REJAUL KARIM BYRON and AHSAN HABIB

Bangladesh spent a record Tk 134,430 crore ($15.7 billion) on interest payments in fiscal year (FY) 2024-25, equivalent to one-fifth of total budget expenditure, according to the latest report from the Finance Division.

Remarkably, this nearly matches the allocation for development projects under the Annual Development Programme, which stood at Tk 144,356 crore for the year.

The government had initially allocated Tk 113,500 crore for interest payments but later increased the figure to Tk 121,500 crore in the revised budget. By the end of the fiscal year, actual spending had surpassed even this higher target.

Spending on interest payments also remained high – Tk 31,952 crore, or 26 percent of total allocations – in the first three months of the current fiscal year, though budget spending in other sectors was low during the period.

HIGH BORROWING, HIGHER REPAYMENT

The surge in interest payments is linked to rising government borrowing from both domestic and foreign sources and an increase in interest rates on treasury bonds and bills.

According to Finance Division data, the government spent Tk 116,617 crore ($13.6 billion) on domestic loans in the last fiscal year, up 17 percent from Tk 99,606 crore in FY24. Meanwhile, interest payments on foreign loans rose 25 percent to Tk 17,812 crore ($2.1 billion) from Tk 14,984 crore in FY24.

Overall, interest payments now consume 28 percent of the revenue budget, up from under 20 percent between FY2010 and FY2020.

A majority of domestic borrowing comes from treasury bills and bonds from bank and non-bank sources, whose costs rose significantly. Once the yield rate of bonds was around 8 percent, which rose above 10 percent in FY24. In FY25, it increased further to hover between 11 percent and 13 percent, according to Finance Ministry data.

Interest payments surged sharply after the Covid-19 pandemic, when the government borrowed heavily from foreign sources to support the economy. Interest obligations on these loans began immediately upon disbursement.

At the same time, domestic borrowing through treasury bonds and bills also contributed to rising costs thanks to their high interest rates. By FY2021, interest payments had already reached 21 percent of the revenue budget.

Meanwhile, the government’s overall expenditure has risen sharply, but revenue collection has failed to keep pace. This has resulted in an 8 percent tax-to-GDP ratio, which is far below the Asia-Pacific average of 19 percent and the 25 percent average among developing countries.

For instance, the ratio is 12 percent in India and 17 percent in Nepal.

Interest rates in the banking sector have also risen by approximately 500 basis points over the last five years, pushing the government’s interest payment obligations to unsustainable levels.

As of March 2025, the government’s debt stock had reached a record Tk 20 lakh crore, up from Tk 13.44 lakh crore in June 2022. Of this, the foreign debt stock has nearly doubled to Tk 8.42 lakh crore since mid-2022. The interim government has signalled its intention to reduce reliance on foreign loans to mitigate risks to external debt sustainability.

Currently, Bangladesh’s external debt-to-export ratio stands at 140 percent, according to the latest Debt Sustainability Analysis (DSA).