The government has again lowered the rates of return on national saving schemes by upto 2.5 per cent. It has also lowered the slab of investment for application of 10 per cent withholding tax. Now people will have to pay the tax on an investment of Rs 150,000 or more in all instruments of national saving schemes.
Earlier the limit was Rs 300,000. The 10 per cent withholding tax also been levied on post office saving account. The new rates of return and the new limits of investment for payment of withholding tax will be applicable only on those accounts and certificates of the NSS that are opened or purchased on or after July 2002.
“Small savers are going to be badly affected (by the lowering of the NSS return and withdrawal of withholding tax exemptions),” says the noted economist, Dr S. Akbar Zaidi. “This is going to lower the saving rate in the country,” he remarks when asked to comment on how NSS rate cuts would impact on the economy.
It is small investors who have a big share in the pie of national saving schemes as institutional investment in these schemes was banned much before the launching of long-term Pakistan Investment Bonds in December 2000. Retired government and non-government employees, senior citizens, widows—and people nearing retirement age or those who want to save some money for future expenses, make up the bulk of the NSS investors. They are the people who have too little amount of money—and are too lacking in investment expertise that they do not want to put money in high-risk modes of investment.
The reversal of the dollarization spree in the outgoing fiscal year (that saw the greenback fall by 6.25 per cent in inter-bank market and 9.8 per cent in open market) has made the NSS more charming for such people. Similarly the declining profits on bank deposits has also left many people with no choice but to invest in the NSS. (The weighted average return on all types of deposits fell from 5 per cent at end-June 2001 to 4.30 per cent at end-May 2002). The government claims that consumer inflation stood at 3.04 per cent during July/April 2002. Officials believe that the fiscal year may end up with a little higher inflation. Let us suppose that consumer inflation in fiscal July/June 01/02 ends up at 3.30 per cent and the weighted average deposit rate remains intact at 4.30 per cent.
Then the net rate of return on bank deposits would fall to (4.30 minus 3.30) only 1 per cent. To add insult to injury the depositors would also have to pay a 10 percent withholding tax on this one percent return. So at the end of the day the depositors would get a net return of only 0.9 percent. Who on earth would put his saving in banks for such a meagre return.
This again shows that NSS are still the most lucrative mode of investment for the savers particularly for the smaller ones who do not have enough money. Now repeated cuts in NSS rates would only bring more misery to the small savers. See this thing in the backdrop of the banking sector and good governance reforms that have left tens of thousands of bankers as well as government employees jobless in the last couple of years—and the plight of the savers would become all the worse. Quite a number of jobless keep the money they got through golden handshake or in final settlement of dues with their employers. Now they are crying over the cut in NSS rates of return and withdrawal of exemption from withholding tax.
One can say why the small savers including those whose jobs were axed in the last couple of years do not make investment in stocks? That really is a good question. But the plain answer is our stock markets have so far failed to expand out at the retail levels and low grade bankers and financial sector employees too do not have enough knowledge and courage to jump into this world of volatility and turmoil called the stock market. Had there been more awareness about the stock market the outgoing fiscal year could have brought in bonanza for the small savers also as the Karachi Stock Exchange 100-share index rose by a big 30 per cent between July/June 01/02.
Says chairman of the KSE Salim Chamdia: “The stock market moved up in the last fiscal year mainly after 9/11 when overseas Pakistanis started making investment at home. The local small investors also found it more profitable to sell dollars (that started falling after 9/11) and buy stocks.” Chamdia says that falling returns on bank deposits and declining yield on national saving schemes will continue to lure small investors into the stock market in this fiscal year too.”
Although the returns on the NSS has been on the fall for some time as Pakistan has linked them to the yield on long-term Pakistan Investment Bonds on the insistence of the IMF, NSS still offer a rate of return that is second only to the dividend yield of the stock market. Chamdia claims that local bourses offer a high dividend yield of around 15-17 per cent which he says is enough to divert investment from NSS to stock market in the days to come. The latest cut in NSS returns has brought down the annualized profit on 10-year defence saving certificates to only 11.6 per cent.
