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No Incentive For Small Savers

Experts have been consistently saying that Pakistan has one of the lowest savings rate, but the successive government have been failing in coming up with the policies that can encourage people to save. The prevailing conditions demand all the political parties, policy planners, academia and public at large to develop a consensus to encourage people to save. The situation also demands imposition of restrictions on the government’s borrowing. Despite persistent increase in tax rates to meet the budget deficit, the gap continues to widen. Analysts attribute high public debt to lavish spending, growing budget deficit, weaker tax and non-tax receipts, and stagnant foreign inflows. It also appears that local funds are also depleting fast.

Let us first of all examine the latest debt position, domestic as well as foreign. According to a report of State Bank of Pakistan (SBP), country’s public debt increased to Rs21.770 trillion in August 2017, which was 11.23 percent higher than that debt recorded a year earlier. The debt was Rs19.572 trillion as of 31st August 2016. Domestic debt surged to Rs15.707 trillion at the end of August from Rs14.147 trillion in the same period of last fiscal year, the SBP stated. Along with this, external debt has also posted a slight increase during the period under review.

The SBP data also showed that the government continued to rely on bank borrowing to meet its budget deficit. Borrowing at such a massive scale leaves hardly any funds with the banks to lend to the private sector.

Cognizant of the drying local sources, the incumbent government seems to have changed its modus operandi. According to another news, the Central Directorate of National Savings has developed a new product; Overseas Pakistanis Savings Certificates (OPSCs). The directorate aims at targeting remittances being sent from non-banking channels and savings which are not channelized in Pakistan. The Directorate estimates that (OPSCs) will enable the government to mobilize funds ranging from US$550 million to US$1,200 million per annum.

Experts apprehend the incumbent government has failed in convincing the multilateral institutions to lend funds to Pakistan. They also fear that if overseas Pakistanis start investing in (OPSCs), the quantum of remittances would further decline. The inflow is on the decline because a large percentage of Pakistanis are becoming victim of ongoing retrenchment policy in the Middle East.

In the recent past, people have been investing in different saving schemes, but a substantial decline in the rates of return, due to the decline in interest rate and imposition of withholding tax on profit now discourages small savers to invest in these schemes. Commercial banks also offer paltry returns on fixed deposits, which often become negative if one compares these with the inflation rate in the country. Mutual funds also seem to be focusing large net worth investors and corporates. In such a scenario housewives prefer to go for BC ‘ballot committees’, where no return is paid but receipt of lump sum amount and payment in smaller installments remains major attractions.

There are nearly two dozens of Modarabas operating in the country. These are exempted from paying income tax if 90% of profit-after-tax is distributed among the certificate holders. These can also be termed closed-end mutual funds. However, these entities have failed in attracting small investors and also those who wish to earn Riba-free income. There seems to be something wrong with their business model. According to an analyst, “Modarabas have failed in achieving the basic purpose of their creation, despite enjoying tax exemption. These were given a mandate to mobilize small savings and also extend medium term financing to small and medium size businesses”.

Those seeking Riba-free income are disappointed because certificates of most of the listed Modarabas are quoted below par. On top of all the daily trading in Modaraba certificates at Pakistan Stock Exchange (PSX) is conspicuous by small volumes. The regulators can be held responsible for the dismal performance of the sector. This statement is based on the following facts: 1) the number of listed Modarabas has reduced to half, from the peak, 2) new listings come after long intervals and 3) some of the recent initial public offerings (IPOs) have failed in receiving the minimum number of applications. It should be a cause of concern for the players and the regulators and demand thorough study.

According to another expert, “Small investors emerge as the net losers because of greed and fear. They want to become rich overnight and often fall prey to the cheaters. One can still recollect the magnitude of the amounts embezzled in cooperatives’ scam, investment companies’ scam and the most recent scam by some of clerics in the name of offering Riba-free income. In all these, people lost money because of greed and fear. Those suffering from greed invested their life savings without even realizing that payment of such fabulous return was impossible”.

According to yet another analyst, “Even the commercial banks, particularly Islamic banks are a victim of limited investment opportunities. Most of them suffering from ‘surplus liquidity’ crisis refuse to take fresh deposits. While conventional banks still manage to earn modest return by investing in interest bearing government papers. Islamic banks prohibited to invest in these securities continue to suffer from surplus liquidity crisis.

In the recent past, the Government of Pakistan floated Ijarah Sukuk running into billions of rupees but lately hardly any Sukuk has been floated. It seems that the government has used most of earning assets as collateral.

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