Agonies of small people to mount
Saturday, 18 August 2007
Enayet Rasul
The savers include pensioners, housewives, small job holders, operators of small businesses and others who cannot be considered as rich people. They may have an existence above the poverty level but they cannot be counted as affluent ones either.
The authorities may try to rebut criticisms of the move saying that only interest income above Taka 25 thousand would be affected by it and, thus, the same would not so much create hardships for the poor. But then it needs understanding that the poor are at a subsistence level. They hardly save or rely on the same. The life of the poor is essentially one of spending all of their income or even borrowing to take care of family expenses. Only the middle classes in the above categories are found to be keen to save and their saved amounts not only create funds for their own use but also cater to the needs of borrowing by the government. Thus, the new decision will come down hard on these middle class savers. The government may also not gain from this decision as it requires large scale borrowing to meet its budget deficit.
Small savers like retired government officers and others are usually found investing their life savings and accumulated monetary benefits obtained after retirement from services in the risk free government saving schemes. For example, an amount of 0.5 or 0.6 million taka deposited by one such person in a saving scheme annually fetches an income of, say, fifty-five or sixty-five thousand taka. From this amount a retired person has to meet his living expenses which are rising faster than the interest he earns from saving. The official inflation rate is touching the double digit mark and the unofficial rate of the inflation is well into the double digits. Furthermore, he has to meet other major expenses in many cases like meeting the education costs of grown up children, expenses on marriage of daughters, on health care, etc. Bangladeshis are not served by any publicly run social welfare schemes either to take care of these costs. Thus, the interests from the saving schemes are found to be modest really compared to the needs. But if he is now forced to surrender ten per cent of his interest income as tax, then what remains in contrast to the heavy expenditures he has to incur from this limited interest income ? The decision will, therefore, only deepen the miseries of such categories of people and the fixed income earners .
Government has progressively gone on reducing both the number of saving schemes and also the higher interest rates on them . The maximum interest rate on the savings schemes used to be nearly 18 per cent about a decade ago. But most of these schemes have been shut down since then and interest on the remaining ones were gradually scaled down by some 6 cent on average. This policy had already hard hit small investors. But even then, they have been keeping their monies in the few remaining official savings schemes and getting substantially reduced income from them finding no other alternative. Now, they have been subjected to twin shocks. On the one hand they are being arm-twisted into taking notably reduced income against their deposits because of the much lowered interest rate. And now, on the other hand, they have been subjected to a 10 per cent tax on their interest accruals that would mean further deep cuts in their income from these schemes.
But the small savers had hardly any other alternative than to go on relying on these schemes. It is not their fault that money growth schemes in the private sector can be highly hazardous and it can be risky for them to put their life earnings and savings in them. The stock market with its stagnant position and crashes have not provided any better alternative either. In this situation, they had hardly any choice other than opting for the government saving instruments considering their relative safety or dependability. But the latest decision to impose a ten per cent tax on the earnings of savings instruments, will likely take away even this attraction of the official saving schemes or make them less paying or useful for the small savers.
So, where will the small savers go ? It should be noted that this step of imposing the 10 per cent tax will also adversely affect the entire volume of national savings because the small savers are the greatest in number and the national savings effort and the mobilization of resources from the same for different applications is so linked to the behaviour of the small savers. It should cause no surprise now if many of them should now decide to encash their savings certificates and refrain from putting their monies in these schemes for a period. But this trend will also undermine the volume of national savings with detrimental effects on the mobilsation of these savings for credit expansion in the different sectors.
Thus, considering all of these factors particularly the worse pressures to be created on people of modest means as a consequence of this action, it certainly merits a rethink leading to its withdrawl.
