With the government's bank and non-bank borrowing on a steep rise, the next fiscal's budget is likely to earmark an allocation of Tk 635.25 billion for paying interest.
The allocation is up by Tk 64.57 billion or 11.31 per cent, compared to the current fiscal year's provision.
"The borrowing is rising. So, we have to pay more in the next fiscal year as interest," a senior finance division official told the FE on Tuesday.
He said since the economy is hit hard by the coronavirus pandemic, the next year's borrowing will go up sharply, which in turn will raise interest payments.
The official said due to the countrywide shutdown between March and May, revenue collection was nominal, forcing the government to step up borrowing from the banking sector to defray public expenditure.
By early June, the borrowing from banks has almost doubled the target of Tk 473.64 billion set for the entire fiscal year. On the other hand, the government could borrow less than half of Tk 270 billion it wanted to raise from savings instruments because of lower sales.
The rate of interest of savings instruments is almost double that of loans from banks, thus the government has increased its reliance on the banking sector to secure funds, said the official.
He also said the government's higher dependence on bank loans will continue over next fiscal year, thus the target is being set at Tk 880 billion.
In contrast, the target for borrowing from savings instruments is being slashed to Tk 200 billion.
The finance division official said the government pays interest for both local and foreign loans. In the next fiscal year, the government's borrowing from foreign sources may also climb, thus driving up the spending on interest, he said.
Already, the government has received over $700 billion from the International Monetary Fund as balance of payments support and $500 million from the Asian Development Bank in budget aid.
Officials also expected to get $1.0 billion from the World Bank to bankroll the budgetary outlay.
Another finance division official said the government has announced a string of incentive packages worth Tk 1.0 trillion for local trade and industrial sectors to help those recoup the financial losses fuelled by Covid-19 outbreak and the resultant shutdowns. The bulk of the funds for the packages will come from the banking sector, but the government will have to pay a portion of the interest as subsidies, which will push up the interest payment burden.
Finance Minister A H M Mustafa Kamal is set to announce a Tk 5.569 trillion budget for fiscal year 2020-21 on June 11 in parliament where he is setting a target of 8.2 per cent growth in gross domestic product or GDP . He will also pledge to keep the inflation rate at 5.4 per cent in the upcoming fiscal.