DHAKA, BANGLADESH - RISING food prices could force authorities to prolong a state of emergency, the London-based Economic Intelligence Unit (EIU) said.

'Preparations for the (year-end) parliamentary polls could be hampered by mounting discontent over food prices and (it) could prolong the state of emergency,' an EIU Country Report for May said.

'A mounting discontent ... could lead to widespread protests during the early part of 2008-09 (July-June) fiscal year,' the report issued on Thursday said.

Garment workers in the capital, Dhaka, defied the state of emergency in April by striking to demand higher wages to cover the cost of rising food prices, the report said.

The situation is unlikely to improve over the short term, despite reports of a bumper rice harvest, and further demonstrations are likely, which will test the caretaker government's ability to govern the country, it said.

Bangladesh is being governed by an army-backed interim authority that took over in January 2007, following widespread political violence.

While around 170 top politicians, including former prime ministers Sheikh Hasina and Begum Khaleda Zia, have been detained in an anti-corruption drive, the government has failed to contain food and other commodity prices that nearly doubled over the past year.

This has caused simmering discontent among a large number of Bangladesh's more than 140 million people, mostly those who live on less than $1 a day.

The EIU report said despite wide ranging electoral reforms, the next election battle would be fought between long-standing rivals, Hasina's Awami League and Khaleda's Bangladesh Nationalist Party (BNP), the two largest political parties.

The interim government imposed a state of emergency on its takeover, cancelled an election due on Jan 22, 2007 and pursued a campaign to clean up politics.

The government headed by former central bank chief Fakhruddin Ahmed has vowed to hold a free and fair election before the end of this year, but the political parties have asked for the immediate release of the detained former prime ministers and lifting the emergency.

Otherwise, they threatened to defy the emergency and boycott the election.

The EIU report said the budget deficit in fiscal year 2007/08 (July-June) could rise to the equivalent of 5 per cent of GDP, compared with the official target of 4.7 per cent.

It said real GDP is expected to grow by 5.7 per cent in 2007/08 and by 6 percent in 2008/09 while consumer price inflation is expected to average 8.9 per cent in 2008, after averaging an estimated 9.1 per cent in 2007.

The government expects GDP to grow more than 6 percent in the current fiscal year because of strong exports and a likely bumper rice harvest.

The EIU said the trade deficit was expected to swell to record levels in 2008/09 'as demand for industrial raw materials strengthens and international oil prices stay high'.