There are many people in Bangladesh of small means who would want their money to grow. They want to invest their money to this end but find no safe outlets. Direct entrepreneurship is no doubt preferred as a way of investing one's resources and making gains from the investments. But entrepreneurship can be risky in the Bangladesh setting. Small savers in trying to be entrepreneurs may lose everything from an investment climate which is full of hurdles and negatives. Unlike the big investors who can count on many factors to remain viable in their enterprising, the small investors cannot rely on such cushions. Therefore, they have always tended to invest their surplus resources on the safest medium available, i.e. the government's various savings schemes.
The savings schemes or savings certificates used to be preferred by them for many reasons. First of all, they generally provided interest rates on maturity at a notably higher rate than the banks. The capital market could be an investment outlet for the small investors. But this market remained stagnant for a long time. Many small investors who invested in the capital market in the past are very resentful because the prices of their shares are substantially lower than the prices at which they bought them. Even the companies seen as profitable do not declare dividends regularly or declare unattractive dividends. Thus, finding no other safe and gainful outlet for investments, the small savers' only option seemed to be the government's savings schemes. In a comparative sense, these proved to be safe investment outlets that provided relatively higher interest rates.
Besides, saving ought to considered also as a major economic policy of the government. Indeed, the people of a poor and developing country needs to save at a higher and higher rate. On the one hand, such savings improves individual resourcefulness and, on the other, the mobilised resources can be utilised by the government for developmental financing in many areas. Surely, the government creates debts for itself by selling the savings certificates on which it has to pay interest . But the saving schemes also encourage the national savings habit which is economically very desirable and provides the government with ready resources to borrow to spend on different developmental projects. Without the savings schemes, the government would not be in a position to lay its hands on a vast pool of mobilised resources to meet its expenditures and the individual savers would be worse off having not saved their resources but spent them on consumption. Certainly, government must keep its public borrowing limited in order to not increase the size of its public debt beyond the desirable level. But government's public borrowing within safe limits is undoubtedly useful as these borrowings and expenditures mean economic activities and creation of demand in the economy.
It is imperative for the policy planners to take all of these factors and more into account and revise policies including the one of the 10 per cent deduction of tax from the interest income of the savings certificates, at the fastest.
The savers include pensioners, housewives, small job holders, operators of small businesses and others who cannot be considered as rich people. They may have an existence above the poverty level but they cannot be counted as affluent ones either.
The authorities may try to rebut criticisms of the move saying that only interest income above Taka 25 thousand would be affected by it and, thus, the same would not so much create hardships for the poor. But then it needs understanding that the poor are at a subsistence level. They hardly save or rely on the same. The life of the poor is essentially one of spending all of their income or even borrowing to take care of family expenses. Only the middle classes in the above categories are found to be keen to save and their saved amounts not only create funds for their own use but also cater to the needs of borrowing by the government. Thus, the new decision will come down hard on these middle class savers. The government may also not gain from this decision as it requires large scale borrowing to meet its budget deficit.
Small savers like retired government officers and others are usually found investing their life savings and accumulated monetary benefits obtained after retirement from services in the risk free government saving schemes. For example, an amount of 0.5 or 0.6 million taka deposited by one such person in a saving scheme annually fetches an income of, say, fifty-five or sixty-five thousand taka. From this amount a retired person has to meet his living expenses which are rising faster than the interest he earns from saving. The official inflation rate is touching the double digit mark and the unofficial rate of the inflation is well into the double digits. Furthermore, he has to meet other major expenses in many cases like meeting the education costs of grown up children, expenses on marriage of daughters, on health care, etc. Bangladeshis are not served by any publicly run social welfare schemes either to take care of these costs. Thus, the interests from the saving schemes are found to be modest really compared to the needs. But if he is now forced to surrender ten per cent of his interest income as tax, then what remains in contrast to the heavy expenditures he has to incur from this limited interest income ? The decision will, therefore, only deepen the miseries of such categories of people and the fixed income earners .
