Thanks to increased domestic borrowing in recent years, the government's interest payments will rise by 14 percent in the coming fiscal year.
Rising interest rates in the banks over the last one and a half years are also why the government will have to spend more in debt interest payments.
Finance Minister AHM Mustafa Kamal has plans to allocate Tk 65,000 crore for the purpose in the budget for 2020-21, said an official of his ministry. The current year's allocation was Tk 57,068.
About 94 percent of the amount might go to domestic lenders in the coming fiscal year and the rest to foreign ones.
Domestic lenders in the country are banks and saving certificate buyers.
Interest payment expenditure has been steadily increasing for 10 years. In the 2010-11 budget, the government earmarked Tk 14,578 crore and in 2015-16 Tk 33,113 crore.
The minister is set to unveil his second budget on June 11 in parliament.
As of May this year, the government borrowed from banks Tk 82,000 crore, almost twice the amount it planned at the outset.
The coming year's borrowing from banks will be around Tk 80,000 crore, officials said.
Interest rate in banks almost doubled in the last one and a half years, thanks to rising demands. Now, the rates range between 7 and 9 percent, up from 3-4.5 percent in December 2018, according to Bangladesh Bank statistics.
In the current fiscal year, government borrowing from the savings certificate sales declined due to measures taken to reduce interest payments burden.
From July 2019 to January 2020, the government sold saving certificates worth around Tk 7,673 crore, a 76 percent drop compared to the sales in the same period the previous year.
Economists argue that increased utilisation of foreign aid now in the pipeline will reduce the burden of domestic borrowing.
Foreign aid in the pipeline stands at $48.11 billion.
World Bank's former economist in Dhaka Zahid Hussain said interest payments grew rapidly in recent years primarily because of excessive reliance on expensive National Savings Certificates (NSC).
He said, "The Tk 8,000 crore projected increase in interest payment expenditure is bigger than the wage support package of Tk 5,000 crore given to export oriented industries.
"The best thing the government can do is to contain the growth of interest payments. The government must fully utilise the opportunities for external financing on concessional terms offered by donor agencies to help countries fight the pandemic. This will help, but not suffice since the bulk of the interest payment is for domestic debt."
Containing the growth of interest on domestic debt requires reforms in the management of NSC debt issuance and setting interest rates, Zahid said.
"The government tightened enforcement of eligibility rules since July 2019 [for NSC buyers]. This must continue. It should now link the NSC rates with bank deposit rates," he added.