Originally posted in The Daily Star on 23 January 2025
Interest payments eat up more than half of govt revenue expenses
Over half of the government’s total revenue expenditure during the first four months of the current fiscal year of 2024–25 was on interest payments alone, mainly due to increased borrowing and a rise in the interest rates.
The interest payments amounted to Tk 58,494 crore, a year-on-year surge of 84 percent.
This accounted for 51.5 percent of the government’s total revenue budget, according to data from the Ministry of Finance.
Of the interest payments, around 88.5 percent or Tk 51,791 crore was made to local sources of funds.
The remaining Tk 6,702 crore was spent against foreign sources.
The country’s interest payments soared as the government borrowed heavily, particularly for mega projects, often without proper research, said Mustafa K Mujeri, executive director at the Institute for Inclusive Finance and Development (InM).
This borrowing was justified by the relatively safe debt-to-GDP ratio at the time, which led to a significant increase in debt, he said.
“Borrowing was often driven by political decisions without proper feasibility studies being conducted, leading to widespread corruption. Consequently, the loans were not utilised effectively or efficiently,” he remarked.
“As a result, these projects are not generating sufficient returns to repay the loans, which ultimately becomes a burden on the budget,” he added.
Some of the loans taken in recent years have short repayment periods, further exacerbating the financial strain.
An analysis of interest payment trends shows that interest payments accounted for less than 20 percent of the total revenue budget between FY2010 and FY2020.
In FY2010, interest payments represented 18.65 percent of the total revenue budget.
Only in FY2021 did the cost of interest payments increase to reach 21 percent of the total revenue budget.
However, after the pandemic, the government had to secure significant budgetary support from foreign sources, which resulted in a growing debt burden.
Interest payments on these debts began immediately after the funds were disbursed.
On the other hand, government expenditure has risen significantly, while local revenue collection has not kept pace with the increase in costs.
As a result, the tax-to-GDP ratio remains low in the country.
Bangladesh’s tax-to-GDP ratio stands at approximately 8 percent, compared to 12 percent in India and 17 percent in Nepal.
Bangladesh’s ratio is far below the Asia-Pacific average of 19 percent and the 25 percent average of developing countries.
“There are very few countries in the world with such a low tax-to-GDP ratio,” said Mujeri, who is also a former director general of the Bangladesh Institute of Development Studies (BIDS).
“Despite this, previous governments attempted to expand the size of the budget for political reasons,” he said.
This necessitated large-scale borrowing from banks and other local sources. As interest rates in the banking sector rose, the government’s interest payment burden increased significantly, he explained.
Meanwhile, interest rates in the banking sector have risen by approximately 500 basis points over the last five years, pushing the government’s interest payment obligations to unsustainable levels.
In fiscal year 2023–24, government debt rose by 13.3 percent year-on-year to a record Tk 18.3 lakh crore, which is 36.3 percent of the country’s gross domestic product (GDP).
Due to high interest payments, the government’s fiscal space has been severely constrained, said Mujeri.
Fiscal space can be defined as room in a government’s budget that allows it to provide resources for a desired purpose without jeopardising the sustainability of its financial position or the stability of the economy.
The economist recommended increasing the country’s revenue earnings while minimising wastage and curbing corruption in government expenditure, including project implementation.
“If you implement a project of Tk 10 with Tk 100, the burden will be much higher, and it has happened over the years,” he added.
The high interest payment gradually arose for the accumulation of loans, said Professor Mustafizur Rahman, a distinguished fellow of the Centre for Policy Dialogue (CPD).
As the revenue-to-GDP ratio was low, the government increased a debt-based annual development programme (ADP). Now, the ADP is almost fully debt-dependent, he said.
Until the revenue, especially direct tax, rises, this pressure will not be eased, he said, adding that different sectors would receive low allotments if the interest payments continue to rise.
“We have continuously told the government that they should not borrow considering a comparatively low debt-to-GDP ratio, but they need to look at the revenue-to-debt ratio and the situation of foreign servicing to reserves,” said Rahman.
Moreover, the project costs were excessive, so the country now needs to pay interest on the excess costs as well. “It is an accumulated pressure,” he said.
If debt-related projects cannot generate enough income, they create a burden, which is happening now, he added.