On June 5, 2006, the government had announced a substantial raise in the National Saving Schemes (NSS) in the budget for the current fiscal year. Will the budget for the next year bring the same good news? Chances are that it would though the increase may not be as substantial this time.

Last year, the government raised the rates of return on NSS by up to one percentage point and the increase was seen a bit above the market rates. But this year “any change in the rates would be dictated by the market conditions,” said a senior official of Central Directorate of the National Savings. These rates are linked to the yields on long-term Pakistan Investment Bonds (PIBs).

The government did not conduct regular PIB auctions prior to the increase in NSS rates in the last budget. That had made it difficult to say whether the rate-rise was market-oriented though the government maintained that the secondary market yields provided the basis for it.

While increasing the NSS rates this time, the government would take into consideration the PIBs yields secured in their regular auctions, the latest of which was held on April 21. And it may also consider the movements in the secondary market yields, depending upon how much increase it wants to make and whether the basis of this can be found in the officially-set yields or in the secondary market yields.

On April 21, the cut-off yields on PIBs fell from 10.20 to 10.13 per cent on 10-year bonds; from 9.76 to 9.62 per cent on five-year bonds and from 9.37 to 9.33 per cent on three-year bonds. If the government does not hold another auction of PIBs before the budget, these cut-offs will continue to influence the secondary market rates.

In that case, the rates of return on three-year Special Saving Certificates (SSCs), five-year Regular Income Certificates (RICs) and 10-year Defence Saving Certificates (DSCs) would see only a nominal change.

Currently, the rate of return on SSCs and RICs is 9.34 and 9.24 per cent respectively and the return on DSCs is 10 per cent.

However, the government may increase the rates of return on these and other saving schemes by half a percentage point and still keep them in sync with the PIB yields. Half a percentage point increase can also be expected in the rates of return on Bahbood (Welfare) Saving Certificates (BWSC) and Pensioners’ Benefit Accounts (PBAs).

The rates of return on these 10-year schemes were also last raised in the budget—from 11.04 to 11.52 per cent. Since these schemes are specially designed for pensioners, widows and senior citizens of 60 years plus, their returns are not tied with the yields on PIBs.

A possible rate-rise in these schemes as well as in other schemes may cheer up six million plus investors of NSS but it is bound to annoy banks.

Sources in the ministry of finance say the new rates of return on three-year and five-year saving schemes may exceed 9.5 per cent whereas the average return on three and five-year bank deposits is 5.44 and 5.57 per cent respectively.

They say that the return on DSCs may rise to 10.5 per cent. This too should be higher than the average return on 10-year bank deposits. These deposits form a tiny percentage of total bank deposits and are clubbed with deposits of five year and above and as such their exact average rate of return is not known.

Though NSS rates are higher than the returns on bank deposits and may become more attractive, one should not expect large additional investment in NSS soon. The reason is that unlike in the past, the gap between the bank rates and the NSS rates is not that big. And banks, with much improved financials than in the past, would also not let this gap widen. Besides, whereas in 1990s people had limited interest in the stock market, nowadays a large number of city dwellers do trade in stocks.

And for those investors who have relatively large surplus funds to employ and are willing to take long -term stakes, the real estate offers a good alternative. The development of the third port in Gwadar and land development schemes in major cities lure many moneyed people—obviously because of much higher gains.

It is because of this quest for higher gains that even within the NSS the public is more interested in high-yielding PBAs and BWSCs ..

In eight months to February 2007, the two schemes attracted net combined investment of Rs43.6 billion whereas other schemes either witnessed net withdrawals or nominal investment. Five-year RICs and 10-year DSCs saw a net withdrawal of Rs10.8 billion and Rs4.2 billion respectively but three-year SSCs fetched Rs2.8 billion net investment.

The challenge that the government is facing now is that it needs to make national saving schemes popular to borrow more though non-bank sources. Lately, the central bank has become more insistent in demanding that the government must cut its borrowing from the SBP to avoid its inflationary impact.

And the government has started relying more on borrowing from commercial banks and, preferably through non-bank sources that is least inflationary.

In its quest for shifting its borrowing from the central bank to the non-bank sources, the government re-allowed institutional investment in NSS from October 2006. Officials of the ministry of finance say that another factor that justified the decision is that there is no room for arbitrage between the NSS rates and institutions’ borrowing from banks. When the government had banned institutional investment in NSS from April 2000 the chief reason was this arbitrage that had become possible due to then prevailing high NSS rates and very low bank loan rates.

But the decision to lift this ban has made banks uneasy and invited criticism from the central bank. “The decision to re-allow institutional investment in NSS is a setback to financial sector reforms,” SBP notes in its first quarterly report for this fiscal year.

It says that as a result of this decision, “institutional investment in NSS will shift medium-term funds away from the banking sector, which in turn, may exert an upward pressure on market interest rates”. It says that the decision also has implications, “for the volatility in government funding cost and expectations for interest rates changes.”

It is not clear if the government would once again stop institutions from investing in national saving schemes. But a senior official told Dawn that CDNS has proposed introducing a new scheme exclusively for institutional investors. The proposal is lying with the ministry of finance.

If the scheme can really take care of institutional investors without hurting banks’ interest, it would be welcome by bankers. “Otherwise, it will create further confusion,” said a source well- versed with the developments on this front.

The government is likely to announce in the budget the much-awaited conversion of CDNS into Pakistan Savings. The new entity would be an autonomous body run by professional management and supervised by an independent board of directors.

The ministry of finance is vetting the proposed conversion and would soon move a summary to the cabinet for approval. The State Bank of Pakistan and other relevant authorities have already cleared the draft rules for PS.

The conversion of CDNS into PS would pave the way for professional planning and management of national saving schemes. Since long CDNS has also been planning to market NSS to overseas Pakistanis more aggressively, once PS comes into being it would become easier. Pakistanis living in the UAE have access to NSS through United Bank and Habib Bank and CDNS plans to extend the coverage area to other Gulf countries.