October 31, 2003	Friday	Ramazan 4, 1424

KARACHI, Oct 30: The government raised Rs2.179 billion in the first two months of this fiscal year through two tailor-made national saving schemes for pensioners and for widows. It managed to raise Rs1.636 billion through pensioners’ benefit accounts and Rs543 million through Behbood (welfare) saving certificates in July-August 2003. The rates of return on the two schemes, the first one tailored for the retired people and the second for widows, carry an annual return of 10.08 per cent, the highest on any national saving scheme (NSS).

There are about 1.76 million pensioners of the federal and provincial governments in Pakistan. The number includes the pensioners of the armed forces as well. Under the rules, all retired officials of the federal government, provincial governments, armed forces, semi-government and autonomous bodies can operate the pensioners’ benefit accounts.

Bankers say the success of the two schemes show that the government has gained after paying heed to the IMF advice that any subsidy (on the rates of return on NSS) for a particular group should be well-targeted and explicit. The IMF regards the gap between the rates of return on NSS and the interest rates on bank deposits of similar maturity as “an implicit subsidy to those who invest in NSS.”

The Fund says in one of its reports on Pakistan’s economic performance that the difference shows the government wants to promote private saving and give support to pensioners and others who rely on income from NSS saving. But it believes that since the very poor do not command sufficient resources to invest in NSS this implicit subsidy “does not appear targeted to those most in need of the government assistance.” Hence its advice for providing well-targeted and explicit subsidy.

The government, after receiving this advice from the IMF last year, introduced 10-year pensioners’ benefit accounts on January 20, 2003 for retired people and fixed its rate of return at 11.04 per cent, the highest on any national saving scheme. But it had to lower the rate, within less then six months, to 10.08 per cent from July 1, 2003 when it made an across-the-board cut in the interest rates on NSS. The interest rates on NSS are subject to six-monthly revision and are loosely tied up with the cut-off yields on long-term Pakistan Investment Bonds.

After revising downwards the interest rates on NSS, the government launched another 10-year Behbood certificates exclusively for widows. And taking advantage of the room the IMF advice had created for providing well-targeted and explicit subsidy on the interest rates on NSS, it fixed the rate of return on these certificates at 10.08 per cent, equal to the return on pensioners’ benefit accounts.

The fact that the government has managed to raise Rs543 million debt through these certificates in just two months (July- August 2003) shows that there is ample room for raising domestic debt at high rates through tailor-made schemes. What reinforces this impression is that the government raised a huge amount of Rs10.170 billion through pensioners’ benefit accounts in the six months to June 2003, against the target of Rs9 billion. In eight months to August 2003, the amount of debt raised through this scheme rose further to Rs11.806 billion.

But a key question is that whether the government will be able to continue to raise such large volumes of expensive domestic debt over the years.

Sources in the ministry of finance say that as the government is struggling to keep its cost of both domestic and external borrowing within limits, this does not seem very practical. They say that the government can, however, raise large volumes of domestic debts through expensive saving schemes targeted for particular groups if the rates of return on the same continue to be adjusted in response to the market forces.

At the current levels, the return on both pensioners’ benefit accounts and Behbood saving certificates is 1.58 percentage points higher than the return on 10-year defence saving certificates, still the most lucrative among all ordinary national saving schemes. (The return on 10-year DSCs is 8.50 per cent). When the government had introduced pensioners’ benefit accounts in January the difference between the rate of return on this scheme and the interest rate on DSCs was 1.01 percentage points. (The interest rate on DSCs was then 10.03 per cent).

What has increased the gap between the return on the two tailor-made schemes for pensioners and widows and the interest rate on DSCs is that the government made a deeper cut in the interest rate on DSCs in July. The reason was that, at one time, the gap between this and the last cut-off yield on 10-year Pakistan Investment Bonds had risen to six percentage points and that was not acceptable to the IMF.

The IMF basically wanted the government to keep the interest rates on NSS, minus those tailored for some target groups, closer to the rates of return on bank deposits of similar maturity. But at the first step it had allowed the government to bring the rates of return on NSS, at least, closer to the cut-off yields on PIBs.