National Savings ratio to GDP declines

Increase in profits on deposits in National Savings schemes allowed to foreign currency account holder is the main reason

From Shamim Ahmed Rizvi, Islamabad
June 28 - July 04,1999

The economic survey 1998-99 has revealed that the ratio of national savings to the GDP has declined to 11.1 per cent in the same period as against 14.2 per cent in the fiscal year 1997-98. It has happened despite increase in profits on deposits in National Savings schemes by 2 to 3 per cent, allowed in the beginning of the outgoing fiscal year and the incentive allowed to the foreign currency account holders by exempting them from deduction of withholding tax if they invested their converted Pak rupees in national savings. This almost brought their tax free profit to 18 per cent. The fall in national savings, despite all these incentives amply proved, if any proof was needed, that low wages and high cost of living had made it almost impossible for the middle and the lower middle classes, which formed the majority of small savers, to save anything for the rainy days. Hence decline in national savings.

In this context the latest decision of the government about reducing the rate of profits on National Savings schemes appears to do more harm than good.

The Finance Minister announced last month the government decision to reduce the profit rate on all the government savings schemes by two percentage points. The rate on savings accounts has been slashed from 13 per cent to 11 per cent per annum. Special savings certificates will now offer 14 per cent instead of 16 per cent for the first 30 months and 16 per cent for the last half yearly period. The profit on regular income certificates has been reduced for 18 per cent to 16 per cent while the compound rate of profit on Defence Savings Certificates has also been lowered to the same extent. Explaining the Finance Minister, Mr. Ishaq Dar said that lowering of rate had become almost inevitable due to two factors: First, the rate of inflation in country had declined by about 5 percentage points and even a reduction in the profit rates of that order could continue to guarantee a positive real rate of return to investors. Secondly, the State Bank in order to boost private sector credit demand and revive economic activity, was pursuing a relaxed monetary policy and signalling for a reduction in the overall interest rate structure. During the current financial year, the bank rate, more commonly known as Repo rate in Pakistan, was reduced from 18 per cent to 14 per cent while rates for treasury bills had come down from about 14 per cent to nearly 11 per cent.

Answering the call of the central bank and as a result of persuasion by the authorities, the commercial banks in general had reduced their lending rates by about 2 percentage points. This was bound to depress the deposit rates in the coming months. Fearing that a wide spread between the rate of their deposits and the saving schemes sponsored by the government could lead to heavy withdrawals and disintermediation of the banking system, the bankers were successful in persuading the Finance Minister to lower the rate of return on government schemes.

The philosophy behind the reduction in lending rate is simple, 'conventional' wisdom. The reduction in bank lending rates, or borrowing rates for entrepreneurs is tantamount to making the cost of capital, one of the factors of production, cheaper for businessmen and investors and is expected to stimulate investment and business and industrial activity and check the slowdown in the economy—a standard practice in such circumstances. The only snag is that it works if the slowdown is caused by high cost of borrowing credit. If this assumption is not true, obviously the results are also not the ones expected. In the present case, unfortunately, the cause seems to lie elsewhere than in high interest rates. The finance minister has already proclaimed "the earlier reduction by PML government in bank interest rates by 2 per cent as an achievement'. "What kind of achievement is it when hardly any positive effects have been generated on the economy so far by such reduction? This is the question they should ask themselves. This is a prescription that can be taken to have failed to work in the present scenario. Interest rates are likely to have an impact much beyond the immediate rather narrow perspective in which the problem is being viewed.

The government's decision to cut down rates of return on its savings schemes is understandably aimed at giving a lead to the financial sector for reducing their lending rates but the other consideration appears to be based on a positive response to the stock exchange fraternity, which for some time has been pleading to the government that the rates of return against the savings schemes were "unrealistically" high and consequently a large bulk of the savings of the general investing public is absorbed by these schemes with the result that the investment interest in the stock markets has remained low for reasons of low dividend yields and poor chances of capital gains.

Whatever the considerations, the decision has certainly hurt relatively low income groups or those with fixed income like pensioners and widows. Basically the popular national savings schemes attract small savers who are not skilled enough to seek other avenues of investment. In any case in recent years industrial or other areas of investment have become the preserve of certain big family groups only, and those who have easy access to credit from commercial banks or financial institutions because of their political influence or some other clout.

Nationals savings schemes may be better but, nonetheless, incomes of vast majority of our people have always lagged behind price escalation. Those whose main source of income is their labour know that there has been no respite from the fury of inflation. Even in the current situation of widespread recession relatively stagnant or slowly rising incomes hardly keep up with prices of many consumer goods which continue to escalate.

In any structural adjustment of the ailing economy one crucial question is how justly are the resources being transferred from the stronger to weaker sections for economic and financial stability. The same also applies to apportionment between sectors or regions. Notwithstanding the rhetoric that it uses for social justice the government now seems to be anxious to appease the lobbies relating to business, industry and the rich land-owners (whether old feudals or new capitalist-farmers). This explains their failure to penalize defaults of huge bank loans or difficulties in taxing the rising incomes of landed elite.