Discouraging investment: Profit rates on savings schemes reduced

Published: October 1, 2011

Returns come down following drop in bond yields and slowdown in inflation. DESIGN: ESSA MALIK

ISLAMABAD: 

The government on Friday lowered profit rates on new investment in national savings schemes up to one per cent for the first time in nine months on the back of a slowdown in inflation – a sign that the central bank may also cut its policy rate this month.

“The new interest rates come into effect from October 1 and will be applicable to new investments,” said Central Directorate of National Savings Director General Zafar Sheikh while talking to The Express Tribune. He said old investors would not be affected by the rate cut.

The maximum cut in the rate was made for Behbood Income Certificates and Pension Benefit Accounts. Against the previous rate of 15.36 per cent, the new rate will be 14.4 per cent, a decrease of 0.96 per cent.

The lowest reduction was made in savings accounts and the new profit rate would be 8.5 per cent with a cut of 0.5 per cent.

Interest rate on Defence Savings Certificates has been reduced by 0.87 per cent to 12.68 per cent, on Regular Income Certificates by 0.84 per cent to 12.60 per cent and on Special Savings Certificates by 0.84 per cent to 12.5 per cent.

Profit rates on prize bonds have been left unchanged.

Zafar Sheikh said since the profit rates were linked with yields on Pakistan Investment Bonds (PIB), the government decided to lower the return on new investments after noting a downward trend in PIB yields. PIBs were traded 100 basis points lower than previous levels.

In August, inflation fell to 11.6 per cent after the government changed the methodology for gauging price movements – a mandatory requirement to change the base year after every five to ten years. Analysts are expecting a further slowdown in inflation in September that may compel the central bank to make another cut in the policy rate, the rate at which it lends to commercial banks. In July, the State Bank had slashed the policy rate by 50 basis points to 13.5 per cent.

Rs25,000 bonds to be launched soon

Sheikh said the government, in a bid to lure more investment, would launch prize bonds of Rs25,000 with a first prize of Rs50 million. In the current fiscal year, he said, the Central Directorate of National Savings would provide a net amount of Rs184 billion to the government for budget financing, adding the target was low due to a ban on institutional investments in national savings schemes. At present, CDNS has total deposits of over Rs1.9 trillion.

In the last fiscal year, the government borrowed Rs192 billion through savings schemes to finance the budget deficit, which soared to Rs1,314 billion or 6.6 per cent of total size of economy.

To bridge the widening budget gap, the government borrowed Rs1,206 billion from the domestic market while from external sources it could arrange only Rs107.8 billion because of the suspension of the International Monetary Fund (IMF) programme.

The Finance Ministry’s debt managers believe that despite massive domestic borrowing, the private sector has not been sidelined, which is actually not borrowing because of unaffordable interest rates. They say commercial banks still have Rs1,3 trillion in reserves with the central bank over and above the statutory liquidity requirements.

Published in The Express Tribune, October 1st,  2011.

Reader Comments (1)

  • meekal ahmed
    Oct 1, 2011 - 3:31PM

    Imagine giving savings account holders 8.5% when inflation is close to 12%! Is it a small wonder why we are a low-savings economy?

    The level of private investment has nothing to do with the unaffordability of interest rates. Investment is being held back by a score of other factors — including political uncertainty.

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