Govt spending 20% revenue on domestic debt interest payments

The government is currently spending 20 per cent of its revenue on payment of the interest on domestic debt, a result of taking loans at high interest rates, according to a recent study.

The interest payments also account for 14 per cent of the total public spending, said the study by the Policy Research Institute of Bangladesh (PRI) revealed Monday at a PRI-CDRM training programme for journalists titled ‘Understanding the Context of Domestic Resource Mobilisation in Bangladesh’ in Dhaka.

According to Bangladesh Bank data, the government’s total net domestic borrowing both from the banking system and from the other non-banking domestic sources in fiscal year 2021-2022 (FY22) stood at Tk 95,583.2 crore or 76.9 per cent of the target set in the revised national budget.

The amount stood at Tk 71,073 crore or 61.8 per cent of the target in FY21.

Rising pressure of debt costs

The PRI said the government borrows from domestic sources at high interest rates and the amount of borrowing was the highest in FY22. At the same time, external debt stock, although still sustainable, is growing at a fast rate reaching $96 billion in FY22 from $40 billion in FY15.

Meanwhile, the study said the local currency has recently been depreciated by more than 20%. Increased foreign debt and service costs is putting pressure on Bangladesh’s already constrained foreign reserves. This pressure is feared to increase in the coming years.

According to the study, Bangladesh’s annual public sector external debt costs will rise from the existing $3 billion to $5.2 billion in 2030. Including the private sector, the costs will be more than $8 billion.

Essential sectors being neglected

The rising debt burden is halting development at essential sectors like health, education, social safety net, etc.

PRI said Bangladesh’s fiscal deficit is equivalent to the government’s proposed annual development plan (ADP) allocation for FY23. Meaning, all ADP allocation will be financed through borrowing, resulting in increased domestic and foreign debt stock.

Debt burden is making it difficult for the government to increase allocation in the desired sectors like health, education, and social protection, said PRI.

According to the study, Bangladesh’s current tax–GDP ratio is far below the average of global economies. Evidence from cross-country analysis of 139 countries reveals that a country’s tax–GDP ratio needs to be at least 15 per cent to accelerate growth and development significantly. The ratio stands at 10.7 per cent for Bangladesh.

Speaking on the issue, PRI Director Dr MA Razzaque said, “Bangladesh’s current tax-GDP ratio is far below the optimum level. Public spending is too low as well. The cost of debt is on the rise.”

He said increased revenue is required for Bangladesh to realise SDG targets by 2030.

The policy expert said Bangladesh’s lower public spending is a direct outcome of low tax effort and that development transitions will require catering to an ever-increasing demand for public goods and services.

According to the PRI study, ideally, public spending on education should be at least 4 per cent of the GDP, which was less than 2 per cent in the revised FY22 budget. The 8th Five Year Plan, a projected course of action for a period of 5 years, aims to increase the rate to 3 per cent by 2025.

Besides, public spending on health should be 5 per cent of the GDP, which was just 0.81 per cent for Bangladesh in FY22. The 8th Five Year Plan aims to take that rate to 2 per cent by 2025.

Meanwhile, as a result of constrained fiscal space, social security has not received due attention despite the on-going inflation.

Currently, the government allocation for social safety net amounts to 2.55% of the GDP, down from 2.8% in the revised budget FY22.

According to PRI, pension for government employees comprises a quarter of social security protection. Excluding pension and food for assets (FFA), the allocation stands at only 1.8% of GDP.

Important social protection schemes operate at a far less than comprehensive coverage as stated in the National Social Security Strategy adopted in 2015, said the PRY study.

Allowances provided to current beneficiaries have not increased for several years, despite the rises in price levels. Allocation for Open Market Sales has been slashed by Tk 223 crore or 11% in recent years, it added.

Recommendations

Experts on the occasion recommended policy change from the government for sustainable development in the long-run.

PRI Executive Director Dr Ahsan H Mansur said, “Even though the government takes money from high interest saving certificates, the poor people do not get much benefit from it.

“The government’s policy needs to change. Otherwise, the government’s expenditure burden will increase in the long run.”

He recommended focusing on increasing the budget expenditure on education, medical and social services, instead of giving benefits to poor people.

Also speaking on the occasion, PRI Director Dr Bazlul Haque Khondker said adequate revenue increases are needed to support public expenditure in important areas such as education, health, social protection and infrastructure.

“Low tax effort has been identified as a key impediment to sufficient expenditure on the social sector as well as infrastructure in Bangladesh,” he said.

Dr Zaidi Sattar Chairman PRI said the government should not protect the local industry for long because it will weaken the competitiveness of the domestic industry in the international market.

He recommended that the capacity of the local industry can be increased step by step by following a plan of around 10 years.