EDITORIAL: The Central Directorate of National Savings (CDNS), under the administrative control of the Ministry of Finance, has raised rates by up to 36 basis points on several savings certificates on offer to the general public, money that is then reinvested in government investment bonds (PIBs) and treasury bills (T-bills) effective 4 August 2020. This is the second time the rates were raised as on 2 July these were raised by 16 basis points.
The reasons behind this recent rise in rates are threefold. First, the incentive to save has eroded because the rate of inflation in July estimated at 9.3 percent by the Pakistan Bureau of Statistics was higher than the rate of return on all CDNS products. In this context it is relevant to note that the new rates for specific products with a maximum limit of investment allowed per individual (including Pensioner Benefit Account, Shuhada Family Welfare Account and Behbood Savings Certificates) have been raised to 10.32 percent, a percentage point higher than the rate of inflation. Defence Saving Certificates and regular income certificates offer 8.44 and 7.8 percent rates respectively - an offer lower than the inflation rate which may presage another rate rise unless inflation can be contained.
Second, the government's negotiations with the International Monetary Fund to resume the 6 billion dollar Extended Fund Facility programme remain inconclusive with part of the problem associated with the government's inability to generate 5.46 trillion rupees in taxes (with the Federal Board of Revenue's target of an unrealistic 4.9 trillion rupees) pledged in the budget for 2020-21. This would imply the government's reliance on non-tax revenue, particularly privatization proceeds would have to rise, as well as its reliance on capital receipts. The budget for the current year envisages lower savings from CDNS projected at 223 billion rupees against the revised estimates of last year at 426.8 billion rupees. One may assume that the rate rise is targeted to raise the deposits in CDNS products.
And finally, the government has budgeted to borrow 400 billion rupees through issuing PIBs in the current year against 410 billion rupees in the revised estimates of last year, and 400 billion rupees through treasury bills auction in the current year against 155 billion rupees in the revised estimates of last year. These budgeted amounts may not be sufficient for the government's needs; hence the requirement to attract more deposits in the CDNS.
The decision to raise rates is certainly not premised on the downgrading of the discount rate to 7 percent by the Monetary Policy Committee on 26 June 2020 - a rate which remains effective to this day. This step is bound to result in transfer of deposits from the banks to CDNS unless the central bank intends to raise the discount rate. Discount rate at present is 7 percent while the Consumer Price Index (CPI) on which the State Bank of Pakistan has set the rate since 12 May 2019, the day the staff level agreement with the IMF was reached, is 9.3 percent. In other words, all things remaining the same the discount rate may well rise whenever the MPC meeting is held unless political considerations are taken into account for a raise in rates given the persistent negative growth of Large Scale Manufacturing sector would simply make a bad situation worse.
Copyright Business Recorder, 2020
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