Domestic savings: Will new bonds deliver?

In an attempt spur domestic savings, which declined by 650 bps to mere 14.3 percent of GDP in the span of last six years, the government is now introducing new and improved avenues of saving in government bonds for small investors.
The fall in savings can be mapped with the money going out of the system; the currency-in-circulation (CIC) has increased from 18 percent of the M2 flows in FY05 to 38 percent in the last year.
But despite the staggering growth in the country financial sector during the 2003-07, the problem of parallel economy has exacerbated. Over all CIC in Pakistan, owing to a large parallel economy, is at 22 percent of money supply versus 15 percent in India and 4-6 percent in developed countries.
Is it the case that our commercial banking system and existing NSS instruments are not capable to attract cash economy into the system, or are there some other impediments to this chronic issue?
The objective cited by Zafar Sheikh to launch NSS bond is a mission to curb the problem of persistent rise in CIC. This coupled with the launch of NITs Government Bond Fund is to open avenues for small individuals and corporations to invest in government papers.
Since, of late, banks have been predominately supplying depositors money to the government, only time will tell whether these new avenues were successful in tapping the cash economy or did they cannibalize the existing NSS and disintermediation of commercial banking.
The lack of banking facilities for rural agriculture economy, and the incentive for tax evasion and black money are the two main reasons cited for abnormally high CIC in Pakistan. Opening of new avenues can address the small savers issue of little access to banking channels, but surely it will not bother smugglers and tax evaders.
Yet, the lack of knowledge of saving schemes and mutual fund staff, if any, in far-flung dispersed areas is likely to restrict these new avenues to large cities. It can make sense for an office clerk sitting in Faisalabad to invest Rs20,000 (minimum investment) in NSS bond but essentially he will take this money out from his banks current or PLS account.
Hence, there are chances that these new avenues will add more cost than benefit to the government, and eventually the tax payers. This can potentially crowd out the private investment by means of bypassing the banking system to channel private savings to meet its expenditure and can also fuel in future inflation at the time of payments on maturity.
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 help boost private investment.
Mind you, total investment, which increased by 540 bps to 22 percent of GDP in the previous four years, declined by 230 bps in the last year. With a staggering 320 bps fall in foreign savings to 5.3 percent owing to global slowdown and bleak local security situation, it is imperative to enhance domestic savings.
But the efforts taken by the government might not be enough; in fact, it would instead crowd-out private investment by pouring money into more corrupt and inefficient public projects which, according to finance minister Shaukat Tarin, mostly cost 100 percent more than originally budgeted.
However, the foremost reason of high CIC results in low savings is tax evasion and black marketing. Right steps to curb these issues are direly needed to put the economy on the right path. Otherwise, it will be one step forward and two steps backward.