DECLINE IN NATIONAL SAVINGS

Survey shows that cut in rate of profit on deposits in various savings schemes led to sharp decline

From Shamim Ahmed Rizvi, Islamabad
August 02 - 08, 1999

While there is a dire need to boost 'national savings' to sustain the development programme which has been duly emphasised in the 1999-2000 budget, the rate of national savings is constantly on the decline.

According to a latest survey there has been a sharp fall in the past 2 months since the Finance Minister announced reduction in rate of profit on deposits in various national saving schemes.

The economic survey 1998-99 revealed that the ratio of national savings to the GDP has declined to 11.1 per cent in 1998-99 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 any thing for the rainy days. Hence decline in national savings.

Instead of providing some attraction and much needed fillip to encourage savings in order to have a positive public response, the Finance Minister announced in May 99 the government decision to reduce the profit rate on all the government saving schemes by two per cent. The rate on savings accounts was slashed from 13 per cent to 11 per cent per annum. Special savings certificates 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 from 18 per cent to 16 per cent while the compound rate of profit on Defence Savings Certificates has also been lowered to the same level.

The Finance Minister said, the lowering of rate had become almost inevitable due to two factors: Firstly, the rate of inflation in the country had declined by about 5 per cent 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 signaling 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 14/15 per cent.

Commenting on the situation page in its issue of May 17-23-1999 had mentioned: "The argument advanced by the Finance Minister that the rate of return on National Savings needed to be reduced because the rate of inflation, which had come down from over 13 per cent to now around 7 per cent, is not acceptable to general public as it is totally against their experience of daily visits to markets where they find prices of almost all items constantly on the rise. Normally people do not buy this because the rates of inflation as commuted in official estimates are never accurate. In this context the latest decision of the government of reducing the rate of profits on National Savings Schemes, appears rather odd and it is feared that this would do more harm than good."

An agency's report, based on inquiries, made at the various national saving centres in the twin cities of Pindi and Islamabad and its verification for the offices of Director General National Savings located in Islamabad,, has confirmed the fears that the new package of National Saving Schemes as announced by the Finance Minister two months back has proved a serious disincentive. There has been a sharp decline in investments during the last two months. The report has also pointed out the unsavoury consequences of the trend if allowed to persist during the rest of the current financial year basically, the adverse impact of the package has been attributed to the cut in the rate of profit and increase in the service charges, which should not be difficult to comprehend.

As for the comparatively discouraging public response to the national savings schemes, specific reference has been made to the Regular Income Certificates. It has suffered primarily by the 2 per cent downward revision in the rate of return on all savings schemes and accounts. Consequently, as applied to the Regular Income Certificate it works out to a reduction in the monthly profit on the investment of every Rs 100,000 from Rs 1,350 to Rs. 1,200. On the other hand, enhancement of the service charge on the pre-maturity enactment of the RICs should have also contributed towards depressing investment interest in the scheme. Viewed in this perspective the likelihood of the eventual non-fulfillment of even the modest budgetary target of Rs. 62.77 billion investment in the national savings schemes cannot be ruled out.

It will be noted that this low target, reflecting a downward revision of Rs. 10 billion against the pervious year's revised estimate of Rs. 72.3 billion, provides indication enough of a somewhat realistic comprehension of the declining investment trend in the national savings schemes. Surprisingly, as such, instead of trying to come up with some imaginative schemes, perhaps, like the ones launched by the banks, they decided to go on the defensive by slashing the budgetary target.

A comparison of savings and investment rate of Pakistan with that of other Asian countries is quite revealing. According to Asian Development Bank's Annual Report for 1997, while Pakistan's gross domestic savings and investment in relation to gross domestic product (GDP) were 14.2 per cent and 18.6 per cent respectively in 1996, South Korea had a rate of 35.2 per cent for domestic savings and 38.2 per cent for investment, while China's respective savings and investment rates were 41.4 per cent and 39.2 per cent. India, whose per capita income is significantly lower than Pakistan's, has gross savings and investment rates of 26.1 per cent and 25.2 per cent respectively.

Now examining the obtaining situation as currently prevailing on the national savings front, one is apt to become disillusioned by its counter-productive performance. As a national institution supposed to be engaged in the challenging task of promoting savings, it has a prime responsibility for helping positive and purposeful mobilisation of the people's savings. For, this is the only sure way of promoting capital formation, leading to the creation of sustainable base for industrial development. Having already faced the grim consequences of heavy reliance on borrowing rather than saving, it is time we get wiser about adopting a realistic approach towards promotion of National Savings