The Central Directorate of National Savings (CDNS) manages a portfolio of Rs3.4 trillion and serves seven million clients, according to information posted on its website.

But a recent media report quoting the Ministry of Finance reveals that the investment portfolio stood around 4tr at the end of October while the total number of active accountholders was 4m. This puts the average size of CDNS deposits maintained in national savings accounts and schemes at Rs1m.

The regulatory oversight of the sources of income feeding such a large number of accounts should have been stringent, but it is not. There is undoubtedly a need for scrutinising national savings accounts and money invested in National Savings Schemes (NSS).

But the problem is that merely announcing the government’s resolve to begin such scrutiny can lead to rapid withdrawals. That is why the government wants to complete this exercise within a year. It plans to complete the scrutiny by June 2020 and risk profiling by December 2020. However, it runs the risk of being reprimanded for setting such a long deadline by the Paris-based Financial Action Task Force (FATF) at the next meeting of its Asia Pacific Group in February.

Pakistan’s internal debt management has become quite difficult over the years. Every government needs to borrow heavily from domestic sources as fiscal gaps remain large. They become larger when economic growth contracts and tax revenue collection shrinks.

Commercial banks insist that returns on National Savings Schemes are high, which makes deposit mobilisation difficult for them

But the government also has to keep a balance in borrowing from the central bank, commercial banks and non-banking sources.

The PPP and PML-N governments were fond of borrowing from the central bank. The two governments relied more on note-printing. But the problem with the PTI government is that under the ongoing IMF lending programme, it is supposed to gradually bring the stock of central bank borrowings to zero.

That is why from the beginning of this fiscal year it is making more net borrowing from commercial banks while retiring the central bank’s loans. Between July 1 and Dec 6, the federal government made Rs547 billion worth of net borrowing from commercial banks whereas its net borrowing from the State Bank of Pakistan (SBP) totalled Rs203bn, latest SBP statistics reveal.

Now commercial banks are lending excessively to the government, which is crowding out the private sector. Between July 1 and Dec 6, their net fresh lending to the private sector plunged to about Rs79bn from Rs357bn a year ago.

To avoid further crowding out of the private sector, the government will likely limit its commercial bank borrowing in the second half of 2019-20. But it cannot do so without first increasing its non-bank borrowing. The reason is that in the first five months of this fiscal year, the revenue collection of Rs334bn by the Federal Board of Revenue (FBR) fell short of the target by Rs211bn despite decent year-on-year growth of 17 per cent.

It is in this backdrop that we see desperation on the part of the government to attract additional investment in national savings accounts and schemes. However, FATF’s demand that the deposits in national savings must be made compliant to anti-money laundering and anti-terror financing regulations remains a challenge.

A fuller implementation of these rules and regulations means there has to be no room for sales of national savings instruments to people and companies if the buyers remain unidentified. The central bank has already discontinued non-registered prize bonds of Rs40,000 denomination introduced by the PML-N government.

In addition to the issue of transparency, there is another challenge. Commercial banks insist that the rates of return on NSS must not remain too high, which makes deposit mobilisation difficult for them.

Since the country is now under a $6bn IMF lending programme, the Fund has already managed to convince the government about the banks’ ‘legitimate’ demand. That was why CDNS had to revise downwards the rates of return on national saving accounts and schemes from November this year. One reason for the reduction in the rates was that the government wanted to keep its domestic cost of borrowing under control.

Amidst this challenging environment, boosting non-bank borrowing only through NSS is not possible. During the first four months of this fiscal year, net investment in NSS totalled only Rs81bn, slightly higher than Rs68bn a year ago.

So mobilising more non-bank funds through CDNS seems to be a Herculean task under the given circumstances. But perhaps a bigger challenge is to transform CDNS, which does not even maintain proper record of all of its dormant accounts. A complete overhaul of CDNS operations to make them compliant to the SBP’s existing rules and regulations about deposit mobilisation and retention while adopting the safeguards against money laundering and terror-financing is a must.

According to media reports, the PTI government has decided to hire the services of a commercial bank to do this job. Will that bank be able to scrutinise all the 4m accounts by June and complete their risk-profiling by December 2020? It chiefly depends on how freely the yet-to-be appointed institution will work.

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