At a branch of the Central Directorate of National Savings (CDNS) in the old-city area in Karachi, a group of doddering old men and women was chattering excitedly on the morning of July 1.

The reason for their happiness was the generosity of CDNS: the government had raised profit rates on various savings schemes. On Behbood Savings Certificates (BSCs), the window of investment available to senior citizens and widows, the monthly profit on a deposit of Rs100,000 had gone up by Rs40 to Rs1,230.

But the jubilation proved short-lived. A few months later, a feeble lady was seen embroiled in a lengthy and angry argument with the cashier at the same CDNS branch. The government had reduced the monthly return on BSCs by Rs190 to Rs1,040 on the deposit of Rs100,000.

From Nov 1, the government slashed profit rates on all National Savings Schemes (NSS). The return on Defence Savings Certificates was cut by 2.33 percentage points to 10.68pc. The profit on Pension Behbood scheme went down by 2.88 percentage points to 12.48pc. The return on regular income certificates was reduced by 2.04 percentage points to 10.92pc. The profit on special savings certificates decreased by 1.7 percentage points to 11pc while that on savings account was slashed by 2.05 percentage points to 8.20pc.

National Savings are supposed to act like a safety net for special segments of society. But the government seems to have set aside such noble notions

“This has been done as interest rates on NSS are benchmarked to secondary market yields on 10-year Pakistan Investment Bonds (PIBs),” explained an investment guru.

The profit rate on BSCs hit the all-time high of 16.65pc in December 2008 when the return stood at 16.8pc.

The profit rate has been slowly rolled back. At the last PIB auction on Dec 13, the 10-year yield dropped below 11pc. This is something to celebrate for less than 250,000 investors who can afford to gamble in the high-risk stock market as extra cash will flow into the equity market. However, it surely is bad news for more than seven million voiceless, risk-averse investors in NSS who may witness further evaporation of their returns.

One of the objectives of CDNS — an attached department of the Finance Division — is to provide a safety net to special segments of society like widows, senior citizens and government retired servants in the absence of an effective social security system. But all those noble intentions have been set aside as the government endeavours to find non-inflationary, non-bank borrowings to ride the overall fiscal deficit.

Only widows and retirees can invest up to Rs5m in BSCs, but regular income certificates are open for all. An alternative to BSCs, regular income certificates were once a reliable source of monthly income. But the dwindling profit rate and a hike in withholding tax have put most middle-class savers in misery.

“If the government has shown magnanimity by increasing the pension given out by the Employees’ Old-Age Benefits Institution (EOBI) by 20pc, why can’t it link the profit of small savers in NSS to inflation?” said an old lady at the NSS branch.

One of the major reasons for a swift cut in the profit on regular income certificates is to prevent the flow of billions of rupees in a safe and government-guaranteed scheme for easy returns. That could be taken care of if the government took the trouble of distinguishing small savers from greedy billionaires who put money in NSS to earn millions without facing any scrutiny with regard to their sources of income. They are able to avoid the kind of scrutiny that bank deposits and stock investments are subjected to in the name of know-your-client (KYC) requirements.

Reduced monthly profits for small savers mean a big dent on their average household disposable incomes.

According to the Economic Survey 2018-19, national savings were 10.7pc of GDP against the target of 13.1pc. Growth in consumption was recorded at 11.9pc, up from 10.2pc a year earlier. Total deposits of scheduled banks stood at Rs12tr as the survey shows investment in NSS equalled a small percentage of bank deposits.

If government securities provide a risk-free return of 11pc, the investment in equity requires an additional 6-7pc. This means investors will find stock market attractive only if it provides them with a return of 18pc.

In 2018, treasury bills posted a return of 6.8pc, Defence Savings Certificates 8.1pc, bank deposits 2.9pc, dollar 4.4pc and PIBs 8.6pc. Gold provided a negative return of 0.7pc. Incidentally, returns on all classes of assets were lower than the average rates of return from 2001 to 2018.

At the start of 2019, an investment banker predicted that stocks would be at the top with a return of 20pc, followed by NSS and government securities eking out average returns of 11.3pc. Bank deposits were thought to provide a 9pc return while the dollar and gold were expected to generate 6pc and 12pc profits, respectively. Almost all of these predictions proved wrong.

Published in Dawn, The Business and Finance Weekly, December 23rd, 2019