June 29, 2003	Sunday	Rabi-us-Sani 28,1424

KARACHI, June 28: The government on Saturday made a smart move through the State Bank of Pakistan to contain an inevitable fall in returns on national saving schemes — and the move did meet this objective. But government sources say even then the rates of return on NSS will have to be lowered substantially — if not too aggressively — and in some cases the return may fall by up to two percentage points. The new NSS rates would be allowed on July 1.

As expected the auction of long-term Pakistan Investment Bonds whose yields serve as the benchmark for returns on NSS attracted huge response from banks. Because they knew that the government is in a mood to offer higher yield on the bonds so that it might not have to cut returns on NSS too aggressively. The auction did generate Rs89 billion bids on face value almost three times the sale target of Rs30 billion. The result: the cut-off yield on 10- year PIBs which is going to serve as benchmark for the return on 10-year defence saving certificates jumped to 5.67 per cent from 4.03 per cent — an increase of 164 basis points.

Senior bankers say this will help the government lower the gap between the yield on 10-year PIBs and the return DSCs. The return on DSCs is currently 10.03 per cent on maturity or six per cent higher than the last cut-off on 10-year PIBs. Now if this rate of return is reduced to 8.67 per cent or by 1.36 per cent then the difference between it and the present cut-off yield on 10-year PIBs would come down to three per cent. Had the government not set a big Rs25 billion sale target for 10-year PIBs in Saturday auction — the cut-off yield would have been lower. And that would have made it necessary to lower the return on DSCs by more than two percentage points to narrow substantially the gap between the PIBs yield and the return on DSCs.

The pre-auction announcement by the State Bank to sell Rs25 billion 10-year PIBs in Saturday auction—generated so much interest that the auction received Rs75 billion bids for them. The SBP almost stuck to the target and sold Rs25.5 billion of these bonds on face value that significantly improved the cut- off yield.

“Had there not been this much participation the yield (on 10 -year PIBs) would not have shot up from 4.03 to 5.67 per cent,” said treasurer of a foreign bank.

Bankers said the auction also improved the yield on three-year PIBs that is going to serve as benchmark for special saving certificates of the same maturity. They said the cut-off yield on these bonds rose from the previous 2.87 per cent to 3.22 per cent again because of heavy participation in the auction for the bonds.

The sale target for these bonds was Rs2 billion but the auction attracted Rs6 billion bids of which the SBP rejected Rs4 billion.

Senior bankers say the new cut-off on three-year PIBs would help the government lower the gap between this and the return on three-year SSCs. Currently the return on SSCs is 8.5 per cent. So the gap in this rate and the last cut-off on three-year PIBs is a big 5.63 per cent. With the new cut-off at 3.22 per cent the gap has already contracted to 5.28 per cent. The government may bring it down further to say three per cent by lowering the return on SSCs by 2.28 per cent. Had the yield on the three-year PIBs not improved the government would have to make a deeper cut in the return on SSCs to narrow the gap.

Senior bankers say the State Bank also auctioned Rs3 billion worth of five-year PIBs at a cut-off of 4.29 per cent. This also will serve as a benchmark for determining the new rate of return on regular income certificates of five year maturity. The RICs currently carry 9.12 per cent annual rate of return if encashed on maturity.

The rates of return on all the three above-mentioned national saving schemes are determined biannually i.e. on January 1 and July 1 each year. The government has been under immense pressure from the IMF to remove all hidden interest rate subsidies and lower the gap between the rates of return on NSS and the market- driven cut-off yield on PIBs. Hence the move to improve the yield on PIBs. Government sources say the rates of return on NSS are determined on the basis of the average cut-off yield on PIBs in last two auctions. They say the improvement in the yield in the current auction would certainly save the government from making too aggressive cuts in the NSS rates of return. But the cut will have to be made anyway — and in some cases it may be up to two per cent.