Changes in interest rates

KARACHI: Those of us who follow the monthly inflation charts posted on the State Bank of Pakistan’s (SBP) website understand and appreciate the reduction of the discount rates by the SBP, resulting in the lowering of mark-up rates by banks and their consequent positive impact on financing cost for business organisations. There is, however, a huge negative impact for persons wholly or substantially dependent for their living on profit from investments in national saving schemes. Let me illustrate this very important downside with a simple calculation.

Mr X had total cash of Rs5 million on retirement in July 2012. He invested this in the special saving certificates in August 2012 for three years at 11.9 per cent. He, therefore, received Rs535,500 annually after the deduction of tax at a 10 per cent rate. Mr X accordingly adjusted his monthly expenditure to ensure that his annual expenditure did not exceed this amount. Taking into account the inflation numbers announced by the SBP for fiscal years 2012-13, 2013-14 and 2014-15 (July-January) of 7.4 per cent, 8.6 per cent and 6.8 per cent respectively, the same items which cost Rs535,500 annually now cost much more. Therefore, Mr X had to drop several necessary items to ensure that his purchases did not exceed Rs535,500 annually. Then he gets hit once again. The national special savings scheme now offers only 8.2 per cent per annum or Rs369,000 only. Thus far, Mr X, three years after he retired, is now able to buy only 55 per cent of the items he was able to buy in 2012. It is, therefore, suggested that the government should make special savings rates for senior citizens in line with the practice in other countries to ensure that the lifestyles of such persons are not impacted negatively.

Moin Mohajir

Published in The Express Tribune, March  11^th,  2015.

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