Building a culture of savings

Government's recent step of introducing registered premium prize bonds is a move towards enhancing documented saving culture. In an economy where banks' major chunk of income is on earning spreads by investing depositors money in government papers, savings are explicitly at a disadvantage. Any measure, that facilitates direct savings to government instruments, can lure individuals to save more. If the instruments are non-interest bearing, it has a potential to attract marginal costumer inclined towards Islamic mode of savings.

The more important reason for having registered prize bonds is to discourage anonymous parking of money in the backdrop of imposing banking transactional tax for non-filers. Bearer prize bonds certificates became a safe haven for shady wealth. A bearer certificate could effectively earn a return of 5-6 percent, if you buy a whole series, without having an asset registered in your name.

The prize bond stock almost doubled to Rs681 billion in the PMLN regime. Within it, the lions share is amongst big ticket bonds - bonds of Rs25k denomination has increased from Rs40 billion to Rs102 billion and Rs40K bond jumped fromRs118 billion to Rs194 billion. Still these bonds are in short supply in the market.

The appetite for prize bonds already exists but for the wrong reasons. Documenting these bonds under the holders name, will discourage black money to be parked here and this open avenues for tax payers to park their savings in prize bonds. Registration in holders name ensures safety of bonds, as in the case of losing the certificate, the holder can redeem it.

The government needs to market these bonds and other NSS instruments aggressively as they provide better returns for individuals than bank deposits; but the ease of dealing is much better at banks. The government should come with short term papers, as a substitute to T-Bills, for people to directly invest through the NSS counter.

The government had tried it earlier, but banks lobbied against it. Ever since, banks invest in T-Bills themselves and earn spreads over depositors' money; issuing papers directly by government would make it difficult for banks to make easy money. Banks were of the opinion that such steps can trigger bank run; but that is a flawed argument and all new avenues will bring healthy competition.

With economic activities picking up, the regulatory regime should incentivize banks to move away from government papers to real lending. Since the rates of lending to private sector are higher, banks can maintain their spreads even by paying higher rate to depositors, should the NSS become a serious competitor to bank deposits.

It is pertinent to note that whatever incentive government will provide through National Saving Scheme, bank deposits will remain the major avenues for savings at large, as NSS stocks are a fraction of bank deposits. With much bigger outreach and efficiencies, banks will not lose their dominance.

The need is to create saving rates in Pakistan which have consistently remained below 15 percent of GDP for many years. Pakistan is largely a consumption based economy which contributes over 80 percent of GDP. In the last decade or so, amid losing manufacturing competitiveness to rest of the world, the onus of consumption is falling more and more on imports. This fact has augmented the balance of payment crisis threat.

Secondly, the investment to GDP ratio is too low at 15.2 percent of GDP; and in old days of higher investment, the gap was filled by foreign savings. For instance in FY08 when investment to GDP was 22.1 percent foreign saving component was 8.5 percent. That ought to be financed by higher current account deficit which was 8.2 percent in FY08. Hence there is no sane way of having higher investment without lowering consumption. Hence, any step to raise savings is applauded.