KARACHI Aug 23: Funds mobilized through National Saving Scheme (NSS) in excess of budgetary requirement may be productively invested in the capital market to ensure a reasonable return on their long-term small savings.
Talking to newsmen informally at the launch of Habib Bank House Finance Scheme at HBL Plaza, Finance Minister Shaukat Aziz said he had advised the Central Directorate of National Savings (CDNS) to consider floating a mutual fund in which the proceeds of the NSS could be profitably invested.
With the total stock of NSS certificates and Prize Bonds worth about Rs1 trillion, the CDNS could spare substantial amount of money for the Mutual Fund specially as the fiscal deficit is being kept under tight control. The yield could reduce the cost of servicing of the NSS debts, now fully borne by the national exchequer.
Sources here said that the government was examining various other options to invest NSS funds in excess of its requirements.
Under consideration of the Ministry of Fiance is also a proposal to allocate some of the funds from the NSS to the banks. Last week, the governor of State Bank Dr Ishrat Husain had advised the Finance Ministry to seriously consider allocating long-term funds mobilized under the NSS in excess of the budgetary requirements to commercial banks for housing finance. The SBP governor was of the view that the banks would be assured of a stable source of long-term funding at realistic rates and the small savers would continue to benefit from NSS and not complain about the erosion of their purchasing power.
Elaborating the benefits of his proposal at a housing finance workshop, the SBP governor said: First, it will limit the government borrowing to its anticipated requirements and it avoid paying the costs of servicing unneeded funds. Second, these savings would be used in the private sector.
Earlier, the State Bank had proposed that the government cap its borrowings to the budget level. Instead, the government has suspended sale of NSS securities by commercial banks which have a country-wide network of several thousand branches against a mere 366 branches of the Directorate of National Savings. It may curb sales.
If the government succeeds in making lucrative investments of NSS funds, it would be a deviation from what the IMF is proposing to the authorities. The government has committed to IMF to apply the formula linking NSS instruments to PIB yields. Going by stipulation of leading bankers, the current low interest rate environment is unlikely to change at least for yet another year.
As the rates of return on NSS certificates are higher than those on deposits with commercial banks of similar maturity, the IMF sees the difference as “an implicit subsidy.” In fiscal accounts, the implicit subsidy is included in the interest bill.
“An estimated lower bound for the implicit subsidy is 0.7 per cent of the GDP in 2002-03 (16 per cent of the domestic interest payment),” says an IMF report.
According to the Fund, the highest implicit subsidy over the full maturity is paid on a three-year Special Saving Certificates with a rate of return almost twice that on three year deposits. For Regular Income Certificates, the implicit subsidy is 26 per cent of the nominal return and for Defence Saving Certificates, the implicit subsidy varies between 6 per cent to 50 per cent of the nominal return, depending on the time of encashment.
The Fund officials assert that several aspects of the NSS merit reform. First, NSS certificates should not be available on tap, so that the government regains full control over non-banking financing. Secondly, the rates of return should be tied to closer to comparable instruments.