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| 06 September 2004 | Monday | 20 Rajab 1425 |
NSS schemes lure investors
In fiscal year 2004, net inflow in national saving schemes (NSS) totalled only Rs247 million. In fiscal year 2003, these schemes had attracted Rs135.8 billion.
Mind boggling, isn't it? Let us first see how many schemes are covered under NSS and then discuss what led to such a big fall in net cumulative investment in them.
Major schemes under NSS are: (1) 10-year DSCs or Defence Saving Certificates; (2) Five-year RICs or Regular Income Certificates; (3) Three-year SSCs or Special Saving Certificates; (4) 10-year PBAs or Pensioners' Benefit Accounts; (5) 10-year BSCs or Bahbood (Welfare) Saving Certificates and (6) Prize Bonds. Table I shows net investment in each of these schemes in FY04 and FY03.
| Table - I | |||
| Schemes | Net investment in F04 | Net investment in FY03 | |
| Defence saving certificates | Rs3.3 billion | Rs22 billion | |
| Regular income certificates | Minus Rs48.9 billion | Minus Rs14.9 billion | |
| Special saving certificates | Minus Rs13.2 billion | Rs84.9 billion | |
| Prize bonds | Rs22.8 billion | Rs26.8 billion | |
| Pensioners' benefit accounts |
Rs13.2 billion | Rs10.17 billion (Between January-June 2003) |
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| Bahbood saving | Rs22.7 billion | BSCs were not born | |
As the table shows, net investment in PBAs and BSCs totalled Rs13.2 billion and Rs22.7 billion respectively. Against this, net investment in each one of other four saving schemes fell or turned negative; or it saw a larger outflow in FY04 than in FY03. Let us first see what attracted huge investment in PBAs and BSCs in the last fiscal year before we discuss why the performance of other schemes deteriorated.
PBAs: The government had launched 10-year Pensioners' Benefit Accounts in January 2003, after slashing the rates of return on NSS for the eighth time since July 1999.
This scheme was tailored exclusively for more than 1.76 million retired employees of the federal and provincial governments including those of the armed forces. The scheme also covered the pensioners of semi-government organisations and autonomous bodies the number of which also runs into hundreds of thousands.
When the scheme was launched, it carried a fixed return of 11.04 per cent on maturity subject to half-yearly revision. This return was much higher than 10.03 per cent applicable on DSCs at that time.
BSCs: Then in July 2003, the government launched Bahbood Saving Certificates, an exclusive savings scheme for widows, after making the ninth downward revision in the rates of return on NSS. The rate of return offered on BSCs was 10.08 per cent, equal to what the government was then offering on PBAs.
Even at 10.08 per cent the return on PBAs and BSCs was much higher than the 8.5 per cent return applicable on DSCs from July 1, 2003. The government allowed widows to buy Bahbood Saving Certificates in denominations of Rs5000 to Rs500, 000.
It also exempted them from compulsory deduction of Zakat on the income earned on these certificates and allowed investors to encash these certificates any time on payment of prescribed service charges. Initially, income from PBAs and BSCs, like income from other saving schemes was subject to 10 per cent withholding tax.
But from July this year the government stopped collecting this tax on the income from both schemes. From July 2004, the government also increased the maximum limit from Rs1 million to Rs2 million for investment in Bahbood Saving Certificates. Earlier, from January 2004 it had allowed senior citizens of 60 years or more to invest in these certificates.
Higher Rates: The rates of return on PBAs and BSCs have remained unchanged at 10.08 per cent since July 2003. But the government has thrice adjusted downwards the returns on all other national saving schemes during this period, first in July 2003, then in January 2003 and finally in July 2004. (The only exception was in case of 10-year DSCs the return on which inched up from 7.96 per cent to 8.15 per cent in July this year).
