KARACHI June 7: The government intends to introduce new rules to curb investment by commercial banks and their customers in National Saving Scheme (NSS).

Finance Minister Shaukat Aziz says that the facility for pensioners, old age and vulnerable groups to supplement their incomes is being misused. The State Bank has sent inspection teams to the commercial banks to examine the situation and come up with new measures to curb this practice, which is not seen as illegal by bankers.

State Bank Governor Dr Ishrat Husain says the investors in NSS get loans on interest of 3-4 per cent and the return on NSS is 8-9 per cent. He laments that there is a seven per cent subsidy on NSS rates.

The NSS returns are linked to Pakistan Investment Bond yield and are adjusted on a six monthly basis. Bankers anticipate that yield from NSS may be reduced from July 1, 2003, by 1-2 per cent and the maximum cut may be applied to profits on Defence Saving Certificate. The expectation is that this may discourage lending in NSS investments.

To protect the widows from shrinking returns, the finance minister announced in his budget speech on Saturday that they would be eligible for enhanced profits as is available for government pensioners. The saving scheme for the pensioners carries two per cent more profits than on normal NSS certificates. Currently, the pensioners get a return of 11 per cent.

While appreciating the official move to formulate new rules to check the ‘misuse’ of NSS facility, analysts are not sure whether such regulatory measures would succeed. The rules may be applied effectively in case of small borrowers but bankers are likely to succumb to the pressures from big borrowers. New ways of deviations from rules may be found.

Whatever the outcome, the issue has to be seen in a much larger picture. The price of capital (money) is made cheaper by excess liquidity and lower demand in the real economy. As long as the foreign capital inflows continue to soar and demand for money does not pick sharply on account of large-scale private and public investments, surplus money will be priced cheaper.

As the unprecedented volatility in capital markets indicates (whether it is the foreign exchange or interest rates or prices of stocks) the global financial system suffers from organic failures. A few years ago, the T-bills yield in Pakistan was 16-17 per cent. Now it is under two per cent. In just one year, the US dollar plummeted by 30 per cent in the international market. The frequent fiscal and widespread crises devastate economies and result in heavy social costs.

The global financial system, which has played a decisive role in fortunes of individual states, is in the process of disintegration and change. The investment opportunities in Europe and the United States are drying up and the interest rates are falling with fears of deflation haunting the industrialized economies suffering from excess production facilities.

Having failed to put excess money into productive use, the policymakers take pride in piling up foreign reserves. Neither private nor public sector is geared to make investments on a scale required to absorb the level of foreign capital inflows.

Under the aging global financial system, the process of capital inflows into the world financial centres has weakened. And Bush doctrine has helped a pronounced dispersal of capital towards the Muslim countries.