Defence saving certificates are the most widely circulated of all saving certificates that fall under national saving schemes: At the end of March 2002 more than Rs278 billion worth of DSCs were in circulation. This amount is roughly one fifth of overall bank deposits of Rs 1393 billion at end of March 02. Upto June 30 this year people were getting a high return of 14.1 per cent on DSCs but from July 1 onwards they will get 11.6 per cent. Admitted that DSCs being the government paper are the most secured—and as such a large number of people may still prefer to hold them rather than going into stock market whose nitty gritty is beyond comprehension of the majority of small savers. But as the KSE plans to start internet-based trading “this may attract many new investors including overseas Pakistanis and local small savers,” says Chamdia.
And what about gold? In the outgoing fiscal year gold prices went up by 6.4 percent in the local market. Chairman of All Pakistan Jem Merchants Association Kamran Khan says that the yellow metal attracted an estimated 15 percent new investors in last fiscal year. “Overseas Pakistanis made indirect investment in gold as they encashed dollars and bought expensive jewellry to keep in the bank lockers,” says Kamran Khan who is also head of Tessori— a leading gold company in Pakistan. He says that older people; retired bureaucrats and those bankers and government employees that were shown the doors also made some modest investment in gold. “Besides we received 10-20 percent more inquiries than in the past which shows that still more people are planning to put money in the conventional save heaven of gold.” Khan says that the recent cut in NSS returns coupled with the low bank deposit rates would help gold attract more investment during this fiscal year.
And what about real estate? Had people made higher investment in real estates in the outgoing fiscal year? And will the cut in NSS rates lead some investors into real estate buying? Dawn put the three questions to Zubair Shaheen who is owner of Pak Estate —a leading real estate brokerage located in Clifton. His answer: “People did make higher investment in real estates in the last fiscal year. The new investors also included overseas Pakistanis and a limited number of senior bankers and government officials who either retired or lost their jobs in the process of reforms.”
“I think the cut in NSS rates at a time when banks are giving low returns and the dollar has lost its lustre will surely attract more investment in real estate in this fiscal year and beyond.”
Last but not the least is euro. The single European currency has gained more than 13 percent in the last three months in the kerb market mirroring its upward march against dollar in the global markets. This has raised its investment value not only across the globe but also in Pakistan. Though very little is known about euro in Pakistan and the volume traded in the kerb market in this currency is only 10-20 percent of an estimated total of around $5 million a day economists and money changers feel that euro has the potential to become a good source of investment in future.
“People can switch over from dollar to the euro (after witnessing its record appreciation).” says S. Akbar Zaidi. But he says that those who put their money in national saving schemes are generally the people who want maximum security and are averse to taking huge risks. So it is not very likely that the lowering of NSS rates would result in a big switch over of investment from national saving schemes to the euro. But he says that relatively young people having enough liquidity and courage to take risk may put their saving in euro instead of investing in dollars. “Because dollar has now emerged if not as a currency in trouble—a currency in transition worldwide,” Zaidi explains.
“Lately the demand for euro has started picking up as the single European currency has gained 13.5 percent in three months to June 2002,” says Anwar Jamal one of the partners of currency brokerage Galaxy International. He believes that the recent cut in NSS rates may lead at least a section of small savers to switch over from the NSS to euro.
The economic managers defending cut in NSS returns say that the new rates should be seen against the backdrop of falling inflation. They also say that the cut in NSS rates will give the banks room to bring down their lending rates thereby enlivening the economy. Their argument is that a 11.6 percent return on 10-year DSCs should be seen as sufficient if the inflation is a bit higher than 3 percent. But the problem is that since the NSS rates are subject to change every six months and the change is to be reflective of the adjustments in the fixed coupon rate of long -term PIBs the rates may keep falling until the economy gets a boost.
The argument that the cut in NSS rates is to help banks lower their lending rates is based on the fact that reduced returns on NSS would enable banks to first lower their deposit rates and then pass on the benefit that accrues to the borrowers. So, when lending rates will come down the depositors will hardly have a reason to celebrate it as they will be getting still lower profits from the banks. All the banks put together lowered their weighted average lending rate by 1.57 per cent in eleven months to May 2002 bringing it down from 13.74 percent at end-June 2001 to 12.17 per cent at end- May 2002. But at the same time they also reduced their weighted average deposit rate by 70 basis points or 0.7 percent—from 5 per cent at end-June 2001 to 4.30 percent at end-May 2002.
