ISLAMABAD, May 9: The World Bank said Friday that Pakistan’s government ought to cut the interest rates on a state savings scheme in line with falling government bond yields.

In an interview with Dow Jones Newswires, John Wall, the bank’s country director, said interest rates on instruments under this savings scheme are much higher than market-based rates.

“There is a big gap and that’s distorting the financial sector a lot,” he said.

Pakistan has promised the World Bank to link the returns on these savings instruments to rates prevailing on the interbank market, as part of a $500 million structural adjustment loan.

However, the 10-year National Savings Scheme certificate is still being sold at 10.03 per cent while a 10-year government bond is currently trading at 5 per cent.

The rates under the National Savings Scheme, or NSS, are adjusted in line with rates on government bonds twice in the country’s financial year, which begins July 1 and ends June 30. So the next NSS rate cut is due in July 1. In January, the rate on the popular 10-year defence savings certificate was cut to 10.03pc from 11.6pc six months ago - a move prompted by the central bank’s 1.5-percentage-point cut in the benchmark discount rate in late November. The scheme also offers two sets of three-year certificates.

The scheme holds nearly Rs700 billion of fixed-income deposits and an additional Rs100 billion of non-interest-bearing prize bonds, making it the biggest savings scheme in the country.

Wall said the high rates on these saving schemes, which also partly finance government borrowings, is impeding the flow of funds to the banking sector.

“It also means people don’t want to put their money either in banks at lower interest rates or public investment bonds. It’s a big distortion and the government has to address that,” he said.

The government is trying to narrow the gap between the rates of return on NSS instruments and government bond yields in an attempt to reduce market segmentation and to deepen Pakistan’s capital markets.

But the gap between government bonds and the saving certificates has widened to over five percentage points, Wall said.

He said the government hasn’t fully implemented the policy on how the rates on these certificates should be adjusted, and a delay could have a negative impact on savings in the long term.

Bankers said the gap has widened due to the central bank’s easy monetary stance and huge liquidity created in the banking system amid a flood of foreign exchange remittances.

“If PIB (Pakistan Investment Bond) rate is 5pc, the rate on these schemes should also be 5pc,” Wall said. “If they are going to live up to their policy they have to reduce that gap.”—Dow Jones Newswires