UPSET by the falling national savings, the country’s economic managers are making moves to arrest the deterioration.

The Central Directorate of National Savings (CDNS) has decided to introduce two new products hoping to attract larger amounts of money into National Saving Schemes (NSS). And the State Bank of Pakistan has made it mandatory upon banks to offer a minimum of six per cent return on saving accounts.

National savings are estimated to come down to 10.7 per cent in fiscal year 2012 from 13.2 per cent of the GDP in fiscal year 2011.

Chairman CDNS Zafar M. Shaikh says two new products — short-term saving certificate and students welfare bonds — would be launched sometime in July and August respectively. He says the new products will add to short-term savings instruments to the NSS basket as all current products are of medium to long-term maturity i.e. from three to 10 years.

In the current global environment, it is but natural for Pakistan to rely more on domestic savings though there is a need to tap foreign savings as well.

Domestic savings are estimated to have fallen to 8.9 per cent of GDP in FY12 from 13.3 per cent in FY11 chiefly due to poor performance of the NSS and not-so-robust growth in saving accounts of banks. Fresh inflows in the NSS during July-April of FY12 totalled about Rs97.4 billion down substantially from Rs188.6 billion. What especially caused this decline was a net outflow of Rs27 billion from NSS in March and a meagre net inflow of only Rs3 billion in April.

“The presidential ordinance that extended exemption to the stock market investors from disclosing their sources of income till June 2014 came on April 25. But I guess major investors had got wind of it in March. That’s why the NSS saw a net decline in fresh investment in March and even in April inflows were nominal despite increase in the rates of return (on NSS),” says a Karachi-based CDNS official.

The ordinance has provided this relaxation to stock investors related to the minimum/maximum period for which they hold the shares.

Mr Zafar M. Shaikh, however, told media in Islamabad on June 7 that in May and in the first week of June huge fresh inflows in NSS had been witnessed and it was estimated that total investment so far this fiscal year had touched Rs150 billion against the revised target of Rs146 billion.

And since the non-bank(CDNS) financing is least inflationary compared to the government’s borrowing from commercial banks or the central bank, it is always good for any government to mobilise as much financial resources through the NSS as possible.

“Banks, therefore, see the CDNS as their direct competitor and complain that NSS distorts the financial market when any new scheme is launched which is more lucrative than banks’ deposits of similar maturity,” explains a central banker.

Except for the Bahbood Saving Certificates (for senior citizens and widows) and Pensioners’ Benefit Accounts (for retired people) that are designed to mobilise savings from targeted segments of population, offering “right rate of return” on other instruments of NSS becomes an issue for the government.

The massive net outflow of Rs27 billion from NSS in March this year is an example because much of this outflow caused a large number of investors of three-year Special Saving Certificates who redeemed the same on maturity instead of re-rolling them.

“One of the reasons was that by that time they had noticed that banks too were paying a return closer to what they were getting on SSCs,” argued a senior executive of a local private bank.

One way of promoting savings other than through CDNS and banks could be expansion in mutual funds industry. Mutual funds and pension funds mobilise savings for their use in commerce and industry and contribute to increase the investment-to- GDP ratio.

But currently the assets under the management of mutual funds industry is about five per cent of total bank deposits whereas in India this percentage is more than double.

Like savings, investment has also showed a declining trend in FY12 and is estimated to have fallen to 12.5 per cent from 13.1 per cent in FY11.

But the core issue is that all the three institutions—the CDNS, banks and mutual funds industry—need to operate in a way that their products do not cause a distortion in the market to the disadvantage of others. “That’s the real challenge,” says a former
chairman of Karachi Stock Exchange. “Unless a more reliable long-term yield curve is established this would remain a big challenge.”

Mobilising savings on long-term basis both through NSS and corporate bonds and TFCs gives a financial market the depth required for development of a long-term yield curve and presence of a reliable long-term yield curve alternatively help in mobilisation of long-term savings.

“The proposed launching of short-term saving certificates and students welfare bonds by CDNS is good in that it would suck in part of the money outside the banking system,” says a senior central banker. “And if the government can finance its budget deficit through non-bank borrowing from sources that have so far remained untapped it makes sense.

“We really need to boost investment to GDP ratio during this fiscal year to achieve a higher growth. Offerings like KESC’s corporate bonds preceded by Engro TFCs and similar offerings also need to be encouraged. The SBP and SECP are both working on it.”