In an effort to reduce dependence on borrowing from the banking sector, the government plans to increase interest rates on savings instruments again amid a fall in sales of such instruments.

The rates of interest on three-year and five-year savings instruments are likely to be hiked by around 1 percentage point to 11.50 percent and 12.50 percent respectively.

The present rates of interest that came into being in July are 10.78 percent for the three-year instrument and 11.55 percent for the five-year one.

An official of the Internal Resource Division said a proposal in this regard may be sent to the government soon.

The official also said, as the sales of savings instruments fell drastically, the Directorate of National Savings (DNS) earlier sent similar proposals several times but the government adopted a go-slow policy. But now the government is actively considering a rise in the rates of interest to reduce pressure of borrowing on the central bank.

However, a finance ministry official said, if the government borrows more through savings instruments, its expenditure on payment of interest will go up in future. But now the government's main concern is soaring inflation, said the official.

As the sales of savings instruments fell last fiscal year, the rate of interest on all types of instruments were increased by about 1 percentage point on July 1.

A DNS official said, alongside a fall in the sales of fresh savings instruments in recent times, the savers are encashing their savings instruments and depositing the money with banks as they offer higher interest.

According to DNS statistics, in the first four months of the current fiscal year the sales of the savings instruments fell by 10 percent compared to the same period last year.

The principal amount repayment in the same period rose by around 16 percent.

In the current fiscal year's budget, the government set a target of borrowing Tk 6,000 crore from the sales of savings instruments.

But in the first four months of the current fiscal year, net sales or borrowing through the savings instruments fell by around 77 percent over the last year, and the borrowing stood at only Tk 592 crore.

In the same period last year, the government's net borrowing was at Tk 2,604 crore.

The finance ministry official said the situation has become such that the government is now compelled to borrow from the banking system to pay the principal amount and interest accrued on the savings instruments bought earlier.

In case of borrowing from banks, the situation is opposite.

In the first five months of the current fiscal year, the amount of government's borrowing from banks reached Tk 19,805 crore, which was around Tk 1,000 crore more than its borrowing target for the entire year.

The ministry official said the pressure of expenditure has fuelled the government's bank borrowing every week.

Normally such borrowing rises at the end of the fiscal year when expenditure on annual development programme goes up.

But in the current fiscal year, the amount of borrowing, especially from the central bank, has been on the rise from the beginning of the year, leading a hike in inflation.

However, bank borrowing fell slightly in December, at a time when a mission of International Monetary Fund was staying in Dhaka to talk with the government about a loan.

The visiting IMF mission expressed concern about the heavy bank borrowing and advised the government to bring the amount down.

On December 12, the amount of government's borrowing was Tk 16,848 crore of which Tk 10,365 crore was from the central bank.

The DNS official said the banks, especially the private ones, have increased their deposit rate much in recent times -- up to 12 percent,

On October 6, the overall deposit growth in all the banks was 13.86 percent compared to December 31 last year. Of the growth, the private banks' deposit rose by 16 percent and that of foreign banks by 19 percent.

Deposit growth in many of the private and foreign banks was 22-36 percent during the period.

Source: The Daily Star/ Bangladesh/ 15th Dec 2011