December 9, 2003	Tuesday	Shawwal 14, 1424

KARACHI, Dec 8: In respect of the cut in rate of returns on National Saving Schemes (NSS), in January 2004, the government faces the Hobson’s choice: damned if does and damned if it doesn’t.

On the one hand is the International Monetary Fund (IMF) that is insisting on further “rationalization” of interest rates and on the other, the political government is eager to pursue its policy of gaining public popularity.

“Investors and bankers are anxiously waiting to see what happens at end of December with the rates of return on NSS,” says Kashif Artani, financial sector analyst at Invest Capital & Securities (Pvt) Limited—a stock brokerage firm. He says that at a time when the government is showering public with a number of relief packages such as cut, albeit, minimal Re0.04 per unit in power rates; decrease in telephone call charges and agricultural packages such as enhanced wheat support price for the farmers by Rs50 per 40 kg, it might be difficult to take an obviously unpopular decision to cut NSS rate.

But the IMF, in its recent reviews of Pakistan’s economy, had insisted that the gap between NSS rates and PIB yields should be minimised. In its fifth review, IMF observed that rates of return should be tied closer to comparable instruments. At a minimum, the IMF recommended that the premium over PIBs should be eliminated. Then the sixth and seventh review of the IMF reiterated that to control government borrowing costs, NSS rates should reflect PIB yields. “Also a new formula is in the making to adjust NSS rates, applicable from June 2004,” says Kashif Artani.

It was in December 1999 that the government began reducing returns on NSS. Since then, the strategy of linking NSS rates to the prevailing interest rates in the economy is being pursued. Following the launch of Pakistan Investment Bonds (PIBs), the resulting yield curve is used as a benchmark to determine the profit structure on NSS instruments, especially the Defence Saving Certificates (DSCs).

Since the start of the interest rate rationalization policy in 1999, only one upward revision was made in June 2001. Otherwise, the rates of return have been going down the slide.

There was a time when NSS was looked up as a saviour of the disadvantaged class. The returns it yielded on some of

its saving schemes, particularly the Defence Savings Certificates, provided people—mostly of the lower and

lower middle class — with a comfortable level of risk-free fixed monthly income. But all that has changed.

In 1998, the return on Defence Saving Certificates was as high as 18 per cent, which was decreased to 16 per cent in 1999 and was pushed further down to 8.5 per cent in June 2003. On the other hand, return on comparable 10-year government bond has slipped from 14 per cent in December 1999 to 6.2 per cent currently.

Government contends that interest rate policy was an important instrument of macroeconomic management. It argues that apart from the fact that returns on NSS had been linked to the profit on PIBs, distribution of higher rates on NSS would be inappropriate for it would mean that more money would have to come out of the budget, which in turn would mean higher debts.

After considerable hue and cry by small savers, the government, in January this year, announced a new product under the NSS designed for pensioners, widows and orphans, which currently offers 1.58 per cent higher rate of return than normal DSCs.

Certain Development Financial Institutions (DFIs) such as PICIC also announced deposit schemes that they claimed would pay 12 per cent profit per annum on deposits parked by widows, orphans, retired civil and armed forces personnel and senior citizens.

Government officials dismiss downward revisions in NSS rates as a blow to small savers, saying that in spite of the cuts, the real rate of returns on the NSS were higher because of low inflation.

“When we talk of 18 per cent return on some class of NSS certificates in late eighties, we must also remember that inflation then was 16 per cent,” an official who asked not to be named argued. He added that the rate of inflation was now just about 3 per cent. But the trouble is that credibility of inflation rates calculated by the government departments is itself suspect.