Over-exposure of government savings tools
Sunday, 25 April 2010
THE national savings certificates (NSCs) have been popular with both the savers and the only seller, the government. However, their skyrocketing popularity, of late, has become a source of serious concern for many, including the seller itself. The total sale of the NSCs during last July-February period was almost twice the sale-target set by the government for the current financial year (2009-10). As a seller the government should have every reason to be elated by the sale figures. But not in this case, for the government has to count a hefty amount as interest payments in the form of rates of return on the NSCs.
Meeting budgetary deficit through the sale of attractive interest-bearing savings tools or through bank borrowing does not necessarily connote prudent fiscal management all the time by a government. Yet governments in many countries have to resort to this kind of fiscal management. But in the case of Bangladesh, non-bank borrowing, apparently, has been exceeding, what seems to be a manageable limit. The other day the International Monetary Fund (IMF), while cautioning the government against such unbridled borrowing from non-banking sources, advised the latter to stop the sale of NSCs to the commercial establishments, including insurance companies, and limit the sale of the same only to small savers.
As a matter of policy, the government cannot discontinue the sale of NSCs, which have been quite handy tools for mopping up resources to meet the annual budgetary deficits, because of a surge in their demands. A worried government, however, formed a committee a few months back to examine the issue of NSCs in details and make necessary recommendations. A report submitted by the committee recently has suggested a few measures to help limit the over-exposure of the NSCs. It has strongly recommended stopping automatic renewal of savings instruments, asking the buyers of NSCs to produce their national identity cards, reducing both rates of return and ceilings of individual investment in NSCs. The committee, too, has made suggestions identical to that of the IMF. Both want suspension of sale of NSCs to commercial establishments and have advised the government to target only the low and lower-middle income groups as the buyers of the same.
The over-sale of NSCs during last eight months has forced the government to make adjustments in its borrowing programmes prepared at the start of the current financial year. It has reduced the size of its borrowing from banking sources. But the fact remains that borrowing through savings tools is more expensive than that from banks. Yet the government cannot abandon the savings schemes taking into consideration the interest of the small savers and retired government and non-government employees, many of who are dependent on savings tools. Besides, the government might be unwilling to give up a revenue source that proved to be handy for the last few decades. Moreover, such borrowing does not create any distortion in the flow of credit to the private sector.
The suggestions made by the governmental committee and the IMF about stopping the commercial establishments from buying NSCs seem practical since there are plenty of other investment options available, including government and private bonds. Moreover, the government should otherwise be free to make necessary adjustments of rates of return on its own savings tools, depending on their demand in the market. But this should be done in a prudent and predictable manner, without hurting the interests of small savers who largely depend, in case of old age, on incomes received as rates of return on such savings certificates. Such people cannot be expected to put in their modest funds in any risky investments. It would, thus, be prudent on the part of the policymakers to create a flexible mechanism to fix market-based rates of return for its savings tools as far as possible, keeping the rate of inflation into consideration. Given the supply of liquidity in the market, the government is otherwise unlikely to face any problem soon as far as the number of buyers of savings tools is concerned if the returns thereof are realistic.
Meeting budgetary deficit through the sale of attractive interest-bearing savings tools or through bank borrowing does not necessarily connote prudent fiscal management all the time by a government. Yet governments in many countries have to resort to this kind of fiscal management. But in the case of Bangladesh, non-bank borrowing, apparently, has been exceeding, what seems to be a manageable limit. The other day the International Monetary Fund (IMF), while cautioning the government against such unbridled borrowing from non-banking sources, advised the latter to stop the sale of NSCs to the commercial establishments, including insurance companies, and limit the sale of the same only to small savers.
As a matter of policy, the government cannot discontinue the sale of NSCs, which have been quite handy tools for mopping up resources to meet the annual budgetary deficits, because of a surge in their demands. A worried government, however, formed a committee a few months back to examine the issue of NSCs in details and make necessary recommendations. A report submitted by the committee recently has suggested a few measures to help limit the over-exposure of the NSCs. It has strongly recommended stopping automatic renewal of savings instruments, asking the buyers of NSCs to produce their national identity cards, reducing both rates of return and ceilings of individual investment in NSCs. The committee, too, has made suggestions identical to that of the IMF. Both want suspension of sale of NSCs to commercial establishments and have advised the government to target only the low and lower-middle income groups as the buyers of the same.
The over-sale of NSCs during last eight months has forced the government to make adjustments in its borrowing programmes prepared at the start of the current financial year. It has reduced the size of its borrowing from banking sources. But the fact remains that borrowing through savings tools is more expensive than that from banks. Yet the government cannot abandon the savings schemes taking into consideration the interest of the small savers and retired government and non-government employees, many of who are dependent on savings tools. Besides, the government might be unwilling to give up a revenue source that proved to be handy for the last few decades. Moreover, such borrowing does not create any distortion in the flow of credit to the private sector.
The suggestions made by the governmental committee and the IMF about stopping the commercial establishments from buying NSCs seem practical since there are plenty of other investment options available, including government and private bonds. Moreover, the government should otherwise be free to make necessary adjustments of rates of return on its own savings tools, depending on their demand in the market. But this should be done in a prudent and predictable manner, without hurting the interests of small savers who largely depend, in case of old age, on incomes received as rates of return on such savings certificates. Such people cannot be expected to put in their modest funds in any risky investments. It would, thus, be prudent on the part of the policymakers to create a flexible mechanism to fix market-based rates of return for its savings tools as far as possible, keeping the rate of inflation into consideration. Given the supply of liquidity in the market, the government is otherwise unlikely to face any problem soon as far as the number of buyers of savings tools is concerned if the returns thereof are realistic.