As a nation, we are bad savers. We are worse while parking our savings in government-run schemes.

In the last five fiscal years (2013-2018), Pakistan’s domestic saving growth rate averaged below 7.4 per cent. In each of these years, the government sector’s saving growth remained negative.

Its reason was that most of us tend to choose a hefty return over the safety of capital. The result: grey banking grows, swindlers thrive and many among us end up lamenting the loss of hard-earned money. Don’t forget the stories of Double Shah and the likes of him. Double Shah, by the way, had reportedly made Rs7 billion via his Ponzi scheme before he was arrested.

Countless mini-Double Shahs still operate across Pakistan and their Ponzi schemes continue to thrive. And who fall prey to their Ponzi schemes: unsuspecting yet greedy folks who think that secretly managed schemes of fraudulent people can offer unbelievably higher returns than the National Savings Schemes (NSS), banks, the stock market and mutual funds.

This form of grey banking, which is just a byword for fraud, keeps thriving because of not only people’s greed but also scant documentation of the economy. But all privately run schemes are not fraudulent in nature. Some of them are run under a thin legal cover.

But they are there and offer tough competition to NSS, banks, the stock market and mutual funds. Warnings of financial regulators fall on deaf ears of greed and ignorance.

That a large segment of population is fond of speculative gains is evident from the fact that prize bonds fetch more investment than most other instruments of NSS

Our new ambitious government must keep this context in mind before hoping against hope that the recently announced increase in the rates of return on NSS will enable it to reduce its reliance on borrowing from banks and increase the share of non-bank sources of its borrowing.

That a large segment of population is fond of speculative gains rather than risk-covered, market-driven returns is evident from the fact that prize bonds fetch more investment than most other instruments of NSS. Since most of our prize bonds are unregistered and tracing their true owners is not possible, a larger investment in these bonds rather than saving accounts and certificates points towards the issue of documentation of the economy.

“Raising returns on NSS is not enough. The government must see it in the larger context of things and do what it must to ensure their effective use as a source of non-government borrowing,” says a senior executive of a large local bank. Bankers usually don’t like higher returns on NSS because that makes their task of mobilising long-terms deposits quite challenging.

In 2017-18, more than half (Rs104bn) of the total Rs203bn fresh savings in NSS were in prize bonds. The bulk of the other half of savings landed in special schemes for senior citizens and family members of martyred military men and personnel of law enforcement agencies. Saving accounts and certificates of regular nature that all people can use witnessed either very little fresh funds or a net redemption, according to the breakdown of Rs203bn investment in NSS.

It is in this backdrop that the new government has raised the rates of return on almost all instruments of NSS by up to 2.74pc under a higher inflation and tighter interest rates regime.

The obvious purpose is to give savers an adequate net return on savings — as previous returns had become too little in the midst of growing inflation — and generate non-bank funds for the government. Since the government generally borrows excessively from banks, it crowds out the private sector. The new government wants to change this trend gradually and encourage banks to lend to the private sector generously, officials say.

In the first half of this fiscal year (between July 1 and Dec 28), banks’ net fresh lending to banks swelled 65pc to Rs504bn from Rs305bn in a year-ago period.

But one must also look at the fact that during this period the federal government actually retired Rs536bn of banks’ credit by borrowing excessively from the central bank or printing fresh currency notes. In the year-ago period, it had borrowed Rs356bn from banks.

In the second half of the fiscal year, the government will have no choice but to borrow from commercial banks to stop fresh currency printing. That will mean smaller room for banks to continue lending to the private sector as generously as they did in the first half of the preceding fiscal year.

If higher returns on NSS work, it should help the government gradually break the cycle of borrowing from the central bank only to retire commercial banks’ credit. But this is a rather long-term projection.

In the short term, even if higher returns attract unusually larger investments to NSS, the volumes will still be too low to make an immediate impact on the government’s borrowing pattern.

Besides, higher returns on NSS just like higher yields on government treasury bills add to the cost of domestic debt servicing. In the first quarter of this fiscal year, domestic debt servicing of Rs462bn was equal to 29pc of the total expenditures.

As signs of sluggish economic growth are becoming clearer, the current tight monetary policy may not be tightened further in this fiscal year. This means room for further hikes in NSS returns may not be available until June. This makes addressing the underlying reasons for low investment in NSS all the more important.

Those who park savings in NSS do appreciate a rate hike. They also crave for better treatment and may be actually looking for more diversified options of savings: new NSS products. But above all, if the documentation level of the economy remains wanting and if grey banking continues, efforts to mobilise more savings via NSS may succeed only partially.

Apart from publishing ads in newspapers, the Central Directorate of National Savings does very little to market NSS products. That is also a reason for the low level of investment in them. Why can’t, for example, senior officials of the directorate visit business centres, regional chambers of commerce and industry, universities and colleges to promote their products?

They need to interact with potential investors, create awareness about perils of Ponzi schemes and explain features of NSS in Urdu and regional languages. In such endeavours, they ought to display the kind of enthusiasm and zeal we see in insurance policy sellers.

Published in Dawn, The Business and Finance Weekly, January 14th, 2019