National Savings Schemes: Savings mobilised increase 62.4% in FY15

Government decides to increase rate of return from August 1

KARACHI:

Savings mobilisation by the National Savings Schemes (NSS) in 2014-15 clocked in at Rs336.1 billion, 62.4% higher than the amount of savings mobilised in the preceding fiscal year.

According to data released by the State Bank of Pakistan (SBP) on Thursday, savings mobilised under the NSS in June alone amounted to Rs27.1 billion, which is 17.3% less than the corresponding figure for the same month of 2013-14.

Although savings mobilisation has recorded a substantial increase on a year-on-year basis, analysts believe accommodative monetary policy pursued by the SBP in the last fiscal year had recently made returns on these schemes unattractive for the general public.

The government has linked profit rates on major NSS with the yield on Pakistan Investment Bonds (PIBs). PIB yields have been coming down consistently, as the SBP reduced the benchmark interest rate by a cumulative 300 basis points in 2014-15.



As a result, the federal government also had to reduce the rates of return on various schemes. For example, the annual profit on Special Savings Certificates (SSC) stood at 6.8% after the rate adjustment of June, which marked its lowest return since January 2005.

Similarly, the return on Regular Income Certificates was 7.6% post-June profit rate revision, which is also the lowest return offered on this scheme since January 2005.

In a surprising decision earlier this week, however, the government increased the profit rate up to 0.9% on all schemes effective from August 1.

Speaking to The Express Tribune, Topline Securities Senior Research Analyst Umair Naseer said the government hiked the returns on NSS because they had gone “too low” following the gradual reduction in the benchmark interest rate. “The recent increase in the profit rate shows the government wants to incentivise people to keep investing in NSS,” he noted.

While the decision drew applause from the general public, representatives of the mutual funds industry criticised the upward revision in the returns on NSS. With inflation hovering at a 12-year low, they said increasing the returns on NSS will discourage people from investing through asset management companies.

Typically, declining returns on government savings schemes result in a shift of liquidity to higher yielding avenues of investments, such as the share market and mutual funds.

Economists believe high mobilisation of savings under the NSS is not a good phenomenon. Government borrowings under NSS are categorised as “unfunded debt” and should thus be minimised.

According to the Ministry of Finance, the government’s unfunded debt stood at Rs2.5 trillion at the end of March. Its share in the government’s total domestic debt currently stands at over 21.1%.

The recent increase in the profit rates on NSS contradicts with several measures the government had taken in the last few years to ‘rationalise’ these schemes, such as linking profit rates on major NSS with the PIB yield, imposition of a withholding tax on profits, service charges and penalty on early redemption.

Savings mobilised under NSS in 2013-14 amounted to Rs206.9 billion, which was 46.3% less than the savings mobilisation achieved during 2012-13.

Savings mobilisation under NSS has grown at a compound annual growth rate of 8.4% per annum for the last five fiscal years.

Published in The Express Tribune, August 7^th,  2015.

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