With a limit on government borrowings from the State Bank in order to contain price pressures on economy and the increasing reluctance of the foreign donors including the multilateral financial institutions to provide budgetary support, it was only natural for the authorities to mobilise a higher level of resources from the non-bank domestic sources to bridge the widening fiscal gap.
Since Central Directorate of National Savings (CDNS) plays a pivotal role in managing such government initiatives, it is reported to have finalised arrangements to launch three new short-term saving schemes in the first quarter of FY12 to mobilise close to Rs 100 billion public savings for the government.
The commercial banks, however, oppose this move arguing that most of the depositors would withdraw their deposits in order to invest in high yielding government securities if CDNS provided them with such an opportunity. This would reduce their credit creating potential and harm productive sectors of economy.
On the other hand, CDNS was of the view that the government was already paying 12-14 percent through treasury bills to commercial banks which were earning huge profits on government borrowing without any effort and hence new saving schemes for common savers would be financially beneficial for the ordinary people without putting any additional burden on the treasury.
The banks were currently offering a return of about 5 percent on saving accounts although they advance loans at more than 17 percent mark-up. Some of the analysts even argue that the banking industry has been guilty of inactive banking practices and thriving on government securities. Even the State Bank in its latest quarterly report has been blaming the banks to have given up their role as financial intermediaries.
Be that as it may, the government seems to have been caught in a very difficult situation. It does not want to fuel inflationary pressures in the economy by relying too much on bank borrowings, particularly from the State Bank, and its hopes of receiving $1.2 billion through international bonds and Coalition Support Fund (CSF) disbursements have failed to materialise so far. In the event, the only plausible alternative is to resort to domestic non-bank borrowings to finance the budget deficit through a variety of schemes offered by the CDNS. However, even such a course of action is not without a cost to economy.
The CDNS has mobilised about Rs 800 billion during the past three years and its portfolio was estimated at Rs 1.830 trillion at the end of March, 2011. Since borrowing through the CDNS is highly expensive, increasing reliance on this source would be very costly for the country in terms of debt servicing in future.
Already, debt servicing is the highest item of expenditure in the budget and any increase in allocation under this head would mean lower availability of resources to other uses including social and development expenditures. Also, higher flow of savings to the CDNS would reduce the flow of deposits to the banks, which could have a contractionary impact on private sector credit and investment. This may retard the growth process, increase unemployment and push more people below the poverty line.
It also needs to be investigated whether the CDNS, with its constrained outreach, limited staff and outdated technical support and practices, would really be in a position to mobilise the level of funds expected by the government through the introduction of new schemes, especially at a time when the capacity of ordinary households to save is on the decline. Keeping the past experience in view, there is every possibility that the CDNS may not be able to deliver.
With all the factors in view, it would be much more preferable for the government to concentrate its efforts on raising more tax resources and cutting expenditures to keep its borrowing requirements to the minimum, rather than spending its energies on finding new ways to plug the widening gap in its fiscal accounts. Obviously, such an approach is very difficult to undertake but its implementation could certainly go a long way in stabilising economy.