So, at present the return on PBAs and BSCs is 1.93 percentage points higher than the return on DSCs. Earlier, it used to be much higher. (See Table II). The government is keeping the rates of return on PBAs and BSCs deliberately higher than those applicable on the saving schemes of similar maturity to support what it calls vulnerable groups or the people who depend on income from PBAs or BSCs for survival.
| Table - II | ||||
| Period | Return on PBAs/ BSCs |
Return on DSCs | Return on PBAs/ BSCs higher by |
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| Jan-June 2003 | 11.04 per cent | 10.03 per cent | 1.01 per cent | |
| July-Dec 2003 | 10.08 per cent | 8.50 per cent | 1.58 per cent | |
| Jan-June 2004 | 10.08 per cent | 7.96 per cent | 2.12 per cent | |
| July-Dec 2004 | 10.08 per cent | 8.15 per cent | 1.93 per cent | |
The IMF on whose insistence the government started slashing the rates of return on all national saving schemes, to make them market-oriented, also has had supported the government initiative of offering higher returns on saving schemes exclusively designed to benefit vulnerable groups. But the Asian Development Bank, in its recent economic update on Pakistan, has warned that the increase in the ceiling for investment in BSCs "will add to the interest rate distortions" and that "there will be greater incentive for misuse of the scheme." Now, it is for the government to ensure that the scheme is not misused.
DSCs/RICs/SSCs: One of the reasons why the government had to agree to the IMF prescription of bringing the rates of return on DSCs, RICs and SSCs was the misuse of these schemes, initially introduced to help the poorer sections of population, by the big and the powerful.
The misuse of DSCs/SSCs hit newspapers' headlines in June 2003 when the government stopped all bank branches from selling these certificates. What compelled the government to take this decision was that banks were selling DSCs and SSCs to their customers out of the loans already offered to them and then persuading them to use these certificates as collateral for re-securing low-cost loans.
This was a win-win arrangement for both the banks and their clients. Since the return on these certificates was much higher than the banks' lending rates, the customers were earning handsome profits by pledging these certificates for securing low-cost loans from banks. On the other hand, banks were able to employ surplus liquidity among first class borrowers against zero-risk near-cash collateral.
Even before this, filthily rich businessmen, politicians, landlords and bureaucrats with lots of tax-evaded money were making bulk of investment in DSCs, RICs and SSCs. Widows, pensioners and elderly people having less than a million rupees in hand had a very little share in overall investment in national saving schemes. That was why, the government had to start slashing their rates of return to make them market-oriented and to reduce its own cost of domestic borrowing. How aggressively, it lowered the returns on these schemes is evident from this.
The rates of return fell from 18.04 per cent at end-June 1999 to 8.15 per cent in July 2004 on DSCs, from 18 to 6.84 per cent on RICs and from 16.33 to 6.95 per cent on SSCs.
From July this year, the government has linked the rates of return on DSCs, RICs and SSCs in a way that any change in the yields on 10-year, five-year and three-year Pakistan Investment Bonds will automatically reflect in their rates of return.
The government has done this, on the insistence of the IMF, to withdraw interest rate subsidy previously available to those who invested in DSCs, RICs or SSCs. Another purpose for doing this is to provide the banks and other institutional investors a level playing field in terms of interest rates because they are not supposed to make investment in national saving schemes - they can make investment in PIBs.
Domestic Debt: Pensioners' Benefit Accounts and Bahbood Saving Certificates have emerged as major instruments of domestic debt raising. In FY04 the government raised Rs121.7 billion domestic debt of which Rs35.7 billion debt or nearly 29 per cent of the total was raised through these two schemes. This shows the popularity of the two saving schemes with the saving public.
These schemes may retain their popularity in future also, if the government continues to pay a higher-than-inflation return on them. In July 2004, consumer inflation rose by 9.33 per cent over July 2003. PBAs and BSCs paying 10.08 per cent profit were the only two schemes that offered a real return to investors.
Profit rates of other national saving schemes, having been far below 10 per cent, became negative in real terms. There is need to introduce an inflation-indexed bond in Pakistan to lessen the impact of rising inflation on household budgets.
The government has projected 5 per cent consumer inflation for the current fiscal year, which it believes is inevitable to achieve the GDP growth target of 6.6 per cent. But a dramatic rise in international oil prices seems to be upsetting these calculations. The Asian Development Bank has estimated that inflation can reach 5.5 per cent. Some independent economists say that it can go beyond 6 per cent.
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