KARACHI, July 19: The government has increased the rates of return on National Saving Schemes or NSS by one percentage point to 2.04 percentage points for six months ending in December 2005. But the rates of return on many long-term NSS are still below the last fiscal year’s inflation or a few basis points higher than that.

Since inflation is set to recede slowly during July-December 2005 the rates of return on NSS look slightly better but real rates of return on NSS are still too low to attract sizable investment from the public saving. Two tailor-made saving schemes for pensioners and widows which offer higher returns than other saving schemes of similar maturity can be cited as exceptions.

The government has increased the rates of return on three-year special saving certificates or SSCs and five-year regular income certificates or RICs from 6.95 to 8.60 per cent and from 6.84 to 8.88 per cent respectively. But the new rates effective from July 1, 2005 are still lower than 9.28 per cent inflation in the outgoing fiscal year.

The government has set inflation target at eight per cent for the whole of this fiscal year i.e. July-June 2005-06. If the economic policies, aimed at controlling inflation, prove successful, inflation in the first half of the fiscal year would not be less than eight per cent in any case. This means that people would get a nominal real return of 0.6 per cent and 0.88 per cent on their investment in three-year and five-year saving schemes. And, they will get even such a low rate of return if they do not encash their SSCs and RICs before maturity. To add insult to injury, they will have to pay 10 per cent withholding tax on the profits earned on these saving schemes, which would further reduce the real rates of return.

The government has also increased the rate of return on 10-year defence saving certificates or DSCs from 8.15 to 9.46 per cent. The new rate of return on DSCs is only slightly higher than 9.28 per cent inflation in the outgoing fiscal year. But if inflation during July-December remains around eight per cent for which the government and the State Bank are making some moves, then the real return or inflation-adjusted return on the 10-year paper would be 1.46 per cent. And savers would get even this much profit on their investment in DSCs if they do not encash them before maturity. Again, they will also have to pay a 10 per cent withholding tax on whatever small return they earn on the long-term saving scheme.

As for Pensioners Benefit Accounts and Bahbood (Welfare) Saving Certificates, both of 10-year maturity, the government has raised their rates of return from 10.08 per cent to 11.04 per cent. Those who invest in these two schemes would get a handsome inflation-adjusted 3.04 per cent rate of return if inflation remains around eight per cent. What is going to make them happier is that the limit for individual investment in these schemes has been increased from Rs2 million to Rs3 million. Besides, investors are not required to pay a 10 per cent withholding tax on the profit earned on these schemes.

So, chances are that these two schemes, which have already won popularity among the savers and have enabled the government to raise substantial amount of domestic debt, would get even more popular with the savers and help the government mobilize more debt. Data released by the State Bank of Pakistan supports this view. During July-April 2004-05, people made a huge investment of Rs16.2 billion in Pensioners’ Benefit Accounts and Rs54.5 billion in Bahbood Saving Certificates. In a sharp contrast to it, they made net withdrawals of Rs51.9 billion and Rs36.4 billion from special saving certificates and regular income certificates. Net withdrawal from defence saving certificates that once used to be the most popular saving scheme also stood at Rs6.3 billion.

Impact on Stocks: the increase announced in the rates of return on NSS is going to attract increased investment in at least two tailor-made saving schemes, if not in any other, one should expect a shift of investment from stock market into NSS. But analysts say, as the market has already discounted in the last few weeks, there would be no visible impact on NSS rate hike on stocks.

“I don’t think the stock market would respond negatively to news of NSS rates hike,” says Mohammed Sohail who heads research department of brokerage Jahangir Siddiqui Capital Markets Ltd.

“In the last few weeks, stock prices already incorporated a possible increase in NSS rates. So there is no reason they should get depressed now when the actual increase has been announced.”

“Further, the margins by which the rates of return on NSS have gone up are in line with what the market was expecting,” he said when reached by Dawn over telephone.