July 5, 2003	Saturday	Jumadi-ul-Awwal 4,1424

KARACHI, July 4: The latest lowering of the rates of return on national saving schemes has narrowed the gap between the yield on Pakistan Investment Bonds and the NSS rates. But the government is determined to remove this gap altogether on the insistence of the IMF. This could most likely mean a further cut in NSS rates in January 2004. But the government will have to do this because the IMF has clearly asked for removing the premium over PIBs that the government keeps while determining the rates of return on NSS.

Senior bankers say after the recent lowering of the NSS rates on July 1 the gap between the last cut-off yield of three-year PIB and the return on special saving certificates (registered) of similar maturity has fallen to 4.45 per cent. Before the July 1 cut on SSCs return this gap was 5.63 per cent. From July 1 the government cut the rate of return on SSCs by 0.83 percentage point to 7.67 per cent.

Bankers say the spread between the last cut-off yield on 10- year PIBs and the return on defence saving certificates of same maturity has fallen to 2.83 per cent. Before the July 1 lowering the return on DSCs the gap was 6 per cent. On July 1 the rate of return on NSS was cut down by 1.53 percentage points to 8.50 per cent.

“But the IMF does not view this cut is enough though it has shown a level of understanding on the problems the government might have been facing had it made a deeper cut,” said a source close to the ministry of finance. He said the IMF does not want the government to fix the rates of return on NSS after adding a premium on PIBs of similar maturity. Because the Fund believes that these rates of return are already higher than what banks have been paying on fixed term deposits. It was on the demand of the IMF that the government had agreed to link the NSS rates with PIBs of similar maturity as one of the conditions attached to a three-year $1.47 billion poverty reduction and growth facility (PRGF).

The Fund believes that the difference between the rates of return on NSS and the return on bank deposits of same maturity is a subsidy to those who invest in national saving schemes.

This “reflects the government’s intention to promote private saving and to give support to pensioners and others who rely on income from NSS saving,” says an IMF staff report. “Given that the very poor do not command sufficient resources to invest in NSS the implicit subsidy does not appear targeted to those most in need of government assistance,” the report observes. That is why the Fund wants that “any subsidy for a particular group should be well targeted and explicit.” Hence the pensioners benefit accounts and Bahbood Saving Certificates for widows.

From July 1 the return on pensioners benefit scheme was cut down from 11.04 percent to 10.8 percent and the return on the newly launched Bahbood Saving Certificates for widows was also fixed at 10.08 per cent.

Senior bankers say the government will have to make another cut in NSS rates in January next year to bring them at par with the yield on PIBs. But they say the extent of the rate cut would depend much on whether the current yields remain intact or they rise further.

At end-June the government and the State Bank made a market based move to boost the yield on PIBs to make a minimum cut in the NSS rates.