NSS: nearly on target, but at what cost

Unlike what some may think, the government hasn missed all of its financing targets. Thanks to high rate on floating unfunded government debts, the government is on track to meet its annual National Saving Scheme target, despite a lacklustre performance of National Saving Bonds (NSB).
The government raised Rs149 billion from NSS during Jul-Feb, against the full-year target of Rs240 billion, which is about 47 percent higher than the amount raised in the same period last year. On the other hand, the much-hyped NSB managed to raise merely Rs3.6 billion, followed by an unwelcoming response by secondary market investors on the Karachi bourse.
But is this any good?
At this juncture, the saving schemes, owing to lucrative rates with implicit sovereign rating, are crowding out investment routed through corporate bonds, channeled by mutual funds. This hinders the growth of corporate debt market.
But on a broader economic picture would that be just a mere shift in resources assuming same efficiencies. Well, the hypothesis that private and public sector are at par in terms of performance does not hold true for Pakistan, a country where rent seeking practices run rampant.
There is no denying that banks have a better chance of attracting savers (depositors) than a savings organization. But if it has to be between a public and private saving organization, the incentives for mutual funds, investment banks and corporations to attract small domestic savers through bonds are much higher than public savings organizations.
Therefore, the thesis of enhancing saving rates by tapping the rural and low middle class market, which is largely out of the banking system through national savings instruments seems like a tall claim. The case in hand is poor investors reaction to the NSB.
One can argue that secondary bond market is at a nascent stage and the market will take time to come on board. But, given the inefficiencies and rent seeking behaviour of virtually all public sector entities and gross failure of the nationalization program during the 70s warrants the shift of onus of building bond market towards private sector.
The mutual funds and brokerage firms should be incentivized by introducing products to tap the high level of currency-in-circulation. Agreed, none of them can woo the tax evaders and black market money to the formal system. But they surely have better potential to reach far flung areas, which are neglected by commercial banks and NSS.
Plans to launch a shariah-compliant Sukuk Bond and zero-coupon bonds to capture interest-free savings in the coming months might not cannibalize existing NSS instruments, but it can potentially crowd out private sector efforts even more resulting in unnecessary administrative expenses.
Disallowing the institutions, however, in the new bond can limit this crowding out substantially. Moreover, the government should bar the institutions putting money in existing NSS instruments to help banking deposits grow, and in turn encourage private investment.
Officials at the savings institutions claim that they aim to tap about Rs100-150 billion which is currently out of the banking system owing to few Islamic instruments. However, without penetrating small towns and villages the realization of these claims seem a distant dream.