According to the latest announcement on 1st January 2004, the annual rate of return on most of NSS instruments has been reduced by more than 0.5 percentage points with immediate effect.
Under the revised structure, the profit rate on 10-year Defence Savings Certificates has been lowered to 7.96 percent from 8.5 percent while return on five-year regular income and three-year special saving certificates and accounts has been brought down from 7.6 percent and 7.7 percent to 7.08 percent and 7.27 percent respectively.
The rate of the Behbood Savings Scheme (BSS) for widows and pensioners was, however, kept unchanged at 10.08 percent.
Additionally, the benefit of higher rate of return on BSS was also extended to accommodate all senior citizens.
Persons of 60 years and above would be categorised as senior citizens for the purpose.
The latest revision in rates can be interpreted in many ways and signals certain priorities of the government.
The authorities had linked the NSS rates with the average yield on similar maturity of PIBs, but the latest reduction appears to be less than what would be dictated by the change in interest rate environment.
Also, the coverage of BSS has been enlarged and it was exempted from the rate cut. This action seems to have been motivated by two factors.
Firstly, there was a fear of negative net financing. During the first four months of the current fiscal year, investment in NSS had declined by Rs 6.1 billion (excluding prize bonds) and the government was apprehensive of further net outflow if the rates were reduced more sharply.
Higher sales of PIBs and treasury bills could make up for the shortfall in the NSS targeted amount but it would be more inflationary and could also reduce the credit creating capacity of the banks.
Secondly, the government also seems to have taken into account its social obligations more seriously this time by announcing a smaller decline on NSS rates for all savers and keeping the rates on BSS unchanged.
However, what is going to be the net impact on the level of overall investment in NSS and response of different categories of investors is difficult to predict accurately.
Most of the investors may continue to prefer this mode of investment despite successive reductions in profit rates due to the fact that this is the most secure form of investment and would still earn a higher rate of return than bank deposits would.
However, the more enterprising among them would definitely have second thoughts and like to consider other avenues of investment.
For instance, transfer of funds to shares market, though somewhat risky, could now appear as a better option.
In the NSS, one does not get a capital gain, which could be had in a booming shares market like the one we had in Pakistan in the recent past.
Also, dividends on stocks are treated as a separate category of income and capital gains are exempted from tax up-to 2005.
Besides, stocks could be encashed after the fourth day of the purchase, whereas those who invest in NSS have to wait for a long time to avoid penalty on pre-mature encashment.
However, these considerations apart, the government now seems to be determined to move in a particular direction.
It is committed to better fiscal management and lowering of its dependence on NSS to meet budgetary requirements.
This would enable the government to reduce its debt servicing cost and avoid interest rate distortions in the economy.
At the same time, the national saving instruments are gradually being converted into target-oriented schemes to benefit vulnerable segments of society like widows, pensioners and other old people.
It may be mentioned that in April, 2000, government had banned institutional investment in NSS, and more recently, financial institutions investing by fake names or in collusion with certain investors to exploit the system, were also reprimanded in order to limit the scheme to the targeted group of people.
In our view, such a strategy is not amiss in our circumstances if it is properly monitored and its benefits accrue only to the weaker sections of the society.
Its need is, in fact, evident because there is no proper support system for vulnerable groups, particularly for the elderly, in the country and there are unscrupulous elements in the society promising their victims a high rate of return and then making off with their money.
However, the process of investment in NSS and getting regular profits should be made easier.
As argued in our editorial on 30th December, 2003, the government, besides maintaining a reasonable rate of return for vulnerable groups, must also consider establishing a separate bank for the purpose or allow the existing banks to deal in specified instruments meant for the widows and the elderly who are extremely frustrated with the present standard of service at the National Saving Centres.