EDITORIAL: A notification issued by Finance Ministry slashed profit rates on the following on offer by the Central Directorate of National Savings (CDNS), excepting two, including on Shariah-compliant products: a cut of 40 basis points on Special Savings Certificates to 15.6 percent, average of 55 basis points on Defence Savings Certificates to 13.67 percent, 36 basis points on Regular Income Certificates to 14.64 percent, 72 basis points on Behbood Savings Certificates, pensioners benefit account allowed only to government pensioners and Shuhada Family Welfare Account to 15.36 percent, and 58 basis points for Short Term Savings Certificates.
CDNS is a state-owned savings bank and operates as an attached department of the Finance Division, Ministry of Finance, and its primary objective is to provide non-bank funding to finance the government’s fiscal deficit while mobilising savings from individual savers in order to provide non-bank financing to the government’s fiscal deficit.
Three observations are in order: (i) the rates on offer before the cut were far below the rate of inflation (consumer price index for January 2024 was estimated at 28.3 percent year on year while the sensitive price index for the week ending 15 February 2024 was 34.25 percent year on year); (ii) nonetheless rates on offer by CDNS are competitive, better than what is available from commercial banks, and is backed by 100 percent government guarantee; in the event of a collapse of a commercial bank deposits up to 500,000 rupees only are protected by the Deposit Protection Corporation, a State Bank of Pakistan subsidiary; however, the SBP has addressed this concern by pointing out that its regulatory and supervisory measures have obviated the need for concern on this count till-date; (iii) individual savings generated almost exclusively from the private sector are used entirely by the government to budget an ever-rising allocation for current expenditure, reflecting not only government profligacy largely supportive of the existing elite capture instead of being allowed to be used by the private sector for engaging in productive activities but also a major factor in the prevalent high rate of inflation as the money is injected right back into the system by the government - money that is not used for development purposes or promoting productive activity.
What is even more disturbing is the fact that on the same day the rates were cut by the Ministry the auction of three-month treasury bills saw a jump from 20.44 percent in the auction on 6 February 2024 to 21.7 percent on 21 February 2024 while keeping the benchmark six-month T-bills unchanged.
This indicates that there is no possibility of a rate reduction by the Monetary Policy Committee scheduled to meet on 18 March and challenges the prevalent perception that there is a linkage between the discount rate and the rate of return on offer by CDNS.
The question is why was it deemed appropriate to cut the return on all but two products on offer by the CDNS? The answer is a rather clumsy attempt to understate the mark-up component of current expenditure as the caretakers raised domestic borrowing from 32.9 trillion rupees July-November 2022 to 40.95 trillion rupees in the comparable period of 2023 – a 24 percent raise.
Sceptics point out that while the then finance minister Ishaq Dar preferred to borrow from the external market, at rates which were lower than the domestic market at the time, and relied on artificially controlling the rupee-dollar parity to understate the mark-up, a component of the current expenditure, the caretakers have opted to massively and, many would maintain irresponsibly, borrow from the domestic market, thereby not only fueling domestic inflation but also crowding out private sector borrowing with negative implications on growth.
A better approach would have been to cut current expenditure which would dampen inflation as well as obviate the need to borrow by the government.
Copyright Business Recorder, 2024
Comments
Comments are closed for this article.