Interest payment revised up by 11.6%, projections even higher for next three FYs

Infograph: TBS

For the first time in Bangladesh's history, the country's interest payment burden is set to surpass Tk 1 lakh crore in the current fiscal year. This amount is equivalent to more than one-seventh of the country's total budget allocation and is nearly three times higher than the annual health expenditure.

A finance ministry document shows that interest payments have nearly doubled over the past six years due to revenue collection shortfall. Consequently, the government has been relying on local and foreign loans to cover its growing expenses.

The allocation for loan interest payment has been increased by 11.57% in the revised budget of the current fiscal year and the amount may increase by the end of the year, according to the document.

Besides, the finance ministry estimates interest payments on domestic and foreign loans will increase by 15% or more in the next two financial years.

This upward trend, which began during the Covid-19 pandemic, now presents a significant challenge for the government with interest rates on both local and foreign loans experiencing substantial increases. Also, the devaluation of the taka against the dollar adds to the burden, worsening the financial strain.

For the last few years, the interest rate on bank loans was limited to 9%, said the officials. The auction rate of the government's treasury bills was also low. 

However, interest rates are rising due to the withdrawal interest rate caps on bank loans and deposits to meet the International Monetary Fund's condition to control inflation. 

As a result, the government is resorting to selling high-interest treasury bills to borrow money. Consequently, government expenditure on domestic loans will increase further in the coming fiscal year, finance officials said.

Towfiqul Islam Khan, a senior research fellow at the Center for Policy Dialogue (CPD), told TBS that revenue collection should have kept pace with the government's growing operating expenses, including interest payments. 

"However, this hasn't happened resulting in a significant portion of the collected revenue being used to cover interest payments. The costs of large government projects, funded by both domestic and foreign loans, have surged," he said. 

He further said the economic and financial benefits of these projects are disproportionately low compared to the investment. The returns from these projects have not met expectations. He said the government must be cautious in this regard.

Why interest expenditure is rising

In the main budget of the current fiscal year, the interest payment was allocated Tk9,4376 crore, which is 12.39% of the total budget of the current fiscal. 

Although the size of the budget has been reduced through revisions, the finance ministry has allocated an additional Tk10,924 crore for interest payment like other years.

Out of the current fiscal year's revised budget size of Tk7,11,416 crore, the interest expenditure will be Tk1,05,300 crore, which is 14.18% of the revised budget. 

Out of this, Tk89,500 crore has been allocated for interest payment on domestic debt and Tk15,800 crore for interest on foreign debt. 

In the initial budget of the current fiscal, there was an allocation of Tk82,000 crore for interest on domestic debt and Tk12,376 crore for foreign debt.

The government's major part of the loans taken from banks are through the sale of treasury bills. According to Bangladesh Bank data, on 21 April, the government took Tk3,340.73 crore in 91-day maturity treasury bills. Its interest rate was 11.15% to 11.35%.

On the same day, it took Tk813.52 crore in 182-day maturity treasury bills at 11.20% to 11.40% interest, and took Tk457.10 crore in 364 days maturity treasury bills at 11.30% to 11.50% interest.

Finance officials said the government has to increase its reliance on bank loans due to a huge deficit in revenue collection. 

In the current fiscal year, the arrears of fertiliser and electricity subsidy also have to be paid by borrowing. Despite this, a huge amount of subsidy for these two sectors is still outstanding, they said.

Moreover, the International Monetary Fund has imposed conditions on the government to reduce the sale of savings bonds to reduce interest on domestic debt. 

As a result, the finance ministry has added various conditions so that common people cannot invest more in savings bonds, said the officials.  With this, although the sale of savings certificates has decreased, the internal interest expenditure of the government is increasing.

Shahriar Quader Siddiqui, secretary of the Economic Relations Division (ERD), in February wrote a letter to the finance secretary explaining the reason for the increase in interest expense on foreign loans. 

He wrote that in recent years, the government has taken foreign loans at an increased rate to implement several mega projects. Besides, foreign loans have been taken as special development assistance for the last few years. 

As a result, the amount of loan instalments is gradually increasing, the ERD secretary said in the letter.

"Currently about 45% of foreign loans are in Special Drawing Rights (SDR) currency, usually repaid in USD and GBP. Due to the exchange rate of USD and GBP with SDR currency, variation in the exchange rate of USD with taka and increase in Euribor/SOFR rate, the amount of interest payments on foreign loans and borrowings is increasing," he added.

What is in next budgets

A review of the finance ministry document shows that an additional allocation of 14.44% has been estimated for interest payments for the next fiscal year compared to the original budget target of the current fiscal year.

In the budget for the next fiscal, the allocation for interest expenditure is estimated at Tk1,08,000 crore. Out of this, the finance ministry has estimated the allocation of Tk93,000 crore for interest on domestic debt and Tk15,000 crore for interest on foreign debt.

The allocation in FY26 is estimated to be 18.52% higher than its previous fiscal. The ministry estimated a total of Tk1,28,000 crore in interest payments on loans that year. 

Out of this, interest on domestic debt is Tk1,10,000 crore and interest on foreign debt is Tk18,000 crore. 

An additional allocation of 15% is estimated for interest payment expenditure in the following financial year.

Debt interest expenditure for FY27 is estimated at Tk1,47,000 crore, of which interest on domestic debt is Tk1,25,000 crore and interest on foreign debt is Tk22,000 crore.

Interest allocation in recent budgets

A review of the last few budgets show the government expenditure has been less than the revised budget. However, despite the reduction in the size of the budget, the amount spent on loan interest payments keeps growing. 

For instance, in the initial budget of FY23, the allocation for interest payment was Tk79,530 crore. In the revised budget, it was increased to Tk89,167 crore but the actual expenditure on the interest payment was Tk92,107 crore.

That is, the actual expenditure on loan interest in that fiscal year is 15.81% more than the original budget allocation, and 3.30% more than the revised budget allocation.

Again, every fiscal year, the interest payment expenses continue to increase against the original budget, revised budget and actual budget expenses. 

Interest expenditure for FY23 was 13.58% compared to the initial budget, 13.94% compared to the revised budget and 16.05% compared to the actual budget.

The allocation in the revised budget increased by 12.11% as compared to the allocation of interest expenditure in the original budget for FY23.

Similarly, in the FY22 budget, Tk68,213 crore was set aside for loan interest payments, and the revised budget allocated Tk71,213 crore. However, the actual spending on loan interest reached Tk77,772 crore.

As such loan interest payment increased by 14% compared to the original budget, and 9.21% compared to the revised budget. In that year, the government spent more than 15% on repayments compared to the actual budget expenditure.