The government in order to halt the outflow from National Saving Schemes (NSS), good returns offered by commercial banks and rising interest rates would raise the rate of returns from NSS by as much as 150 basis points soon.
The government may be buoyant on the recent splurge of cash, which is expected to come from offloading of 26 percent management stakes of PTCL, which would be a one-time impact coming mainly on the government books. There is a dire need to address this critical element as proving a better return on NSS would not only induce people to invest in the saving schemes but would also provide the government with a handful amount to mobilise it in the economy.
Faisal Shaji and Humaira Zaheer, from Capital One Equities, said that the tumbling of the secondary market PIB yields is the most likely outcome after the decision by the government to scrap its much-awaited auction. However, the impact of that would be far greater on the direction of already beleaguered NSS rates in the upcoming FY06. In yesteryear, there had been a strong relationship of PIBs (mainly 10-year), which were normally used as reference rates for NSS. Any dampener on the longer-end of the yield curve merely means that an increase in NSS rates would not be 100-150 basis points.
The above phenomenon pertaining to NSS has far greater connotations. Even though the protagonists are putting their cents on strong GDP growth in the country, owing to supply side measures taken by the government in early 2000, yet one should not forget that it has also fuelled appalling and largely ungovernable inflation (May CPI figures: 9.9 percent).
The side effects of the easy monetary policy has also greatly disturbed the saving & investment pattern vis-à-vis consumption, which is now proving to be counter-productive for the policy makers in a developing country like Pakistan. "While achieving some growth with a meagre trickledown effect on the people, we have emerged as a consumption-oriented society with low saving preference."
Pre-FY05, while complying with the IMF instructions of bridging the fiscal deficit by warding off subsidies and relief once provided to the masses in the shape of security net viz, NSS, the policy makers themselves allowed to let the pattern of savings slip from hands. Consequently, when the cut-off yields over PIBs on different tenors were moving down in FY03-04, taking the NSS rates along in the same direction, prompted the savers to relocate money in unproductive sectors such as real estate and stocks.
"Allowing this outflow to happen from NSS, we had seen the impact of speculation in various aforementioned segments viz, property deals and equities trading, thus igniting inflation across the board."
Since July 2004, NSS rate had been capped in the case of SSCs ie 6.95 percent, whereas it came further down to 5.7 percent for RICs on January 2005 (these rates were as high as 18 percent for RICs and 16.3 percent for SSCs in FY98). These abysmal rates envisaged disparity and demotivated individuals in a scenario where there are few alternatives available for investment opportunities for the middle and lower income segments. Moreover, this is also a ruthless fact that real incomes are not moving in tandem with CPI rates in the country, thus putting the low salaried class to remain hand to mouth.
Ever since the decline in NSS rates began, several NSS investors shifted to stock market to park their savings for want of a higher yielding investment opportunity. With the rate of return on the 10-year DSC falling steadily from around 18 percent in FY98 to 8.15 percent currently, a marked increase has been seen in funds flowing into equities.
"The local stock market has been, and we believe still continues to be, more sensitive to changes in these NSS rates rather than changes in PIB yields," Khalid Iqbal Siddiqui, head of research at Investcapital Securities said.
A reason for this is that most of the volume generated in the stock market is through the retail investor base. Now, with a cap placed on how much money banks and DFIs can invest in the stock market, there is usually not a lot of shifting of funds seen to and from the stock market via the interbank money market.
Even though NSS investment is still disallowed through bank branches, it is believed that the foreseen increase in NSS rates can give a sentimental jolt to a market already short of confidence following the March 2005 crash.
Mohammad Imran, research analyst at Jahangir Siddiqui Capital Market, said that during the first 11-and-a-half months of FY05 the major contribution in NDA was made by private sector credit. The private sector credit crossed its revised annual target of Rs 350 billion and stands at Rs 378 billion. On the other hand, government borrowing for budgetary support has also reached Rs 84 billion (the revised target is Rs 88 billion for FY05). Money supply growth of 19.6 percent during FY04 and current growth of 16.6 percent in first 11-and-a-half months of FY06 is due to the growth in NDA component of money supply.
The higher budgetary borrowing target of Rs 98 billion for FY06 and the demand for credit from private sector is also expected to become the main reason for the growth in banks'' deposit base in the coming year.
Keeping in mind the reason for the growth of banks'' deposit base in recent years it is very clear that the change in NSS rates is not likely to significantly impact the deposit base of the banking system.
Commercial banks in Pakistan have now also started to offer attractive rates to their depositors. Major private commercial banks are now offering from 7 percent to 11 percent return to their depositors on term deposits. So it is also giving a strong indication that the people may not withdraw their savings from banks in an environment where banks have started to give them attractive rates with much better service than the saving centres. Banks have a vast branch network and provide convenience to depositors as compared to NSS centres.