EDITORIAL: The federal government has decided to ban institutional investment in national savings schemes (NSS) administered by the Central Directorate of National Savings. This must be fully supported because it was allowing large institutional investors to engage in arbitrage defined as a trade that profits by exploiting differences in financial instruments in different markets which was largely at the cost of lending to the industrial/productive sectors with the capacity to fuel Gross National Product (GDP) growth. In other words, this practice was generating inefficiencies with several institutions including commercial banks opting to purchase savings certificates at zero risk and a rate higher than available in the market.
The question of course is whether this decision would lead to achieving the objective of banks increasing their lending to the productive sectors or whether the banks would try to use available lacunae to circumvent the ban on their direct purchase of savings certificates. The fact of the matter however is that the government routinely uses the resources of the National Savings Centres to meet its funding needs. As per the Economic Survey 2019-20, up to March 2020 unfunded debt of the government was 3.4 trillion rupees, out of total domestic debt of 13.2 trillion rupees, with defense certificates accounting for 486 million rupees, behbood savings 992 million rupees and special savings certificates of 414.8 million rupees.
In the event of a greater need by the government for funding (due to a shortfall between its revenue generation and expenditure allocation) the interest rate applicable on the savings schemes has been adjusted upward. In this context it is relevant to note that the Summary of Consolidated Federal and Provincial Budget Operations 2020-21 indicates that reliance on domestic borrowing rose to 322.9 billion July-September 2020 compared to 119.5 billion rupees in the comparable period of the year before – a rise of 170 percent. No doubt this led to the decision in October 2020 to raise the profit rate on national savings schemes by 36 basis points with the highest increase in the rates of pension, behbood and shuhada family interest rates - from 9.96 percent to 10.32 percent.
Inflation is a major factor in the ability to save and in this context it is relevant to note that with inflation at around 9 percent, incomes of civilian and military personnel frozen for the current year and the private productive sectors continuing to show a decline notwithstanding some positive signals with respect to export orders and construction industry as claimed by government officials, the capacity to invest in the savings schemes would be severely compromised.
To conclude, while the decision of disallowing institutional investors is a good one and long overdue yet care must be taken to ensure that these investors do not use indirect ways to invest in these schemes as well as bringing the inflation down to encourage individuals to save and reduce government expenditure to narrow the gap between revenue and expenditure and consequently the reliance on this source of unfunded debt.
Copyright Business Recorder, 2020
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