Pak Economy: Mobilisation of national savings

By Ihtasham ul Haque

He explained that the objective is to reduce government’s dependence on central bank borrowing to finance fiscal deficit. Finance Minister Syed Naveed Qamar had recently said that borrowing from the State Bank had reached “unacceptable level” and was the major source of inflationary pressure.

Analysts believe that the mobilisation of domestic savings though national savings scheme for productive investment will help tame inflation.

With the interest rates increased by two per cent, the CDNS is geared to mobilise Rs150 billion to help minimise the government’s financial difficulties during a challenging year, says the CDNS official.

The CDNS, which could not be converted into a corporation – Pakistan Savings – even after its approval by the PML(Q) government about two years back, is believed to have finalised a number of new schemes which will shortly be offered to the public.

Also, a separate proposal has been finalised to seek pension funds from government’s corporation particularly Wapda, PIA, military land and cantonment and labour institutions.

According to an official of the ministry of finance, pension funds of public sector entities, which are lying unutilised, will be secured by offering them up to 12 per cent interest rate. Similarly, general public will be offered better returns to invest in various saving schemes. It includes Shariah-compliant instruments, fresh saving and current account schemes and cheque-book scheme.

In addition, various saving schemes are being ‘updated’ in terms of enhanced interest rates, approved by the new government. New products of short maturities of three months and six months will also be introduced.

A CDNS official said: “We are changing the mind-set of the people to substantially enhance our savings”. The latest two per cent increase in interest rate on saving schemes will certainly help generate Rs150 billion in 2008-09.

He said that the borrowing from the national savings scheme is cheaper than the central bank. Out of total government’s loan portfolio of Rs3,000 billion, Rs1,800 billion belonged to the State Bank and Rs1200 billion to the CDNS. “The central bank is charging 10.4 per cent interest from the government while CDNS is offering similar lending at seven per cent interest rate, the official said.

Some senior officials of the finance ministry met Prime Minister Yousuf Raza Gilani recently and requested him to borrow more from the CDNS and convert it into a corporation. The previous cabinet had approved the conversion of CDNS into a corporation. The proposal was later fully vetted by the ministries of finance and law and justice and was then sent to the President for issuing an ordinance. But it did not happen.

It is generally agreed that the conversion of CDNS into an autonomous corporation would ensure its smooth and independent functioning. “It takes months to get any file cleared even from the section officer; under these circumstances how could you make the CDNS a competitive and responsive organisation?”, another official said.

He said salary structures of the organisation needed to be improved to inculcate a new spirit and motivate the employees to deliver. It needs to be brought at par with other private sector banks and allowed to operate on a level playing field.

Analysts say that successive governments failed to offer proper incentives to increase domestic savings. While some government officials are against allowing CDNS to offer increased rate of interest, many analysts believe that like banks, saving organisation should also be facilitated to mobilise adequate savings.

National savings stood at 13.9 per cent of GDP during the out-going financial year compared to 17.8 per cent of 2006-07. It is the lowest since 1999 and was able to finance only 69.5 per cent of fixed investment in 2007-08 as against 83.5 per cent of last year.

Domestic savings has declined to 11.7 per cent of GDP from 16.0 percent of GDP in 2006-07. Public sector investment has also increased by 30.0 per cent per annum during the last three years and 20.2 per cent during the out-going year in nominal terms.

The contribution of national savings to the domestic investment is indirectly the image of foreign savings required to meet investment demand. The requirement for foreign savings needed to finance the saving-investment gap reflects the current account deficit in the balance of payment position.

Source: Daily Dawn, 23/6/2008

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