.

1- NEW INITIATIVE IN PRIVATIZATION AND INVESTMENT
2- REVENUE COLLECTION FOR THE FIRST SIX MONTHS
3- PAKISTAN: THE BEST PERFORMING EQUITIES MARKET
4- NATIONAL SAVING SCHEMES
5- TRANSFER PRICING BY MNCS
6- NPV: METICULOUS MEASURE OF PROJECT EVALUATION?

.

NATIONAL SAVING SCHEMES

 

Reduction in the rate of profit is continue

 

From SHAMIM AHMED RIZVI, 
Islamabad

Jan 13 - 19, 2003
.

 

 

The government has once again reduced the rate of profit on National Saving Schemes w.e.f. 1.1.2003. According to saving certificates, special saving certificates, monthly income certificates and saving accounts as been fixed at 10.03 per cent, 8.67 per cent and 5 per cent per annum respectively. However, the present decision will not be applicable on certificate purchased or accounts opened prior to January 1, 2003.

This is the second reduction in six months and third since July 2001. The rates of profit have come down to 10.3 per cent form 18 per cent on defence saving certificates, to 8.67 from 15.5 per cent on defence saving certificates and unprecedented crunch inflicted on the NSS depositors in the history of Pakistan. And the victim of this arbitrary decision are the pensioner, widow, orphan and small poor savers who generally rely on government guaranteed saving schemes for profit for their subsistence. To add salt to their wounds these small savers are told that they have to suffer to provide room to the inefficient banking system to cut the lending rates for big industrialists and business tycoons. This is most unfair and callous on the part of the government.

The official handout explains that as the inflation rate has come down and lending rates have also been cut by the banks it was imperative to reduce the rate of profit on saving schemes. However, despite the present reduction, the real rates of return (adjusted for inflation) on these financial instruments would range between 2 to 7 per cent which are much higher than those offered by the commercial banks, Elaborating further, the press release has also tried this time to remind the savers of some basic principles. It says that interest rate policy is an important instrument of macro-economic management that affects savings investment process. It is in fact the cornerstone of any government's policy to influence business conditions and economic activity. The objective of monetary and fiscal policy is to keep the inflation rate low so that the interest rate could be kept low as well. The rate of inflation in the country has been brought down to only 3.1 per cent through prudent monetary and fiscal management. Rationalizing the rates of return on NSS was also a part of the government's debt reduction strategy, the official handout explained.

Ironically the lending rates charged by the banks on lending still range between 13 to 18 per cent while profit on saving accounts have been reduced to 5 per cent. Secondly, the inflation rate being calculated by the government agencies is faulty and unrealistic. They only include the prices of some essential eatable and totally ignore increase in the prices of utilities while calculating the rate of inflation. The average increase in the prices of atta, onion, potatoes, mutton, chicken and rice may be within the range of 3 to 5 per cent, but the price hike in respect of gas, electricity and petrol is much higher. According to an estimate the prices of utilities have gone up by about 40 per cent during the last 3 year. About 20 per cent of every household budget is spent on utilities and the people are now paying 40 per cent more of the 20 per cent of their budget. This comes to a rise of over 10% in the cost of living.

 

 

The reason given by the government for their latest decision may appear logical but the reality on the ground should not be so ignored. A very large number of retired people, both from the government and the private sector, widows and people belonging to low-income groups depend on profits from these schemes. They have been either totally depending upon them or replenishing their small incomes through these profits. All of them will be hit hard by the decision to further reduce the rates of return on all the national saving schemes.

The only saving grace in the situation is the expected announcement of an exclusive savings scheme for pensioners and widows which should, of course, carry a higher rate of return. The Advisor for Finance and Economic Affairs will shortly make this announcement. But this will not be enough. In a situation where poverty and unemployment are widespread, the institution of national savings should continue to serve as a safety net at least for those sections of the society who have been afflicted by these problems. The government might have also been encouraged to reduce the profit rates on savings schemes after it found that they continued to proliferate despite repeated reductions in profit rates. But that will demonstrate that in view of the rising cost of utilities and some other feeling compelled to replenish their meagre incomes. The investment in national savings schemes is one such option and attractive profits on them should be assured on a sustained basis.