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Pakistanis switching savings to govt schemes from private banks

KARACHI, October 17 (Internews): Pakistanis are investing more in
national saving schemes and latest statistics made available here
Wednesday show that the savings have shot up to Rs 6.8 billion in
July-August 2001.

This is up from Rs 3.6 billion in July-August 2000 and business sources
say the increase is because the government has started paying a
market-based floating rate of return on the schemes.

New statistics also show that average bank deposit rates are declining,
leading the savers to shift part of their savings from bank deposits
into the state-managed national saving schemes (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 Bonds (PIBs) 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.

The 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 of Pakistan

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

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
Rs 50 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 trade-off one thing for the other
whenever it goes for higher borrowing through NSS.

At end-August, un-funded debt stood at Rs 700 billion or 45 per cent of
the total domestic debt Rs 1,560 billion. This percentage is just too

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 cheap bank credit difficult for the government and
securing more of non-bank credit becomes more important. -Internews

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