An unexplainable neglect

Within a year of PML-N's rule, practically all the political parties seem bent upon its exit - a fate it confronts due to its intoxication with power courtesy its majority in the National Assembly that led to believing that it could get away with anything. But blunders committed last week in Lahore's Model Town and yesterday at Islamabad and Lahore airports could cost the party dearly.
Diversion of the Emirates flight carrying Allama Tahirul Qadri, despite assuring against such a move, worsened the damage already caused to Pakistan's image by the Karachi airport tragedy. The 5-year long PPP regime had damaged Pakistan enormously; the PML-N regime is making it worse, forcing people to ask "is this what democracy delivers?"
That said no political party seems worried about Pakistan's gravest reality - inadequacy of domestic financial resources to meet skyrocketing demands for investing in its infrastructure. Pakistan's saving-to-GDP ratio remains below 10 percent although, over time, escalating gaps in its infrastructure required that ratio to rise above 20 percent annually.
This called for not just higher savings but savings that were sustainable in the medium term to provide a stable base for investing in infrastructure projects. But what you see is the opposite; according to the SBP, on June 30, 2013 time deposits with banks formed 21.6 percent of the economy-wide time deposits - down from their share of 27.6 percent on June 30, 2009.
During July 2010-June 2013, average annual growth rate of these deposits was 7.6 percent. But the saving grace was the 17.8 percent average annual growth in medium and long-term savings mobilised by the Directorate of National Savings (CDNS). From their July 2009 level of Rs 1.428 trillion, by June 2013, these savings increased to Rs 2.445 trillion.
The major factor prompting this growth (noted by similar institutions in South Asia but not by banks in Pakistan), was that the returns CDNS certificates offered were slightly above the CPI giving the savers net positive rates of return, which often wasn't the case with time deposits placed in banks. Undeniably, returns offered by CDNS encouraged medium and long-term saving.
On June 30, 2013 time deposits in banks (having close to 7,700 branches) amounted to Rs 3.472 trillion - just 30 percent higher than the amount raised by CDNS despite its small, 380-branch network and operational inadequacies that it continues to suffer from, courtesy sustained neglect of this vital institution by successive governments. Visit any NSS branch office and see for yourself.
In 2008, the Musharuff regime had given CDNS a target of adding 124 branch offices to its country-wide network to raise their total to 500. However, after PPP's coming into power, and limits being placed on outlay by the CDNS on its network expansion, only four more branches were added, and to-date only 110 (ie 29 percent) of the total 380 branches have been computerised.
Finance Ministry's logic behind not increasing the network of saving centres (according to insiders, reflecting pressure of the powerful banking sector) was that CDNS certificates could be sold via commercial banks' branches. But the fact is that competitive rates on CDNS certificates make it unattractive for banks to market, them instead of their own low-return time deposit products.
At present only selected branches of commercial banks deal in CDNS certificates - Special Saving and Defence Saving Certificates - not in its other saving certificates. The government didn't realise that promoting CDNS certificates and setting up a system for their discounting could also facilitate issuance of Certificates of Deposits by banks - a much needed banking product.
Nor did governments consider the benefits of setting up a system whereby CDNS certificates could be traded in the debt paper market. Sadly, this was despite the fact that it kept sucking liquidity out of the banking sector and thus squeezing credit to the private sector leading to a slowdown in GDP growth along with all its negative socio-economic consequences.
By 2010, despite the ongoing economic recession and its own operational limitations, CDNS was ready to launch Dollar-denominated bonds for investment by non-resident Pakistanis, and had devised Standard Operating Procedures for this initiative, which were ratified by the SBP. This initiative could partially reduce Pakistan's growing dependence on external borrowing.
Due to the government's sidelining of this initiative, it wasn't implemented even on experimental basis to test it, let alone expand its outreach to non-resident Pakistanis globally. Nevertheless, CDNS kept expanding its outreach to domestic savers, which is manifested by the huge growth in its resource base and its contribution in plugging the expanding fiscal deficit.
Rise in CDNS resource base was faulted by the banking sector because returns on CDNS certificates exceeded those offered by commercial banks who had been earning spreads as high at 7.2 percent on lending their depositors' savings, although a key benefit of higher investment in medium-term CDNS certificates could be lower consumption, and hence lower inflation.
Until end-2013, in spite of this treatment, NSS was performing well beyond expectations by mustering huge resources for financing the fiscal deficit because, on an annual basis, CDNS was generating fresh resources well in excess of outflows on account of debt servicing, and thus its resource base was increasing every year, which dictated expanding the operations of the CDNS.
Beginning 2014, this scenario changed. In 2012-13 NSS had mobilised net saving of 385 billion against debt servicing of Rs 265 billion resulting in net inflow of Rs 120 billion. But by June 2014, resources mobilised amounted to just Rs 170 billion compared to debt service of Rs 255 billion resulting in net outflow of Rs 85 billion when the fiscal deficit was at its highest level.
According to a former CDNS executive, an Asian Development Bank study showed that the cost of public borrowing via CDNS was lower than that of borrowing via T-Bills and PIBs. Besides, the maturity profile (medium and long-term) of the CDNS certificates offered a significant advantage - avoiding frequent rollover of debt acquired via T-Bills.
In this context, it is worth remembering that, in 2011, CDNS became the first state agency to launch tradable bonds on Pakistan's stock exchanges. This move should have been supplemented by setting up a mechanism for discounting CDNS certificates to increase their acceptability and enhance their potential for mobilising higher savings and containing inflation - both urgent needs.
Despite this resource mobilising potential, CDNS is being ignored; not expanding its network, computerising its entire network, modernising its branches to bring them at par with well-designed bank branches, allowing it to issue Dollar-denominated certificates and, above all, zero promotion of its certificates through the media reflect neglect that is unexplainable by the state.