KARACHI, Aug 25: Net investment in National Saving Schemes (NSS) fell to just Rs247 million in fiscal year July-June 2003-04 from about Rs136 billion in 2002-03.

Net investment in NSS sank to such a low level in FY04 as investors made a net encashment of Rs13.2 billion from Special Saving Certificates (SSCs) and of Rs48.9 billion from Regular Income Certificates (RICs).

In FY03 people had invested Rs85 billion in SSCs. Though they had made net withdrawals from RICs but the volume of withdrawals was much lesser - Rs15 billion. Data released by the State Bank show that net investment in Defence Saving Certificates (DSCs) also fell to Rs3.3 billion during FY04 against a much larger investment of Rs22 billion in FY03.

People made heavy withdrawals from three-year SSCs and five- year RICs primarily because of repeated slashing in their rates of return. From January 1, 2004 the government reduced the rates of return on RICs and SSCs to 7.08 and 7.27 per cent from 7.68 and 7.67 per cent respectively. It also lowered the return on 10-year DSCs from 8.50 to 7.96 per cent.

This was the 10th downward revision in the yields on NSS since July 1999 when the government had started the process of making these yields market-based. Till June 1999 people were getting a high return of 18.04 per cent on DSCs; 18 per cent on RICs and 16.33 per cent on SSCs.

When the government had started slashing the rates of return on NSS initially it had not resulted in huge outflow of funds because even the reduced rates were too high. But as time passed by and repeated slashing of the yields on NSS grossly reduced the actual profit earned by the investors people started withdrawing funds from NSS.

Then realizing the plight of the savers depending on income from the NSS the government in January 2003 launched 10-year Pensioners Benefit Accounts (PBA) and fixed its return at 11.04 per cent - the highest on any national saving scheme. But in July 2003 it had to reduce this rate of return to 10.08 per cent on the insistence of the IMF.

After slashing the rates of return on PBA and other national saving schemes the government launched 10-year Behbood (Welfare) Saving Certificates for widows and fixed its return at 10.08 per cent. The government in January 2004 also allowed all citizens of 60 years or above to invest in PBA to extend the scope of this scheme.

The two schemes immediately became popular with small savers and proved an efficient tool of domestic debt raising for the government. The SBP data show that the government raised Rs35.9 billion through these schemes (Rs22.7 billion through PBA and Rs13.2bn through Behbood Certificates during July-June 2003-04.

The government also managed to raise Rs22.8 billion through prize bonds during this period. But huge withdrawals from old national saving schemes offset the impact of this cumulative investment of Rs58.7 billion in two tailor-made schemes for the retired and the elderly plus prize bonds. The result was that net overall investment in NSS sank to Rs247.1 million in FY04 from a peak of Rs135.8 billion in FY03.