KARACHI, Oct 16: Investment in national saving schemes (NSS) shot up to Rs6.8 billion in July-August 2001 from Rs3.6 billion in July-August 2000 as the government started paying a market- based floating rate of return on them. In the meanwhile average bank deposit rates also declined, leading the savers to shift part of their savings from bank deposits into NSS.

In January this year the government started paying floating rate of return on new defence saving certificate and from July the rates of return on other instruments of NSS were also made market-based.

This resulted in a slight improvement in the yields on the instruments of NSS whose returns had been on the fall for the past four years — since 1997 when banking sector reforms set in.

The return on defence saving certificate for example fell to 9 per cent for one-year encashment from 14.5 per cent in 1997.

But after the yield on these certificates was linked to long- term Pakistan Investment Bond it started moving up as the bonds were priced well. Three-year bond carried 12.5 per cent return whereas five-year and ten-year bonds carried 13 and 14 per cent of return. Same is true for other instruments of NSS as well.

Even after the recent slashing of the yield on PIBS, the bonds offer handsome real interest rates as inflation has also gone down. At present three-year PIBs offer annual return of 11.8 per cent; five-year PIBs 12.2 per cent and ten-year PIBs 13 per cent.

Meanwhile the average deposit rates of all banks slipped from 5 per cent in June to 4.96 per cent in August, according to State Bank statistics. The fall was much higher — up to 40 basis points in case of five leading banks that jointly claim more than two third of the total bank deposits.

But people in Pakistan do not keep a real-time track of the deposit rates. So increased investment in NSS in July-August does not mean that lower deposit rates immediately shifted investment from bank deposits to NSS.

What is more likely is that the deposit holders had started looking for more-yielding modes of savings even earlier — after the average deposit rate had fallen to 5 per cent in June from 5.9 per cent a year ago.

That provided the savers a good reason to shift part of their bank deposits into NSS and also make additional investment on them.

Officials of the National Saving Directorate say that the trend continues. But the figures for September 2001 would not be out before early November.

Increased investment in NSS helps the government cut its net budgetary borrowing from banks. That in turn helps the State Bank keep monetary expansion, and inflation rate, at the targeted level. In July-August 2001, net government borrowing for budgetary support was Rs50 billion. Had the government not been able to raise more money through NSS than in the past, this figure could have gone up.

But the other side of the picture is this. Investment in NSS accounts for the major chunk of un-funded debts of the government and, as such, it is riskier than other debts from economic point of view.

So the government often has to tradeoff one thing for the other whenever it goes for higher borrowing through NSS.

At end-August, un-funded debt stood at Rs700 billion or 45 per cent of the total domestic debt Rs1,560 billion. This percentage is just too high.

But as the lending rates of the banks are on the rise, and their long-term financing is just coming to an end, the financing market is witnessing a flurry of term finance certificates that offer quite lucrative rates of return.

That makes raising of cheap bank credit difficult for the government and securing more of non-bank credit becomes more important. “That is why the government is trying to mop up more funds through national saving schemes than in the past,” said a source close to the ministry of finance.