IMF suggests cut in savings tool rates and limit sale only to small savers
Monday, 19 April 2010
Nazmul Ahsan
The International Monetary Fund (IMF) has advised the government to reduce the rates of interest on the national savings certificates (NSCs) and suspend their sale to commercial establishments.
The observations of the Fund, contained in a report, have recently been made available to the Ministry of Finance (MoF) and Bangladesh Bank, sources said.
The government is actively considering the recommendations of the multilateral agency, a top- bureaucrat said.
'The sale of NSCs to commercial entities should be suspended and focused exclusively on small savers,' said the IMF.
'The limits relating to individual investment in the instruments should also be strictly enforced, and the interest rate structure of the scheme should be modified linking those to market rates.'
The insurance companies, construction firms and suppliers are allowed to purchase National Investment Bond under the current regulations. The total sale of the Bond during the first eight months of the current fiscal year was about 10 times more than the borrowing target fixed for the 2009-2010 fiscal, sources said.
The increased sale of the Bond has taken place in recent times as auction rate of Treasury Bonds has fallen drastically, sources in the financial sector said.
On the other hand, the amount of borrowed though the sale of other NSCs during the first six months of the current fiscal year was above Tk 50 billion as against the annual target of Tk 38 billion, sources in the MoF said.
As a result, the government has recently substantially downsized its bank- borrowing target for the current fiscal to Tk 97.08 billion in view of its higher borrowing from the non-banking sources, including savings instruments, sources added.
The government in its budget document for the current 2009-2010 fiscal had estimated its bank borrowing at Tk 167.55 billion and non-bank borrowing at Tk 38 billion to finance the budget deficit.
The IMF in its report warned the government of severe consequences if the current practice of higher borrowing through NSCs continued.
Presently, 10 kinds of saving instruments are available for individuals. A single individual can invest maximum of Tk 5.0 million and jointly with another individual Tk 10 million.
The interest rate for National Investment Bond is 8.5 per cent with no investment limit.
The individual investors are heavily tilted towards saving certificates, as the rates of return on savings instruments have not been reduced despite a cut in rates on fixed deposits and treasury bonds, a high official in the MoF said.
'The cost of debt servicing of the government would increase enormously if it continues borrowing through savings instruments at higher rate of returns despite having an option to borrow at lower cost through Treasury Bonds,' he told the FE on Sunday.
The MoF official, however, said the cut in rate of NSCs is likely to take place soon after receiving a report on the issue from a high -powered committee, headed by a deputy governor of the central bank.
Earlier, a report of the MoF recommended rationalization of current interest rates of 3-year and 5-year saving certificates, reducing the investment limits both for individual and under joint names, introducing investment for single category instead of present system of investment limits for individuals and joint categories and reducing the government's borrowing target through its auction calendar.
The International Monetary Fund (IMF) has advised the government to reduce the rates of interest on the national savings certificates (NSCs) and suspend their sale to commercial establishments.
The observations of the Fund, contained in a report, have recently been made available to the Ministry of Finance (MoF) and Bangladesh Bank, sources said.
The government is actively considering the recommendations of the multilateral agency, a top- bureaucrat said.
'The sale of NSCs to commercial entities should be suspended and focused exclusively on small savers,' said the IMF.
'The limits relating to individual investment in the instruments should also be strictly enforced, and the interest rate structure of the scheme should be modified linking those to market rates.'
The insurance companies, construction firms and suppliers are allowed to purchase National Investment Bond under the current regulations. The total sale of the Bond during the first eight months of the current fiscal year was about 10 times more than the borrowing target fixed for the 2009-2010 fiscal, sources said.
The increased sale of the Bond has taken place in recent times as auction rate of Treasury Bonds has fallen drastically, sources in the financial sector said.
On the other hand, the amount of borrowed though the sale of other NSCs during the first six months of the current fiscal year was above Tk 50 billion as against the annual target of Tk 38 billion, sources in the MoF said.
As a result, the government has recently substantially downsized its bank- borrowing target for the current fiscal to Tk 97.08 billion in view of its higher borrowing from the non-banking sources, including savings instruments, sources added.
The government in its budget document for the current 2009-2010 fiscal had estimated its bank borrowing at Tk 167.55 billion and non-bank borrowing at Tk 38 billion to finance the budget deficit.
The IMF in its report warned the government of severe consequences if the current practice of higher borrowing through NSCs continued.
Presently, 10 kinds of saving instruments are available for individuals. A single individual can invest maximum of Tk 5.0 million and jointly with another individual Tk 10 million.
The interest rate for National Investment Bond is 8.5 per cent with no investment limit.
The individual investors are heavily tilted towards saving certificates, as the rates of return on savings instruments have not been reduced despite a cut in rates on fixed deposits and treasury bonds, a high official in the MoF said.
'The cost of debt servicing of the government would increase enormously if it continues borrowing through savings instruments at higher rate of returns despite having an option to borrow at lower cost through Treasury Bonds,' he told the FE on Sunday.
The MoF official, however, said the cut in rate of NSCs is likely to take place soon after receiving a report on the issue from a high -powered committee, headed by a deputy governor of the central bank.
Earlier, a report of the MoF recommended rationalization of current interest rates of 3-year and 5-year saving certificates, reducing the investment limits both for individual and under joint names, introducing investment for single category instead of present system of investment limits for individuals and joint categories and reducing the government's borrowing target through its auction calendar.