Higher interest payment throwing economy into 'long-term loan-trap'
Thursday, 4 December 2008
FHM Humayan Kabir
Interest payment is growing larger in the national budget throwing the economy into a "long-term loan-trap" and creating an imbalance in overall fiscal management, a government study said.
It said dependence on external sources has gradually declined in the wake of falling foreign assistance, which leads to higher domestic borrowing.
"Increased reliance on domestic borrowing has the risk of increasing the rate of inflation or crowding out of the private sector from the credit market," said the study styled "Financing growth and poverty reduction policy options and challenges in Bangladesh".
The study said the borrowing may create pressure on the liquidity and ultimately on interests on loan. This will have worsening impact on investment, employment and poverty reduction, it added.
The General Economics Division (GED) of the Ministry of Planning has carried out the study aiming to analyse past and ongoing policy reforms and their implication to growth and poverty reduction in Bangladesh.
Borrowing from both the external and internal sources is a common phenomenon, which is reflected in the country's budget making process. The government borrows large amount of money every year to finance its budget.
It also requires paying a large amount of interests from its revenue earnings.
In the current financial year the government has allocated highest 12.6 per cent or Tk 125.65 billion out of total Tk 999.62 billion national budget for interest payment.
Of the total amount, Tk 112.74 billion has been allocated for making payment against domestic borrowing and Tk 12.91 billion for external borrowing.
Till January of FY08, the cumulative internal borrowings of the government from the banking and non-banking sectors stood at Tk 90.721 billion, 32.05 per cent up from that of previous year.
Out of the Tk 999.62 billion public expenditure in current fiscal, the government has set a target of taking Tk 169.98 billion worth of loan from the domestic sources and Tk 114.57 billion from the foreign sources to minimise its budget deficit.
Deficit in the current fiscal budget has been projected at 4.99 per cent of the total gross domestic product (GDP). It was 4.77 per cent in the last FY08 budget.
In last FY08 budget, the government's Tk 119.67 billion allocation on interest payment accounts for 13.9 per cent of the total public expenditure of Tk 860.85 billion.
In last FY08, the government borrowed Tk 199.23 billion from the domestic sources and Tk 130.24 from the external bilateral and multilateral lenders to minimise its budget deficit.
The GED study said that over the last two decades, the revenue-GDP ratio has increased, but it is still very low even by the standard of the developing countries.
The share of the revenue expenditure as a percentage of GDP increased as compared to increase of the development expenditure."
"The recent budgetary policies reflect government's attention to achieve short term objectives rather than medium and long term gain.
By lowering the size of the ADP, there has been less imperative for the infrastructure development and it may have the result that investment will not boost up and it will not bring about positive gains in the long run in attaining growth and poverty reduction objectives," the study said.
Interest payment is growing larger in the national budget throwing the economy into a "long-term loan-trap" and creating an imbalance in overall fiscal management, a government study said.
It said dependence on external sources has gradually declined in the wake of falling foreign assistance, which leads to higher domestic borrowing.
"Increased reliance on domestic borrowing has the risk of increasing the rate of inflation or crowding out of the private sector from the credit market," said the study styled "Financing growth and poverty reduction policy options and challenges in Bangladesh".
The study said the borrowing may create pressure on the liquidity and ultimately on interests on loan. This will have worsening impact on investment, employment and poverty reduction, it added.
The General Economics Division (GED) of the Ministry of Planning has carried out the study aiming to analyse past and ongoing policy reforms and their implication to growth and poverty reduction in Bangladesh.
Borrowing from both the external and internal sources is a common phenomenon, which is reflected in the country's budget making process. The government borrows large amount of money every year to finance its budget.
It also requires paying a large amount of interests from its revenue earnings.
In the current financial year the government has allocated highest 12.6 per cent or Tk 125.65 billion out of total Tk 999.62 billion national budget for interest payment.
Of the total amount, Tk 112.74 billion has been allocated for making payment against domestic borrowing and Tk 12.91 billion for external borrowing.
Till January of FY08, the cumulative internal borrowings of the government from the banking and non-banking sectors stood at Tk 90.721 billion, 32.05 per cent up from that of previous year.
Out of the Tk 999.62 billion public expenditure in current fiscal, the government has set a target of taking Tk 169.98 billion worth of loan from the domestic sources and Tk 114.57 billion from the foreign sources to minimise its budget deficit.
Deficit in the current fiscal budget has been projected at 4.99 per cent of the total gross domestic product (GDP). It was 4.77 per cent in the last FY08 budget.
In last FY08 budget, the government's Tk 119.67 billion allocation on interest payment accounts for 13.9 per cent of the total public expenditure of Tk 860.85 billion.
In last FY08, the government borrowed Tk 199.23 billion from the domestic sources and Tk 130.24 from the external bilateral and multilateral lenders to minimise its budget deficit.
The GED study said that over the last two decades, the revenue-GDP ratio has increased, but it is still very low even by the standard of the developing countries.
The share of the revenue expenditure as a percentage of GDP increased as compared to increase of the development expenditure."
"The recent budgetary policies reflect government's attention to achieve short term objectives rather than medium and long term gain.
By lowering the size of the ADP, there has been less imperative for the infrastructure development and it may have the result that investment will not boost up and it will not bring about positive gains in the long run in attaining growth and poverty reduction objectives," the study said.