, savings certificates have a big role to play.
Dr Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), said the government's borrowing from savings certificates had exceeded the level a few years ago.
The government's borrowing in this sector has decreased due to the recent introduction of automation and reduction of interest rates and restrictions on the timely purchase of savings certificates. In this situation, it would not be logical to reduce the interest rate in future to bring down the borrowing from savings certificates, she added.
Dr Fahmida Khatun said that a large part of the middle class is dependent on interest on savings certificates. Even if they have some money, they cannot afford to do business. Since the real inflation rate is higher than the interest rate on deposits, the actual value of the money received with interest decreases even if the money is kept in banks.
In this situation, she recommended not imposing big restrictions on savings certificates to keep the life of the middle class in order.
She said it would be difficult in the future to meet the needs of the government by borrowing from foreign sources even if interest rates were low.
"Although more than $50 billion has fallen into the pipeline, this money is not being released due to inefficiency in project implementation," she added.
In the future, the country will have to borrow money from the International Bank for Reconstruction and Development (IBRD) - the commercial loan window of the World Bank - with extra interest, said the CPD executive director.
Apart from that, after the removal from the list of least developed countries, foreign grants will stop and interest rates will increase, she added and called upon the government to consider these issues seriously in future financial management.