KARACHI, April 16: The government may increase the rates of return on fixed income national saving schemes or NSS at the beginning of the next fiscal year in July.
A senior monetary source said that before increasing the rates of return on NSS the government would let the yields on long term Pakistan Investment Bonds or PIBs rise in the next auction. He said the government would hold the next auction of PIBs most likely in May or in June.
The government needs to increase PIB yields before increasing the rates of return on NSS because the change in PIB yields provides the basis for a revision in NSS rates — according to a formula the government adopted on the insistence of the IMF.
During the first three quarters of the current fiscal year the government failed to sell PIBs as the market was demanding a much higher yield than it was willing to offer. A final auction of PIBs is due during this quarter i.e. April-June 2005. Unlike in the past the government cannot scrap the fourth PIBs auction altogether because in that case revising NSS rates will become all too difficult and keeping their rates of return unchanged would increase net outflows from NSS. Already in July-January 2004-05 NSS have witnessed net outflow of Rs4.514 billion. In full fiscal year 2003-04 also NSS had seen a net outflow of Rs259 million because of falling rates of return. The government revises NSS rates of return after every six months.
In January 2005 the government kept unchanged the rates of return on four major schemes in the NSS. Returns on three-year SSCS or Special Saving Certificates and 10-year DSCs or Defence Saving Certificates were kept unchanged at the July 2004 level of 6.95 per cent and 8.15 per cent. The return on tailor-made 10-year PBAs or Pensioners Benefit Accounts and BSCs or Bahbood Saving Certificates was also kept at the July 2004 level of 10.08 per cent.
The interest rate tightening that the State Bank initiated since the start of this fiscal year in July last to contain inflation and the rate of inflation itself has now made the rates of return on NSS extremely unattractive.
Inflation during July-March 2004-05 increased by an average 9.06 per cent year-on-year whereas the weighted average yield on one-year treasury bills reached 7 per cent on April 13. Earlier, on April 11 the SBP raised its discount rate for the first time in more than two years from 7.5 to 9 per cent.
Immediately after the increase in the discount rate the yields on three-year and 10-year PIBs went up by up to one per cent in the secondary market which makes a stronger case for upward revision in PIBs yield in the next auction.
In May 2004 the government had offered weighted average yields of 4.23 per cent on three-year PIBs; 5.27 per cent on five-year PIBs and 7.13 per cent on 10-year PIBs against their coupon rates of 6, 7 and 8 per cent respectively.
Since then it conducted three more auctions of PIBs — the first in August 2004, the second in November 2004 and the third in March 2005 -— but it had to scrap all the three auctions as the market was demanding much higher yields.
In the secondary market the yield on three-year and 10-year PIBs has moved up from 6.30 and 8.35 per cent before the discount rate hike to 7 plus and 9.25 per cent afterwards.
This itself is a clear indication that the government will have to raise the effective yields on PIBs substantially in the next auction if it believes it needs to borrow through PIBs to finance the budget deficit.
In case the government rejects even the fourth auction of PIBs due in May or June on the ground that it does not need borrowing through PIBs the very purpose of the launching of these bonds i.e. providing a benchmark for long-term yield curve would be defeated. Senior bankers say the government, in fact, needs to increase the coupon rates of PIBs before holding their auction just to reinforce the SBP signals of tightening of interest rates.
The government had last revised the coupon rates of PIBs in October 2003.
