EFFECTIVE July 2, the Central Directorate of National Savings (CDNS) decided to dole out a little extra sum to the savers. Yet the profit rates did not really climb, only crawled up.
A doddering old lady, who was barely able to talk with saliva dripping from her mouth, was seen walking out of a National Savings Centre. “I hear that the government has raised profit rates on Behbood Savings Certificates — a scheme meant for pensioners, retirees, widows and generally the voiceless members of society,” another woman of her age who just reached the centre asked happily. The first lady grumbled: “Yes, they gave me Rs10 more on an investment of Rs100,000. I will be able to eat an extra loaf of bread a month,” she retorted.
The CDNS has raised profit rates on average 0.1 percentage points per annum on its various schemes, including Behbood Savings Certificates, Pensioner Benefit Accounts, Shuhada Family Welfare Account, Defence Savings Certificates and Regular Income Certificates. As the upward revised rates come after a long series of cuts, many investors feel relieved. The CDNS, however, did the opposite by decreasing the rates of return on short-term savings certificates of three-, six- and 12-month tenors.
Institutions would take advantage of the arbitrage by moving funds between Pakistan Investment Bonds and National Savings Schemes
The change in profit rates comes on the heels of an earlier circular by the Finance Division that barred institutions from parking money in National Savings Schemes (NSS). The statement read: “In the light of the committee constituted to finalise the plan for the elimination of institutional investors from NSS products and recommendations of the State Bank of Pakistan, the competent authority has been pleased to direct that institutional investment in all NSS shall be discontinued from July 1.”
A fund manager stated that the investment already made by institutions would stay till its maturity, but the ban was placed on fresh investment in any of the NSS products. He argued that the government had corrected “price inefficiency” by taking that step. Although a bulk of institutional investments came from pension funds and provident funds, institutions were taking unfair advantage of the arbitrage by shuffling money from Pakistan Investment Bonds (PIBs) to NSS (and vice versa) — whichever avenue offered higher returns at a particular moment.
PIB rates stood as the benchmark for NSS rates. But there was a time lag between the changes in PIB and NSS rates. Institutions were taking undue advantage of it and making tens of millions of rupees.
An old-timer recalled that former prime minister Shaukat Aziz was the first to make the cruellest cut in NSS rates from 18pc in 1999 to just about 7pc in 2004 in Behbood Savings Certificates and others. “To saddle savers with further burden, the profit was subjected to a 10pc withholding tax, deducted at source.” Mr Aziz had also put a ban on institutional investment in NSS, which was later reversed by the PPP government.
Economists say it is a tough choice for the government. As a means to “tap the cheapest source of borrowing,” the government had been cutting down the rates of return on NSS. A fixed income analyst observed that it may not be a popular decision among the voiceless pensioners, widows and small savers who put their money in NSS for a regular return to make ends meet. However, decreasing the rates made economic sense for the government. One money manager pointed out that investment in NSS and prize bonds was the easiest and safest means to launder black money. He observed that unlike banks deposits and equity investments, no questions were asked about the source of funds invested in NSS. However, if providing unattractive returns to investors in NSS drives away or slows down the flow of illegal money, genuine small investors who put their life savings in various schemes to meet their daily needs also suffer.
“A middle-of-the-road solution seems to be to increase the profit rates and discourage deep-pocket individuals with heaps of mostly ill-gotten cash to invest in NSS by restricting the amount of investment.”
NSS is the biggest non-bank borrowing institution for the government. According to the Economic Survey 2019-20, the total domestic debt on March 31, 2020 stood at Rs22.5 trillion. “Most of the net domestic debt raised during the first nine months of 2019-20 was through medium-to-long-term government securities i.e. PIBs and NSS,” the survey stated. The CDNS affirmed that it had achieved 124pc of the gross and 61pc of proportionate targets. The amounts parked in the product basket of NSS included: Defence Saving Certificates Rs93bn, Special Savings Certificates Rs1.1bn, Regular Income Certificates Rs71.6bn, Behbood Savings Certificates Rs77bn, Pensioners’ Benefit Account Rs31.2bn and Special Savings Accounts Rs36bn.
Published in Dawn, The Business and Finance Weekly, July 6th, 2020