December 6, 2003	Saturday	Shawwal 11, 1424

KARACHI, Dec 5: The rate of return on 10-year defence saving certificates is set to fall at least half a percentage point next month as the State Bank keeps the yield on 10-year Pakistan Investment Bonds unchanged around 6.23 per cent.

The interest rates on three-year special saving certificates and five-year regular income certificates should see a larger decline — at least up to one percentage point. The reason is that the gap between the interest rates of three-year SSCs/five-year RICs and PIBs of three-year and five-year maturity is already larger than the gap between the return on 10-year DSCs and 10- year PIBs.

Besides, the SBP on Friday lowered the yields on three-year and five-year PIBs by 14 and 11 basis points, respectively, to 3.95 per cent and 5.01 per cent. That has expanded the gap between the PIBs yields and the rates of return on SSCs/RICs even further.

The rates of return on these certificates and all other instruments of national saving will fall further from January 1, 2004 because the government will align these rates more closely with the yields on PIBs. It will do this to meet one of the IMF conditions tagged with its three-year $1.5 billion Poverty Reduction and Growth Facility. Successful implementation of this and several other conditions would qualify Pakistan for receiving the next tranche of the PRGF.

The IMF has put forward a formula under which the rates of return on the NSS would

be linked more closely with the yields on PIBs from January 1.

Under this formula the average yield on three-year, five-year and 10-year PIBs over the past six months is to be made equal to the net compound interest rate on the NSS of similar maturity. The net compound interest rate refers to the gross interest rate on the NSS minus withholding tax and Zakat.

Senior bankers say the current rate of return on 10-year DSCs will have to be reduced by 50-70 basis points under this formula. This means that the return on DSCs that at present is 8.5 per cent will fall to somewhere between 7.8 and 8 per cent from January 1.

THE ONLY OPTION: Senior bankers say slashing the return on the DSCs by 50-70bps seems inevitable. The reason is that the spread between the interest rates of NSS and the yields on PIBs could have been bridged according to the IMF formula in three ways: (i) the yields on PIBs could have been raised (ii) the interest rates on NSS could have been lowered; and (iii) both actions could have been taken to

balance their plus and minus points.

Senior bankers say since the State Bank on Friday left the cut-off yield on 10-year PIBs unchanged the only option

left with the government is to make a substantial cut in the return on 10-year DSCs and other NSS.

Similarly the lowering of the cut-off yields on three-year and five-year PIBs by 14 and 11bps has again left no option for the government but to reduce the interest rates on NSS of similar maturity. At present the rates of return on three-year special saving certificates and five-year regular income certificates are 7.67 per cent and 7.68 per cent, respectively. At these levels the gap between these rates and the Friday’s cut-off yields on three -year and five-year PIBs is 3.72 per cent and 2.67 per cent, respectively.

Senior bankers say this means that the government will have to lower the rates of return on three-year and five-year instruments of NSS by more than one percentage point to comply with the IMF formula.