SBP proposes issuance of ISBs, tax exemption on NSS

The State Bank of Pakistan (SBP) has proposed introduction of Islamic Saving Bonds and tax exemption on National Savings Scheme''''s return on small investment aimed at attracting more investment. The downward revision in NSS rates continued to dampen the net investment in NSS instruments, which recorded an increase of only Rs 26.8 billion during Q1-FY17, the SBP revealed in its recent report.
According to a report, the composition of NSS indicates that all major schemes, except for Defense Saving Certificate (DSC), witnessed decline in inflows during the quarter. The major contribution came from Behbood Saving Certificate (BSC) that is being exempted from withholding tax and Zakat.
Special Saving Scheme (SSS) and Regular Income Certificate (RIC) witnessed net retirements during the period. It is worth noting that the share of NSS in domestic debt stock has been falling persistently. This trend needs to be reversed in order to reduce the government''''s reliance on borrowing from banks and external sources. Therefore, the SBP, in its first quarterly report on economy, has suggested the following recommendations to increase NSS inflows through introduction of new retail instruments as well as changes in the existing ones.
Expanding distribution network: Distribution is an important factor in mobilising funds through retail debt issuing activity. In areas without national saving centers and/or banks, the NSS instruments could be offered to general public through retail shops offering some money transfer facility or through better marketing and optimally utilising the existing set-up of Pakistan Post Offices.
Allowing flexibility on premature withdrawal: Anecdotal evidence suggests that some retail savers do not want to lock in their savings for a longer period, and hold cash to meet expenses related to children''''s education or marriage, etc. Therefore, offering an option to withdraw investment without much cost in terms of forgone interest - that is, offering return on pro-rata basis - could encourage that segment to invest in NSS instruments and withdraw when the need arises.
Islamic bonds (floating rate/asset based): A large segment of the population in Pakistan does not like to keep their savings in bank accounts or invest in NSS instruments to avoid interest. Introduction of retail products on the lines of Ijara Sukuk might attract such small savers who prefer to invest in instruments based on the principles of Islamic finance.
Electronic retail system: The objective to design electronic retail debt instruments is to reach the investors who consider it cumbersome to go to a bank or national saving centre. Although the individuals in Pakistan have direct access to primary market of government securities through Investor Portfolio Services Account, no such facility is available for non-tradable retail debt instruments. The introduction of electronic retail system to subscribe retail debt instruments or withdraw their investment would not only attract more retail investors but also could make it a relatively cost-efficient option.
Tax exemption on return for a minimum investment: The return/profit on most NSS instruments are subject to withholding taxes, except for BSC and PBA. To attract more investment from small savers, return on some minimum level of investment can be exempted from the withholding tax.
Inflation-indexed bonds: In countries where inflation is relatively high and volatile, people would want to protect the purchasing power of their assets. In inflation-indexed bonds, both the capital and coupon are linked to the consumer price inflation. Many countries, such as US, UK, Japan and South Africa, offer inflation indexed retail bonds to the savers. However, the disadvantage to government for issuing such bonds is the increase in cost with the increase in inflation.
Exchange rate indexed bonds: Some investors are more concerned about the value of their assets in terms of foreign currency. To make debt instruments attractive to such investors, creating a linkage to an international currency might be an alternate option. Such bonds are generally denominated in domestic currency but the coupon and capital amount are linked to an international currency. Thus, the government does not need to have foreign exchange to serve this type of debt.