Page 22 - Azerbaijan State University of Economics

Murad Y. Yusıfov: Econometrıc Assessment Of Optımal Interest Burden: Case Study For Azerbaıjan

(International Monetary Fund, GFSM, 2014; Xavier and Tidiane, 2013). K.Torstensen

defined the interest burden as interest expenses after tax as a percentage of disposable

income plus interest expenses after tax. The interest burden impacts the volume of
household income which is available for consumption (Kjersti, 2016). According to
Guariglia Alessandra, Spaliara Marina-Eliza and Tsoukas Serafeim, a higher interest
burden exposes the company to the higher interest costs (Guariglia et al., 2015). The
growth of the interest burden affects the level of GDP in the real sector. As a result,
the interest expenses debited to the enterprise's expense accounts exerts pressure on
the enterprise's net profit, wages and social security contributions and consequently,
at the same time it causes the reduction of tax revenues.

As a generalized indicator at the macroeconomic level, the interest burden was defined
by D.Rodgers as the ratio of accrued interest to GDP. At the enterprise level, the
interest burden is defined as the ratio of interest expenses to interest and pre-tax
earnings (EBIT) (David, 2015). Jaroslav Sedlacek and Daniel Nemec determined the
company's interest burden as EBT / EBIT (Sedláček & Nemec, 2018).

Hence, as it is shown the interest burden was investigated in the studies at the macro
and micro levels depending on object of study. (Table 1).

Table 1. Summary of Representation of Interest burden

At the Macro level At the Micro level Research study

The ratio of interest payments to
GDP Xavier & Tidiane (2013)
The ratio of accrued interest to David, R. (2015).
GDP
EBT / EBIT Sedláček & Nemec, 2018
Interest coverage ratio
Francisco Palomino et.al
(ICR)
Source: Authors’ compilation

Low-cost borrowing, as well as greater access to finance, increases the investment and
consumption of entities in the economy. This, in turn, increases the burden of debt

service on the private sector (Kohlscheen et al., 2018). The main operating income of
banks falls on the share of loan interest income. The large amount of accrued interest
can create problems with delays or non-repayment of the loan portfolio. As a rule, the
repayment of interest is usually made at the expense of value added created by the
borrower. According to the System of National Accounts (SNA), we can note the
following equation (United Nations et al., 2009, Vu Quang Viet, 2012) for having
some insight into this issue.

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