Govt to borrow more from provident fund than savings certificates in FY25

The government will not take savings certificate loans in the upcoming fiscal 2024-25, rather it will repay the old loans. Instead, despite being more interest-bearing than savings certificates, the government will increase the amount of loans from the General Provident Fund, a means of investment for government employees.

Though both the sources constitute an insignificant amount of the government's overall domestic borrowing, the approach will reduce scopes of small savings for common people and expand it for a privileged group with higher returns, economists say, suggesting that interest rates should be equal for both.

Not only in preparing the budget for the next fiscal year but by revising the current fiscal year's budget, it is estimated to take more loans from banks and Provident Fund than the original budget target. However, the borrowing target from savings bonds has been reduced to negative.

The target of borrowing from the high-cost Provident Fund is being increased by Tk30 crore in FY25 compared to the original budget of the current fiscal year. The interest rate on government loans from the Provident Fund has been 13% since 2015. Only government employees can invest in the Provident Fund. Therefore, 22 lakh government employees are enjoying the high-interest rate.

The government plans to sell Tk50 crore worth of savings certificates in FY25 and will repay higher amounts upon maturity. Consequently, the projected borrowing target from savings schemes is negative by Tk50 crore. The interest rates are between 11.04% and 11.76% for four schemes with three to five years' maturity.

Due to the imposition of various restrictions on the purchase of savings certificates, the investment in the savings schemes in which common people invest is decreasing.

However, there is a huge increase in pension savings certificates, where mainly the officials and employees who retire from government jobs invest.

Currently, a government employee can invest a minimum of 5% and a maximum of 25% of his basic salary in the GPF fund.

Mahbub Ahmed, former finance secretary, told TBS that it would not be right to reduce the government's borrowing from savings certificates whose interest rates are now equal to that of banks and even lower Treasury bond yields.

"When the IMF asked to control the sale of savings bonds, the interest rates on savings bonds were much higher than bank interest rates. Now the advice of the IMF has lost its effectiveness," he said.

The former finance secretary said common people feel safe to invest in savings schemes. "If the government does not allow investment here, then where will they put their life savings?" he asked, referring to present state of many banks.

Since bank interest rates have increased now, there is no scope to reduce the interest rate of GPF, he felt.

Earlier a government employee could keep 100% of his basic salary in the GPF. Many employees put their entire salary into this fund. "I fixed the maximum limit of 25% while I was the finance secretary," Mahbub said.

Towfiqul Islam Khan, senior research fellow of the Centre for Policy Dialogue, told various policies of the government already reduced people's scope to invest in savings instruments. "Moreover, people have no savings due to high inflation," he said.

Towfiqul suggested that the interest rate of GPF should be equal to that of savings certificates.

Bank borrowing, interest burden rising

The Finance Division is aiming to set a target to borrow Tk1,52,000 crore from the banking sector in the next budget, nearly Tk20,000 crore more than this year's original target.

Economists fear that the flow of money to the private sector will decrease due to the increased bank borrowing during the liquidity crisis in the banking sector. They fear that private investment and job creation will be disrupted.

Officials of the Ministry of Finance, who are directly involved with budget formulation, said as the government's interest expense is increasing due to the high-interest rate on savings bonds, it is increasing its reliance on bank loans, which offer relatively lower interest rates. The trend will continue for the next two fiscal years as well, they said.

In the original budget of the current fiscal year, the allocation for interest payments was Tk94,376 crore. In the budget of the next financial year, the allocation is estimated to be increased to Tk1,08,000 crore-- Tk93,000 crore for interest on domestic debt and Tk15,000 crore for foreign debt.

Former finance secretary Mahbub cautioned higher bank borrowing by the government may cause the private sector to face capital problems for investment.

Economist Towfiqul said to reduce dependence on bank loans, the government needs to increase revenue earnings and prioritise project expenditure.