Government has progressively gone on reducing both the number of saving schemes and also the higher interest rates on them . The maximum interest rate on the savings schemes used to be nearly 18 per cent about a decade ago. But most of these schemes have been shut down since then and interest on the remaining ones were gradually scaled down by some 6 cent on average. This policy had already hard hit small investors. But even then, they have been keeping their monies in the few remaining official savings schemes and getting substantially reduced income from them finding no other alternative. Now, they have been subjected to twin shocks. On the one hand they are being arm-twisted into taking notably reduced income against their deposits because of the much lowered interest rate. And now, on the other hand, they have been subjected to a 10 per cent tax on their interest accruals that would mean further deep cuts in their income from these schemes.
But the small savers had hardly any other alternative than to go on relying on these schemes. It is not their fault that money growth schemes in the private sector can be highly hazardous and it can be risky for them to put their life earnings and savings in them. The stock market with its stagnant position and crashes have not provided any better alternative either. In this situation, they had hardly any choice other than opting for the government saving instruments considering their relative safety or dependability. But the latest decision to impose a ten per cent tax on the earnings of savings instruments, will likely take away even this attraction of the official saving schemes or make them less paying or useful for the small savers.
So, where will the small savers go ? It should be noted that this step of imposing the 10 per cent tax will also adversely affect the entire volume of national savings because the small savers are the greatest in number and the national savings effort and the mobilization of resources from the same for different applications is so linked to the behaviour of the small savers. It should cause no surprise now if many of them should now decide to encash their savings certificates and refrain from putting their monies in these schemes for a period. But this trend will also undermine the volume of national savings with detrimental effects on the mobilsation of these savings for credit expansion in the different sectors.
Thus, considering all of these factors particularly the worse pressures to be created on people of modest means as a consequence of this action, it certainly merits a rethink leading to its withdrawl.
There are many people in Bangladesh of small means who would want their money to grow. They want to invest their money to this end but find no safe outlets. Direct entrepreneurship is no doubt preferred as a way of investing one's resources and making gains from the investments. But entrepreneurship can be risky in the Bangladesh setting. Small savers in trying to be entrepreneurs may lose everything from an investment climate which is full of hurdles and negatives. Unlike the big investors who can count on many factors to remain viable in their enterprising, the small investors cannot rely on such cushions. Therefore, they have always tended to invest their surplus resources on the safest medium available, i.e. the government's various savings schemes.
The savings schemes or savings certificates used to be preferred by them for many reasons. First of all, they generally provided interest rates on maturity at a notably higher rate than the banks. The capital market could be an investment outlet for the small investors. But this market remained stagnant for a long time. Many small investors who invested in the capital market in the past are very resentful because the prices of their shares are substantially lower than the prices at which they bought them. Even the companies seen as profitable do not declare dividends regularly or declare unattractive dividends. Thus, finding no other safe and gainful outlet for investments, the small savers' only option seemed to be the government's savings schemes. In a comparative sense, these proved to be safe investment outlets that provided relatively higher interest rates.
Besides, saving ought to considered also as a major economic policy of the government. Indeed, the people of a poor and developing country needs to save at a higher and higher rate. On the one hand, such savings improves individual resourcefulness and, on the other, the mobilised resources can be utilised by the government for developmental financing in many areas. Surely, the government creates debts for itself by selling the savings certificates on which it has to pay interest . But the saving schemes also encourage the national savings habit which is economically very desirable and provides the government with ready resources to borrow to spend on different developmental projects. Without the savings schemes, the government would not be in a position to lay its hands on a vast pool of mobilised resources to meet its expenditures and the individual savers would be worse off having not saved their resources but spent them on consumption. Certainly, government must keep its public borrowing limited in order to not increase the size of its public debt beyond the desirable level. But government's public borrowing within safe limits is undoubtedly useful as these borrowings and expenditures mean economic activities and creation of demand in the economy.
It is imperative for the policy planners to take all of these factors and more into account and revise policies including the one of the 10 per cent deduction of tax from the interest income of the savings certificates, at the fastest.