March 22, 2003	Saturday	Muharram 18, 1424

KARACHI, March 21: The State Bank of Pakistan has advised the government to consider restricting the sales of NSS (National Saving Scheme) instruments to a budgeted target.

Presently, the volume of NSS sales are determined by the public demand. There is no limit on fresh NSS issues.

In its second quarterly report 2003, the SBP has stressed that “the current practice of NSS instruments being continuously available on tap, needs to be reviewed.”

In fact, the central bank points out that the government could borrow cheaply from the banking system because of the prevailing low interest rate instead of mobilizing resources for deficit financing through the NSS that is relatively costlier.

The State Bank has not been deterred in making this suggestion despite “its negative implications for inflation” acknowledged in its report in case of “change in mode of deficit financing from non-banking sector to the banking sector”. The change will fuel inflation.

In the fiscal 2002, the government had set a target of Rs54.8bn for non-banking financing of budget deficit but ended up by borrowing Rs95.2bn. There was a surge in NSS investments because of falling bank deposit rates, lower yields on PIBs and lack of avenues for investment.

The weighted average bank deposit rate on local currency in December 2002 was 3.6 per cent in December 2002 as against five per cent a year ago. This deposit rate is very close to inflation rate, which, as measured by consumer price index, was 3.8 per cent for the first quarter and 3.3 per cent for the second quarter of current fiscal.

Spelling out policy options in its report, the State Bank says that “the pre-announced schedule rate of adjustment” could be discontinued and the government could maintain” a fixed rate differential between NSS and PIB (Pakistan Investment Bond) rates. When this differential crosses the set limits, the rates should be adjusted, the report adds.

From January 1, 2003, returns on NSS instruments were lowered, as per existing formula, to reflect reduced yields on PIBs in July-December 2002 (on a six monthly basis). Returns on the various instruments fell between 1.4 to two percentage points.

The NSS rates are linked to PIB rates. However, the wedge between the profit rates on NSS and yields on PIB has recently increased slightly. The fall in interest rates on traded government debts (PIBs) was relatively greater than the decline in profit rates on NSS. For example, in second half of fiscal 2003, the weighted average return on three-year PIBs was 6.86 per cent and on 3-year Special Saving Certificates was 8.5 per cent. The State Bank’s suggested option is that the differential between the two rates should be fixed and adjustments should be made automatically.

However, the State Bank concedes that the pensioners and widows etc., could retain access to the recently announced Pensioners Benefit Account Scheme that offers slightly higher return. This new instrument was introduced for government pensioners in January 2003, with an element of subsidy.

As part of putting public finance on sound footing, the IMF is of the view that a comprehensive plan to restructure the NSS will be crucial to avoid abuse of subsidy.

The IMF mission, in its fourth PRGF review, also made the following observation: “In this regard, the staff regrets the recent establishment of a new subsidized scheme for government pensioners.”

The Fund is of view that coupled with other measures, the reforms of the National Saving Schemes will allow the financial sector to better support investment and growth.