Bulk from the budget to be spent on interest payment

Govt down in debt

Sajjadur Rahman and Sohel Parvez

The huge interest burden will squeeze the government’s scope for spending on productive purposes, such as infrastructure development and energy projects, say experts.

The government paid 12.3 percent of the outgoing year’s budgetary allocation for interest payment, which is estimated at 12.2 percent of the Tk 1.9 trillion budget for the coming fiscal year.

Only the public service sector will absorb a higher sum than that of interest payments in the coming fiscal year. The amount of interest payments will be even greater than the aggregate allocations for fuel and energy, social security and welfare sectors.

Economists have sounded a warning about the mounting pressure of interest payments on public expenditure. They say this reduces the government’s scope for investing in other sectors and its ability to respond to sudden shocks such as natural disasters or a global economic turmoil.

Hossain Zillur Rahman, economist and former adviser to a caretaker government, said rising pressure of interest payments may create a “vicious circle” and affect economic growth.

“It cuts the government’s ability to invest in productive sectors.”

If a big portion of the country’s incremental revenue income is spent on interest payments, availability of funds in other sectors dwindles, said Rahman.

He said Latin American countries had faced problems in the ’80s due to burden of high interest payments on their exchequers. Policymakers should be more careful to keep the country out of this vicious circle, said the former adviser.

The Centre for Policy Dialogue in its budget analysis found that more than 43 percent of total incremental revenue will be spent on interest payments.

“It [interest payments] is the outcome of the government’s bank-based borrowing,” said CPD distinguished fellow Debapriya Bhattacharya.

Allocation for interest payments is estimated to rise by 17.7 percent to Tk 23,302 crore in the coming fiscal year from Tk 19,796 crore in the outgoing year. And the interests on borrowing from domestic market will be Tk 21,604 crore in the coming year.

“Increased pressure of interest payments reduces the government’s ability to respond to unexpected shocks,” said Zahid Hussain, a senior economist at the World Bank in Bangladesh.

Echoing Bhattacharya, he said increased borrowing from the domestic market is mainly responsible for the inflated interest payments.

“This [interest payment] is non-discretionary expenditure. Once borrowed, it must be repaid.”

The average effective interest rate for domestic borrowing is much higher than the average effective interest rate on concessional external loans taken from development partners, Zahid said.

The economist said the government can ease the burden of interest payments by removing bottlenecks in getting foreign funds from development partners. Donors and multilateral lending agencies have already committed more than $12 billion to Bangladesh, he said.

“We have the opportunity. So, we should try to use it.”

Zahid said interest payment as percentage of Bangladesh’s GDP remains low compared to many other countries, and it is yet to reach an alarming level.

The government must be prepared to face unexpected shocks without cutting expenditures in other sectors, particularly health, education, safety nets and other social sectors, said the economist.