June 26, 2003	Thursday	Rabi-us-Sani 25,1424

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ISLAMABAD, June 25: The International Monetary Fund (IMF) has asked Pakistan to eliminate premium over Pakistan Investment Bonds (PIB) to reduce returns on National Savings Schemes (NSS).

This is expected to be partially implemented when new savings rates are announced early next month with a cut of up to 175 basis points as the State Bank of Pakistan holds the second auction of the PIBs later this week.

The IMF has suggested a three-pronged strategy to reform the NSS. Firstly, NSS certificates should be available on tap, so that the government regains full control over non-bank financing. Secondly, the rates of return should be tied closer to comparable instruments. At a minimum, the premium over PIBs should be eliminated. Thirdly, any subsidy for a particular group should be well-targeted and explicit.

The NSS certificates finance the federal government budget, and are available on tap from the National Saving Centres, post offices and commercial banks. Since the year 2000, the rates of return on NSS certificates have been loosely tied to those of PIBs of the same maturity with a premium on semi-annual adjustment.

The rates of return on NSS certificates are higher than those on deposits with commercial banks of similar maturity. The difference is viewed by the IMF as an implicit subsidy reflecting the government’s intention to promote private savings and to give support to pensioners and others who rely on income from NSS savings.

Given that the very poor do not command sufficient resources to invest in NSS, the implicit subsidy does not appear targeted for those most in need of government assistance.

An estimated lower bound for the implicit subsidy is 0.7 per cent of GDP in 2002-03 or 16 per cent of domestic interest payments. The highest implicit subsidy is paid on the three-year Special Savings Certificates with a rate of return almost twice the amount given on the three-year bank deposits.

For regular income certificates, the implicit subsidy is 26 per cent of the nominal return and for Defence Savings Certificates, the implicit subsidy varies between 6 per cent and 50 per cent of the nominal return depending on the time of encashment.