The interest payment on government borrowing grew by 30% in the first four months of the current fiscal year as compared to the same period previous fiscal year, prompting the authorities to go for a mid-term debt strategy.

Officials are expecting the strategy to significantly ease the rising payments on debt servicing that soared well above the usual level of 18% annually.

“The government is considering steps to rationalise domestic borrowings and minimise the interest payments,” said a member of debt management committee of the finance ministry.

“We’ve already prepared a medium-term strategy and it will be sent to the ministry for approval soon.”

A move has already been taken to mobilise funds through issuing medium term bills and bonds in accordance with the strategy, said the official.

Domestic sources of borrowings – particularly the banking system – usually increase the cost of borrowing, leading to a rise in the payment of interest, analysts said.

The spending would exceed the government’s target in the current fiscal year 2013-14 unless the rising trend is addressed. It might force the government to borrow from the commercial banks to meet the budget deficit, they said.

In the current budget, the government’s target for domestic interest payment on debt is Tk26,000 crore.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said the interest payment was rising mainly due to the government’s increased borrowings from domestic sources.

“Domestic borrowings involve at least double-digit interest rates while foreign financing costs single-digit interest rates. The interest payment on foreign financing grew negatively by over 4%.”

According to the finance ministry, the government paid only Tk590 crore in July-October period of the current fiscal year against Tk615 crore in the corresponding period of the previous fiscal in interest on foreign financing.

Mansur said the government needed to focus on the external financing as any increased borrowing from the local banking sector might cause a crowding-out effect on the economy.

According to the finance ministry, the government’s expenditure on interest payment on debt in the FY2012-13 stood at Tk24,000 crore, nearly 18% up from the previous fiscal.

Of the amount, Tk22,500 crore was paid in interest on domestic borrowings and Tk1,492 crore on foreign financing.

In first half of this fiscal, the government made a net repayment to Tk6,700 crore while borrowing Tk11,300 crore from scheduled banks, according to Bangladesh Bank.

News:Dhaka Tribune/11-Feb-2014