KARACHI, Feb 19: Investment in the most popular Defence Saving Certificates (DSCs) fell to Rs3.149 billion in July-December 2003 down 68.5 per cent from 9.988 billion in July-December 2002.

This happened chiefly because the government cut their rate of return from 11.61 per cent in July 2002 to 10.03 per cent in January 2003 and to 8.50 per cent in July 2003.

Analysis of the latest data released by the State Bank shows that investment in DSCs fell in each month of the second half of 2003 compared with corresponding months of 2002.

Following are the figures for monthly investment in DSCs in July-December 2003. The figures in brackets show monthly investment in DSCs between July-December 2002. All figures have been rounded off.

July Rs422m (Rs1.938bn); August Rs590m (Rs1.431bn); September Rs284m (Rs1.131bn); October Rs431m (Rs1.621bn); November Rs453m (Rs1.383bn) and December Rs970m (Rs2.485bn).

Higher investment in DSCs in December 2003 as well as in December 2002 indicates that people normally invest more in national saving schemes before six -monthly reduction in their rates of return in January and in June each year.

SBP data reveals that in July-December 2003 people made a net withdrawal of Rs4.934 billion from three-year Special Saving Certificates whereas in July-December 2002 they had invested Rs29.57 billion in SSCs. The reason: the government had reduced the rate of return on SSCs from 10.47 per cent in July 2002 to 8.67 per cent in January 2003 and to 7.67 per cent in July 2003.

Investment in SSCs in five out of six months between July- December 2003 remained negative. Only in September 2003 SSCs attracted a small investment of Rs172 million against a huge Rs3.423 billion in September 2002.

In the remaining five months of the second half of 2003 people made net withdrawals from SSCs. Following are the figures for negative investment in SSCs in five out of six months between July-December 2003. Figures in brackets show investment in corresponding months of 2002. All figures have been rounded off.

July minus Rs847m (Rs3.169bn); August minus Rs53.5m (Rs3.149bn); October minus 2.397bn (Rs3.728bn); November minus Rs1.97bn (Rs5.693bn) and December minus Rs2.206bn (Rs10.406bn).

Whereas tens of thousands of people keep crying over the falling rates of return on DSCs and SSCs government officials say that the rates were being lowered to discourage interest rate arbitrage by moneyed people.

They say that the key reason for a big fall in investment in DSCs and SSCs in the second half of 2003 was that this interest rate arbitrage had stopped-thanks to the action taken by the SBP.

The central bank had stopped banks from selling DSCs and SSCs in June last year after it had found that businessmen were getting loans against these instruments for interest rate arbitrage.

Since banks' lending rates were cheaper than the rates of return on DSCs and SSCs they were thus earning a cool spread of up to four per cent.

Officials say that the launching of two tailor-made investment schemes - one for widows and the other for pensioners and citizens above 60 years of age - the government has minimized the suffering of the really small investors.

Bahbood Saving Certificates for widows and Pensioners Benefit Accounts for public sector pensioners and senior citizens are 10-year instruments and offer higher rate of return than 10-year DSCs.

In July-December 2003 the rate of return applicable on them was 10.08pc against 8.50 per cent on DSCs. That is why the two tailor-made schemes attracted Rs12.9bn investment in six months to December 2003.