Investors in National Saving Schemes (NSS) were expecting announcement of a raise in the rate of their profits at the time of the budget, but were disappointed when the budget did not contain any news to that effect. However, a move in the desired direction was made on 25th June, when the government revised upwards the rates of return on NSS with effect from June 23, 2007.
The rate of profit on Defence Saving Certificates having 10 years' maturity was raised by 12 bps and rate of return on maturity would now work out to 10.15 percent from the previous 10.03 percent per annum. Profit on five years' maturity scheme, namely RIC, has been increased by 30 bps to 9.54 percent from 9.24 percent per annum.
The profit rate on Behbood Saving Certificates, a special scheme for widows and senior citizens, has been increased by 12 bps from 11.52 percent to 11.64 percent per annum. Now monthly profit of Rs 970 will be paid on investment of each Rs 100,000 under this scheme. The terms of Pensioners' Benefit Account have also been improved on similar lines.
The rate on Savings Account, the oldest scheme designed to encourage small savers and to meet their day to day needs, has witnessed the highest increase of 50 bps. With this surge, the profit rate on Savings Account would go up from 6 to 6.50 percent. Profit on Special Saving Certificates has also been increased by 8 bps, from 9.17 percent to 9.25 percent.
The rise in the NSS rates may provide some relief to the common people who generally invest in these schemes to supplement their income, but, seen closely, the increase in rates was not without sound economic rationale. As is well known, financing of the government budget from non-banking sources is less inflationary than borrowings from the banks.
A few days ago, the State Bank Governor had claimed that the government now appreciated the central bank's point of view, which would like to press into service all the elements of inflation control in view of price hike in the country. To follow an anti-inflationary policy, it was essential to raise more funds from NSS and reduce government borrowing requirements from the banking system which would only be possible if the rate offered on NSS was slightly better than that of the banks.
Since banks are generally increasing their rates on fixed deposits these days, there was no alternative for the government but to move in a similar fashion. The exact amount of additional funds likely to be attracted through the increase in NSS rates is, however, difficult to tell at this stage, but such a shift is almost inevitable.
The net proceeds of various saving schemes launched by the government known as deferred liabilities, were targeted at Rs 15.2 billion during 2006-07, but this target was likely to be exceeded by a wide margin. For 2007-08, the government has estimated a net inflow of Rs 44.1 billion which would not be possible if the NSS did not compete on equal footing and attract investors' attention. Ahmed Awan Pirzada, Director General, NSS, was quite explicit when he said that rates of return on NSS were revised keeping in view the returns on products of similar maturities offered by the financial sector.
This rate of increase will not mitigate the bullet payment outflow on account of Defence Saving Certificates maturing in the next two years. This year alone, the budget took a hit of Rs 80 billion; and next fiscal it is estimated to be Rs 160 million. In 2008-09 it would be even more. The government thus needs to raise the revenue to GDP ratio or cut back on non-development expenditure. Domestic debt servicing is now more than the expenditure on Defence.
While there could possibly be no argument against the rise in rates on NSS, it needs to be stressed that rates offered on most of the schemes are still lower than food inflation which is really the core inflation for most of the people in this country. The government, however, may be reluctant to offer more attractive rates due to increase in its debt servicing liability and the need to provide a level-playing field to the commercial banks.
However, what we don't understand is the apparent lack of progress in establishing new structure for Pakistan Savings, which was approved by the Prime Minister about one and half years ago. The idea needs to be put into practice at the earliest to raise the standard of service at the national saving centres and alleviate the sufferings of investors who have to stand in long queues to get the attention of overworked, uncaring and low paid government employees almost every month.