After nearly three weeks of delay the government on July 19, announced increase from 0.96 to 2.04 percent in rate of return on various instruments of National Saving Scheme (NSS). According to an official announcement, the rates on Saving Accounts, Special Saving Certificates/Accounts, Regular Income Certificates, Defence Saving Certificates and Pensioners Benefit Account/Bahbood Saving Certificates were raised from 4 to 5 percent; from 6.95 to 8.60 percent; from 6.84 to 8.88 percent; from 8.15 to 9.46 percent and from 10.08 to 11.04 percent respectively.
For the Pensioners Benefit Account and Bahbood Saving Certificates, the investment limit was also increased from Rs 2 to Rs 3 million. The new rates of return on NSS and the revised investment limit on Pensioners Account and Bahbood Certificates would be effective from July 1 and applicable during the first half of fiscal 2005-06.
It is hoped that with the increase in rates and investment limit, senior citizens and pensioners would especially be better placed to get a higher regular monthly income to meet their expenses.
It may be mentioned that the government reviews the rates of return on NSS biannually in line with the market conditions, and since the State Bank had been following a tight monetary policy during the last six months or so, such a move was not unexpected. As a general rule, the yield on Pakistan Investment Bonds (PIBs) of 3, 5 and 10 years maturity is considered a benchmark to work out the profit rates on NSS of comparable maturity period, but this time such a mechanism was not available for ready reference.
During the past six months, only one auction of PIBs of various tenors was made by the State Bank, which, too, could not materialise as the offers received were finally rejected.
It appears that in the absence of any PIB auction, the government took into consideration the yield of this instrument in the secondary market and other related factors, while determining the new rates for NSS applicable to next six months.
Although prospective investors in NSS would be happier for the higher profitability, yet the net rate of return on most of the investment instruments, adjusted for the projected inflation rate of 8 percent and withholding tax, is still likely to be negative.
The overall position, however, would be better as compared to the last six months when the inflation rate was comparatively higher and the rates were lower. The main beneficiaries would, of course, be senior citizens and pensioners who would now get a handsome inflation-adjusted 3.04 percent net rate of return if inflation remains on targeted level for which the government and the State Bank are making some moves.
The data already seems to indicate that investors are making huge investments in Pensioners and Bahbood Accounts and withdrawing their investments from other schemes. Grannies and grand-pas appear to be in great demand from the younger generation to earn better profits.
They should demand a cut to provide this sort of post-box facility. It may be considered a joke but the government needs to ensure that the facility of higher rate of return is availed only by the persons for whom it is intended. To contain debt-servicing cost and maintain the popularity of other NSS instruments, we had proposed to lower the investment limit of Bahbood Certificates to around Rs 0.5 million in a previous editorial, which would probably have been a better approach.
In Pakistan, the family system is so strong that titles of accounts could be changed to take pecuniary advantages. It is, however, nice to observe that financial institutions which always used to complain about higher rates of return on NSS, are now in a competitive mood and are in certain cases offering, more or less, similar rates of return on deposits of varying maturities.
Last year, the budget makers had forecast net outflow of Rs 136 billion from NSS. The budget documents for FY06 have revised it to Rs 257 billion. For the current year the budgetary estimation is an inflow of a meagre one billion rupees from the NSS window.
The new rate structure for NSS will not be able to reverse this negative mobilisation trend. The budget framers also indicate an amount of Rs 55 billion for financing a portion of the fiscal deficit. This amount comes from two sources: (a) the NSS schemes; and (b) PIBs sold to the corporates.
Since government is not interested in paying between 11 and 14 percent for three, five and 10 years paper (PIBs) it would therefore have to fund on-going maturities from inflows in Bahbood Certificates and pensioner account and the balance shortfall from privatisation proceeds.
Government now expects Rs 155 billion from the strategic investor in PTCL, as against Rs 20 billion projected in the budget from privatisation in FY06. In case 90 percent of PTCL proceeds (10 percent have to go towards poverty alleviation) are utilised for retiring external debt, then the bank borrowing for budgetary support would be above the projected Rs 98 billion for FY06.
In order to keep stability in the financial market, government should clearly announce its decision on the usage of PTCL receipts. Banks must clearly know the government needs. This is important in order to avoid fiscal and monetary authorities working at cross-purposes.
The debt servicing cost of the government, other things remaining the same, would rise in FY06 as against FY05 but the impact on real estate, stock exchange, etc, is difficult to foretell. This is due to the fact that there are several other important factors influencing their value and the market may have already discounted the impact of rise in NSS rates because enhancement was vastly anticipated.
Overall, we feel that the present rise in NSS rates is in line with the tight monetary policy stance of the State Bank and would provide some relief to risk-averse investors, who are hard hit by the rising inflation.