KARACHI, Jan 1: The 50-60 basis points reduction in the rates of return on fixed-income national saving schemes effective January 1, 2004 would further force people to withdraw money from these schemes.
They have already withdrawn money from these schemes following successive rate cuts dating back to July 1999.
That the fresh rate-cuts would make NSS further unpopular with the saving public is evident from the fact that investment in the most popular Defence Saving Certificates (DSCs) too has turned negative. The latest data on NSS shows that 10-year DSCs saw net negative investment of Rs2.4 billion in October 2003. The data further shows that five-year RICs or Regular Income Certificates also saw negative investment of Rs2.9 billion in the same month.
The government has cut the rates of return from 8.5 per cent to 7.96 per cent on DSCs; from 7.68 to 7.08 per cent on RICs and from 7.67 per cent to 7.27 per cent on three-year SSCs or Special Saving Certificates.
In July 2003 it had lowered the rates of return from 10.03 to 8.50 per cent on DSCs; from 9.12 to 7.68 per cent on RICs and from 8.67 to 7.67 per cent on SSCs. This huge rate-cut forced savers to withdraw money invested in NSS and employ it somewhere else-in stocks and in real estate for example.
BOOST TO STOCKS: Senior stockbrokers say the recent lowering of NSS returns is expected to make stocks even more popular. Says former chairman of Karachi Stock Exchange Mr. Yasin Lakhani: "This rate-cut should also lead people to invest more in the stock market." He says that in the past one year people have overcome their fear of stock market vagaries "and have gained a better understanding of the market."
Karachi Stock Exchange 100-share index went up from 2661 at the end of last week of 2002 to 4393 at the last weekend of 2003. Part of this phenomenal growth is rooted into rising confidence of small investors into the stock market.
"In NSS one does not get a capital gain-and whatever fixed income he earns over a period of time is eroded because of inflation," says Mr Lakhani. Besides, income from NSS is clubbed with other incomes for the purpose of tax assessment. "In contrast dividend yield on stocks is treated as a separate category of income and the capital gains are also tax-exempted up to 2005."
Add to this the advantage that stocks can be encashed after fourth day of the purchase whereas those who invest in NSS have to wait for a long period to earn profits "and then you realise it makes sense to invest in stocks." But Mr Lakhani admits that whereas investment in NSS is least risky whereas investment in stocks does carry a risk-that certain stocks may not perform well. "That risk too is largely associated with who you choose as your guide."
WHY RATE-CUTS? Since July 1999 the government has been lowering the rates of return on NSS as part of its strategy to end interest rate subsidy on the insistence of the IMF. With the launch of the long term Pakistan Bonds in December 2000 the government has also been making efforts to bring the rates of return on NSS gradually in line with the PIB yields.
This has brought down the return on DSCs down to 8 per cent now from 18.04 per cent at the end of June 1998. Retired people who rely heavily on incomes from NSS to support themselves have been crying-making heart-touching appeals to the government to stop the rate-cuts but to no avail. The government keeps telling them that inflation has also been on the fall during past few years.
INFLATION-NSS LINK: But the fall in inflation has been much lesser than the fall in NSS rates. Annualized Consumer inflation has fallen about three percentage points in the last three fiscal year-from 6.4 per cent in July/June 1998-99 to 3.5 per cent in 2002-03. During this period the return on DSCs was lowered by eight percentage points - from 18.04 per cent to 10.03 per cent. Hence the public outcry.
Since those who invest in NSS also have to pay 10pc withholding tax and Zakat, the actual return is always lower than the announced rates of return. And they do get even smaller return when they encash their saving certificates or withdraw money from saving accounts prematurely.
WITHDRAWALS: All this explains partly why people have started withdrawing investment from NSS. What else explains such withdrawals is that the government has deliberately discouraged non-deserving groups from earning a very high return on NSS. It continues to do so.
In April 2000 the government banned institutional investment in NSS on the ground that NSS returns were kept deliberately higher to benefit the retired people and senior citizens-and not for business tycoons. For the institutional investors the government then designed PIBs whose yields were market-driven and still are.
