The PIB fiesta seems to be coming to an end. Smart were the ones who were able to lock in higher yields ahead of the downfall. A sudden month-on-month decline of 49 percent in the national savings schemes (NSS) in September 2014 bears witness to the switch over in portfolio allocations and thus the rising demand for PIBs during the month.
Despite the heavy monthly fall, the government was able to mobilize funds to the tune of Rs66 billion from NSS during July-September 2014, reflecting a decent jump of 11 percent over previous quarter. On a year-on-year basis, this translates into a whopping jump of 51 percent.
However, this is just a payback of the lucrative jump in profit rates on various saving schemes that helped in pulling funds into the NSS kitty. Since September 2013, profit rates have witnessed rise of 239 basis points (bps), 282 bps, and 280 bps on DSC, RIC and SSC, respectively, thus tracing the upward movement in PIBs.
Few bankers have also linked the September fall with the cash needs associated with Eid-ul-Azha season. Its the time when people encash their savings to pay for livestock, thus stoking the currency in circulation during the period. This drift is, however, short-lived and normalises once people start heaping their savings again.
Interestingly, within a year, the contribution of mid-term instruments, including RIC (5-year maturity) and SSC (3-year maturity) has magnified by almost twofold at the expense of prize bonds and other saving accounts, with the share of DSC (10-year maturity) staying at a skimpy level. Perhaps, investors are getting increasingly fond of saving schemes with shorter-tenors. Hence, the introduction of a wider range of schemes in shorter duration looks set to receive a warm welcome from existing and potential NSS investors.
On the darker side, while bearing lucrative returns and sovereign ratings, the saving schemes are considered to be hampering the growth of corporate debt market by fouling the investments in corporate bonds and mutual funds. Also, investors have to be wooed by relatively higher yields to invest in corporate bonds and other debt instruments.
Yet, the commercial banks soaring interest in government securities needs to be flashed on. Commercial banks lending to the government crowds out the private sector and dismantles the demand for saving schemes. If that remains, inflows into NSS might not see a breakthrough.
Pakistans domestic savings rate is one of the lowest in the region - it is not even half of what the rate is in India, Bangladesh or Malaysia. No wonder then Pakistanis are dubbed as a spending society than a saving society.
Economists suggest imposing mandatory savings on the real wage rate instead of minimum wages. By saving a sizeable sum every year for 30-40 years will pave the way for boosting investment and infrastructure activities in the country. In that context, it is imperative to widen the outreach and quality of NSS services. If done properly, the government can then fetch the savings of individuals directly rather than borrowing from banks and straining the growth of private sector.
All the same, the fate of NSS rests on the movement in interest rates. With the likely scenario of interest rates moving south and the resulting yields on PIBs sloping downwards, NSS inflows are likely to gather steam in the near future.