The 1.5 percentage point interest rise in every category and term of savings instruments effective from today has put the highest interest rate at 12.5 percent on Pensioner Savings Certificate. In comparison, the highest interest rate on bank deposits is 11.5 percent.

While the government has to pay interest at a rate ranging from 6.78 to 7.5 percent on bank borrowing, it will have to pay 11.5 to 12.5 percent interests on public borrowing.

Centre for Policy Dialogue (CPD) Executive Director Dr Debapriya Bhattachariya said, "In the backdrop of modest increase in revenue collection, the offtake in public expenditure portfolio has accelerated in the recent month. To meet the widening fiscal deficit, in the absence of adequate foreign financing, the government had to resort to domestic borrowing."

The move, which will attract more public investment in savings instruments, is expected to reduce the government's bank borrowing. It is also seen to shrink the liquidity and credit outflow of banks, abetting the non-food inflation.

Until September, on a point-to-point basis, the food inflation has been leaping relentlessly and non-food one registering but minor changes, both upward and down.

But in September, the overall point-to-point inflation fell by .92 percentage point, standing at 7.01 percent, though the non-food inflation rose by 1.15 percentage point and stood at 6.86 percent.

A source at the Bangladesh Bureau of Statistics (BBS) said, although the figures for October are yet to be compiled, the overall inflation continued to decrease in that month, while the non-food inflation was on the rise.

Dr Bhattachayia said, "In view of the increasing trend in inflation, the government is juggling with contractionary policies. The recent decision to increase the interest rates of the savings certificate needs to be interpreted in the context of this evolving macroeconomics situation. The government needs to borrow, but it has decided to borrow more through the high-cost but low-inflation borrowing instruments."

"However this high cost borrowing in the long run will increase the domestic debt servicing liabilities of the government to be serviced through the revenue budget. This will result into low availability of revenue surplus for ADP financing," he added.

Until mid-November this year the government borrowed more than Tk 3,700 crore from the banking system, which was negative in the corresponding period last year. On the other hand, in July-September the net sales of savings instruments went down by 45 percent compared to the corresponding period of the last year.

A Bangladesh Bank source said earlier, when the bank interest rate was climbing, the government cut the interest rates on savings instruments and also abolished certain categories, which augmented the amount of repayment. Repayment of savings instruments increased by 55 percent in July-September this year from the corresponding quarter of 2004.

The BB source said if the sales volume of savings instruments does not rise significantly, it would be difficult for the government to repay the past borrowings. As of end-September, the government's public borrowing stood at Tk 36,939 crore.