Government plans to cut savings certificate loans to ease pressure on interest payments
The government will halve savings certificate borrowing within three years to limit interest payments, according to finance ministry officials.
To this end, the Ministry of Finance should impose more restrictions to discourage investment in savings certificates.
While a cut in borrowing from savings certificates could ease government pressure on interest payments, economists fear the move could hurt the country’s large middle class.
As the interest rate on savings certificates is almost double that of bank deposits, the middle classes invest in risk-free savings certificates.
Many people, including retirees, invest all their savings there and live off it. Savers have become interested in investing in savings certificates mainly due to fear of losses in the stock market and falling interest rates on bank deposits. As a result, cash bond investment has increased even during the Covid-19 pandemic.
The revised budget for the current financial year has set a borrowing target of Tk 32,000 crore from this sector, which could increase by Tk 3,000 crore in the next financial year. And dependence on low-interest foreign loans will increase by restricting investment in savings certificates over the next two fiscal years.
In the last financial year, the government spent about Tk 70,600 crore on interest payments.
In the revised budget of the current year, the allowance for interest expense has been set at over Tk 71,000 crore. In the next financial year, it will rise to over Tk 80,000 crore.
Of this amount, more than 73,000 crore taka will be spent to repay interest on internal loans including savings certificates.
Finance Ministry officials say such a high amount of interest expenditure creates an imbalance in the budget, as revenue does not increase to the desired level. Although a large portion of the budget is supposed to be spent on development to stimulate economic growth, management expenditure is increasing due to interest expenditure. In the 2024-25 fiscal year, operating profit is expected to shrink to the size of the budget, and a large portion of government spending will be on development.
According to the Ministry of Finance, over the past decade, 26% of the total financing of the deficit came from foreign sources, while the remaining 74% came from domestic sources.
According to the Finance Ministry’s plan, 45% of the deficit financing will be covered by foreign sources in the 2024-25 financial year, which will reduce the risk of crowding out in the domestic market.
Professor Mohammad Abu Eusuf, of Development Studies at the University of Dhaka, said that in addition to simplifying government financial management, the government had introduced savings certificates to encourage ordinary people to take an interest in personal savings.
“Lately, restrictions have been imposed on savings certificates. If the government imposes more austerity in this regard, people’s tendency to save will decrease,” he added.
The economist said if there are savings on hand, people can spend on any major disaster. And if there are no savings, the government must help. Considering these aspects, cash vouchers have a big role to play.
Dr Fahmida Khatun, executive director of the Center for Policy Dialogue (CPD), said government borrowing on savings certificates had exceeded the level of a few years ago.
Government borrowing in this sector has declined due to the recent introduction of automation and the reduction in interest rates and restrictions on the timely purchase of savings certificates. In this situation, it would not make sense to lower the interest rate in the future to drive down cash bond borrowing, she added.
Dr. Fahmida Khatun said that a large part of the middle class depends on interest on cash certificates. Even if they have money, they cannot afford to do business. Since the real inflation rate is higher than the interest rate on deposits, the real value of money received with interest decreases even if the money is kept in banks.
In this situation, she recommended not imposing big restrictions on savings certificates to keep middle-class life in order.
She said it would be difficult in the future to meet government needs by borrowing from foreign sources, even if interest rates were low.
“Although more than $50 billion has fallen into the pipeline, this money is not being released due to inefficient project implementation,” she added.
Going forward, the country will have to borrow money from the International Bank for Reconstruction and Development (IBRD) – the World Bank’s commercial lending window – with additional interest, the CPD executive director said.
Apart from this, after removal from the list of least developed countries, foreign subsidies will stop and interest rates will increase, she added and called on the government to seriously consider these issues in future financial management. .