November 4, 2003	Tuesday	Ramazan 8, 1424

KARACHI, Nov 3: The IMF has asked Pakistan to link the rates of return on the National Saving Schemes (NSS) with the yields on Pakistan Investment Bonds (PIB) in such a way that would bring the NSS rates almost at par with the PIB yields.

It has set the deadline of January 1, 2004 for this purpose. The Fund has introduced a formula for linking the NSS rates with the PIB yields and the government will have to follow this formula while making the next six-monthly revision in NSS rates from January 1, 2004.

Senior bankers well-versed with this formula say its application would eventually bring the net compound rate of return on NSS of three-year, five-year and 10-year almost at par with the average yield over the last six months on PIBs of the same maturity. They say the application of this formula will not leave any room for the government to keep the NSS higher than the average six-monthly yields on PIBs.

Even after the July 1 slashing the rates of return on NSS are currently higher than the yields on PIBs of similar maturity. The return on three-year special saving certificates (registered) at 7.67 per cent is 3.52 percentage points higher than the last cut-off yield of 4.15 per cent on three-year PIB and the return on 10-year defence saving certificates at 8.50 per cent is 2.25 percentage points higher than the last cut-off yield of 6.25 per cent on 10-year PIB. Similarly the return on five-year regular income certificates at 7.68 per cent is 2.53 percentage points higher than the last cut-off yield of 5.15 per cent on five-year PIBs.

Bankers say that the State Bank will have to raise the yields on PIBs in the next auction due on Tuesday (today) and another auction due next month to avoid making a drastic cut in NSS rates from January. They say the extent to which the government will have to lower the NSS rates of return in January would depend on how much increase is allowed in the PIBs yield in November-December auctions.

The Fund has made it clear to the government that it will have to adjust the NSS rates to reflect PIB yields according to this formula to qualify for receiving the ninth tranche of PRGF. And this is not the only condition. Pakistan will have to do several other things to get the ninth tranche of the three-year Poverty Growth & Reduction Facility of about $1.5 billion but those need separate mention.

As for NSS, the IMF has also asked Pakistan “to establish a new formula in consultation with Fund staff that will align NSS rates to government bonds of the same maturity.” The deadline, it has fixed, is March 31, 2004.

Officials in the Ministry of Finance say the IMF has been consistent in its demand to tie up the rates of return on NSS with the effective yields on PIBs to eliminate what it calls the implicit subsidy to those who invest in NSS. The Fund believes that by keeping the rates of return on NSS higher than the rates on PIBs of similar maturity the government has been offering a sort of interest rate subsidy to those who invest in the national saving schemes. The IMF wants the government to eliminate this because it believes that if this is not done the interest rate structure will remain distorted, to the disadvantage of those who invest in PIBs.

But the problem here is that whereas the majority of individual savers, including retired people, senior citizens and widows invest in NSS, the individuals do not simply invest money in PIBs. This makes it difficult for the government to keep the rates of return on NSS at par with the yields on PIBs because in that case the government will either have to make further cuts in the interest rates on NSS — or else increase the yields on PIBs.

This is too difficult task because the government has already made successive cuts in the rates of return on NSS and further cuts would ruin it politically and invite greater public criticism. On the other hand, if the yields on PIBs are increased this would signal to the financial markets that the monetary policy is being tightened and that the interest rates would move up. That would give serious setback to the government efforts to prop up businesses and lift the economy from the slump by encouraging larger production by making cheap credit available to the private sector.

“So we are caught between the devil and the deep sea,” remarked a senior official of the ministry of finance reached by Dawn over telephone in Islamabad. But a key question is why individual investors do not invest in PIBs? Is it only a lower return than on the NSS or something else that makes it difficult for them?

Bankers say many individuals do not even know of PIBs — what to talk about investing in them. The reason is that PIBs are scripless bonds, or in simple words, they do not exist physically and can be purchased and sold only electronically through less than a dozen banks and other institutions that sell these bonds on behalf of the government. Besides, these bonds are available in the multiples of Rs100,000. As against this, people can make as little investment in NSS as Rs500 — and they can buy saving certificates and bonds, and also open accounts in national saving schemes from 366 saving centres scattered across Pakistan.