The PICIC — a development financial institution (DFI)— launched last week a unique deposit scheme that would pay 12 per cent profit per annum on deposits parked by widows, orphans, retired civil and armed forces personnel and senior citizens.

The Corporation has promised to pay Rs 1,000 on the 1st day of every month as profit on investment of Rs 100,000. Minimum and maximum limit of investment per person has been set at Rs 60,000 and Rs 300,000. It would be difficult to dispute PICIC’s claim that the scheme has been introduced as a social welfare initiative and that the corporation would take the resultant loss on its books.

In the cold environs of the corporate board rooms—particularly those of banks and financial institutions— there is precious little place for emotions and a step that could be seen to take even the slightest gloss off the bottomline, would not have been favoured by the majority. It was thus best for those disadvantaged class of the society who would benefit, that the PICIC board was not needed to be consulted.And nothing could have been more pleasing to read in the morning papers two days after the PICIC’s initiative that the habit has caught on fast. The Director General, Central Directorate of National Savings, (CDNS), Ahmed Pirzada announced that NSS would give better—higher and more favourable rates of return— on deposits to widows and pensioners. He asserted that the idea had been on the government’s mind for quite some time. The Director General CDNS did not specify the details of his laudable plan, but the fact that there is the will, there would surely be the way.

There was a time when NSS was looked up as a saviour of the disadvantaged class. The returns it yielded on some of its savings schemes, particularly the Defence Savings Certificates, provided people—mostly of the lower and lower middle class— with a comfortable level of risk-free fixed return on investment. But all that has changed. And in the last four years, returns on NSS have been slashed by as much as 50 per cent. In the 18 months between January 1, 2001 to July 31, 2002, the rates of return on NSS have been reduced three times, by a collective 6 per cent (2, 1.5 and 2.5 per cent on six monthly basis). Now the profit rates are set to be further cut in January 2003. On 10-year Defence Savings Certificates, the rate of return has come down from 18 per cent in 1988 to 11.7 per cent currently. On 3-year Special Saving Certificates, it has dropped from 19 to 9.95 per cent. NSS’s Regular Income Certificates (RIC) yields Rs 794 per month on an investment of Rs 100,000. The Government is currently believed to be the custodian of Rs 835 billion of depositors money in various National Savings Schemes, inclusive of prize bonds. According to market experts around 15 per cent of those deposits constitute those of the disadvantaged class: widows, orphans and pensioners. The cool calculating economists argue that since the rate of inflation has slipped steeply over the past few years, the real rate of return for NSS depositors has increased, notwithstanding the rate cuts. According to official sources, inflation (CPI) has declined from 7.8 per cent in 1997-98 to 3.5 per cent for 2002. Going by the CPI, the rate of inflation is 2.2 per cent lower than was three years ago, in 1999. But the trouble is that credibility of inflation rates calculated by the government departments are themselves suspect.

Independent studies show that in just the last three years, prices of 35 essential commodities have increased by 30 per cent or more. These include 15 per cent increase in price of wheat flour; 11.5 per cent in rice; 46 per cent in gram daal; 3 per cent in beef; 9 per cent in mutton; 3 per cent in bread; 5 per cent in sugar; 16 per cent in cooking oil; 7 per cent in potatoes; 18 per cent in tea; 10 per cent in washing soap and 71 per cent in prices of kerosene oil. In the three years, since October 1999, electricity and gas charges for domestic consumers have spiralled by over 35 per cent on average, depending on consumption. Imposition of 15 per cent GST on large number of items including vegetable ghee, cooking oil and even medicines—until it was withdrawn after six months of public outcry—have pushed prices of essential items much higher. Add to that the impact of increase in prices of petroleum products.

In such dismal scenario, it would be heartless to continue to axe the fixed income of disadvantaged class—those who have placed all their money—such as an insurance claim received by a widow on the death of her husband or the severance pay package of a fifty-something who has been thrown out of job or the life-long savings of retired pensioner who is no longer able to work. And we are not even talking about the poor who save and invest in NSS over a generation of hard work. More than 56 million people are living below the poverty line. According to the recent report released by the Social Policy and Development Centre, in 1964 about 40 per cent population was estimated to be poor. In 1987-99, the poverty percentage dropped to 17 per cent— incidentally that also was the year when NSS also provided a high rate of return. But more people have fallen in the depths of poverty and in 2000-01, the level had again reached 1964’s 40 per cent. According to the study, in Karachi—which must be regarded as one of the most prosperous cities in respect of average income and opportunities of livelihood— one in four households can not afford to cook a meal every day!

But what are the economists’ cool judgments on rate cuts on the NSS. They say that higher returns on NSS in mid-nineties changed the composition of domestic debt as huge private savings were channelled in the NSS instruments. At the end of financial year 2002, domestic debt stood at Rs 1,695 billion, which accounted for 46 per cent of the GDP. Unfunded debt (largely constituting NSS) made up the major portion of domestic debt. “It was in 1999 that the government realised the anomaly in interest rates and began reducing returns on NSS on the instructions of the lending agencies”, says an analyst. Since then, the government is following the strategy of linking NSS rates to the prevailing interest rates in the economy. Following the launch of Pakistan Investment Bonds (PIBs) last year, the resulting yield curve is used as a benchmark to determine the profit structure on NSS instruments, especially the Defence Saving Certificates. The linking of rates of DSCs with PIBs began from January 2001 and the government now revises NSS rates after every six months. The 10-year PIB rates are currently down to 8.9 per cent, which means the NSS savers must brace themselves for another shock of further reduction in their income rates in January 2003.

And the banks have been no big help to savers either. The deposit rates on average stood at 8.4 per cent in 1997-98, which have now dipped to 4.7 per cent. Lending rates have not dropped that sharply; they are down from 16 to 13 per cent in the four years. It means that banks earn fabulous spreads of over 8 per cent. The Governor SBP has been goading banks to reduce the spread between the lending and the deposit rate. He pointed out early last year that while the deposit rates had remained stagnant at around 7-8 per cent, lending rates had increased from 10.6 per cent in 1989-90 to 14.50 per cent in 1999-2000. The main factors responsible for stagnancy in deposit rates were believed to be increased administrative cost of financial institutions involved in liberalization process, overstaffing and increasing volume of non-performing loans and defaults. The increased cost of inefficiencies were passed on partly to the borrowers in the form of higher lending rates and partly to depositors as the rate of return on deposits was reduced. This trend has an important bearing on the pattern of income distribution, national saving, investment as well as on the growth of the economy. Low deposit rates encourage consumption rather than saving, resulting in high debt-to-GDP ratio, increased debt servicing liabilities, lower economic growth and harsh consequences for the vulnerable and the poor of the country. But, then who cares for the poor, anyway!