Despite IMF advice, govt won't lower interest on savings tools

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FE Report
The caretaker government will not lower interest rate on national savings tools, despite suggestion made by the International Monetary Fund (IMF).
The interim administration will instead provide incentives, including attractive profits and tax rebate, to increase the sale of such savings instruments, a source familiar with the move said.
"We'll rather launch a wide-ranging campaign to enhance the sale of savings instruments," the source noted.
"The authorities concerned have been directed to distribute leaflets mentioning a number of benefits such as state guarantee, attractive profits, and tax exemption on the annual profits upto Tk 150,000. The measures, we believe, will boost the sale of the savings certificate," he added.
The council of advisers recently amended the Income Tax Ordinance 1984, raising the tax-exemption ceiling of the interest income from national savings instruments.
Under the amendment, the ceiling of income tax deduction at the rate of 10 per cent at source from interest of savings certificates has been raised to Tk 150,000 from the previous level of Tk 25,000.
The sources noted that an IMF team, which conducted a review mission in September last, called for reduction on the interest rate on savings tools.
The IMF officials were reported to have asked the government to adjust the interest rate of savings tools with that of treasury bill (T-bill) in order to bring harmony in the borrowing market. It felt that the different interest rates helped push the cost of borrowing up.
Currently, the rate of savings certificate is higher than that of T-bills. The government borrows through the auction of T-bills and sale of savings certificates.
The sources said the government would have found it extremely difficult to borrow from non-banking sources had it reduced the interest rate on national savings tools.
It has taken the decision to bring back the people who have already begun diverting their investment to other investment avenues offering higher benefits, the sources added.
Due to lower than expected revenue income by the national board of revenue (NBR) in the last fiscal, the government had to borrow some Tk 85.89 billion from banking and non-banking sources.
Of the amount, the government borrowed almost a half from the non-banking sources. It was forced to do so following an agreement with the IMF that limited the ceiling of bank borrowings.
The government borrowings from the banking sources increased by 13.94 per cent in 2006-07 compared to that of 23.57 per cent at the end of 2005-06.
On the other hand, borrowings from the non-banking sources increased by 10.58 per cent in 2006-07.
It made two recommendations -- joint audit of income tax and value added tax (VAT) departments and changes in the VAT law -- to help spur revenue growth, source said.