Being an important source of debt and financing of the budget deficit, the federal government has decided to enlarge the scope of the National Savings Schemes.

The Central Directorate of National Savings (CDNS) will soon launch three new investment instruments — registered prize bonds, children protection certificates and Sharia papers.

It also plans to provide online facility to overseas Pakistanis to invest in National Saving Schemes (NSS) by upgrading the IT infrastructure and setting up special counters.

The federal government raised Rs390 billion through NSS in 2012-13, compared with Rs246 billion in the preceding year. The NSS attracted Rs51 billion during June 2013 alone. The government’s debt servicing expenditure has increased in the wake of high borrowing from the banking system for financing the budget deficit. The government borrowed Rs1.5 trillion from banks during the last fiscal year, and the increase in the fiscal gap was 8.8 per cent of GDP.

According to the Economic Survey 2012-13, the contribution of national savings to domestic investment is indirectly the ‘mirror image’ of foreign savings required to meet the investment demand. The requirement of foreign savings to finance the saving-investment gap reflects the current account deficit in the balance of payments.

Meanwhile, falling investment and rising savings narrowed the saving-investment gap to 0.9 per cent in FY-13, against 2.1 per cent in the preceding year. National savings were 13.5 per cent of GDP in 2012-13, compared with 12.8 per cent in 2011-12, and 15.2 per cent in 2005-06.

Domestic savings also decreased from 13.4 per cent of GDP in 2005-06 to 8.7 per cent of GDP in 2012-13. This savings to investment gap makes foreign investment critical for the economy.

A developing economy like Pakistan’s, analysts say, requires higher rates of both savings and investment than what they are at present, to reduce foreign dependence. They estimate that savings should be around 25 per cent of GDP, while investment should not fall below 20 per cent of GDP. In India, the savings rate is 30 per cent of GDP. It was 37 per cent in FY08, and has been

falling since then. The country witnessed an increase of 25 per cent in FDI in FY13.

The CDNS has, in the meantime, decided to extend its reach to rural areas to tap resources outside the banking system. For this purpose, it is about to sign an agreement with Pakistan Post to use it’s over 7,000 branches in rural areas as sale points of the National Saving Schemes as well.

Meanwhile, facilitation desks have been established at all the 12 regional directorates of national savings for non-resident Pakistanis. In addition, the CDNS plans to diversify its product range to meet the investment needs of different categories of customers.

The CDNS has asked the government to increase its branches to 500 from the existing 378. This is likely to help increase its investment portfolio in a major way. Currently, it is only catering to the needs of the urban population.

According to the State Bank of Pakistan, the NSS has become the most cost-effective avenue of funding for the government. Despite the 15 per cent increase in the NSS portfolio during the outgoing fiscal year, the debt servicing cost has been reduced by 16.2 per cent. In the same period, debt servicing on other government securities, i.e. Pakistan Investment Bonds (PIBs) and T-Bills, increased by 44 per cent and 40 per cent, respectively.

The NSS recorded a net investment of Rs385 billion despite multiple rate cuts during the last financial year. According to SBP statistics, the CDNS received a gross investment of Rs1,014.9 billion, out of which Rs629.9 billion were repaid on maturity of different schemes.

During the last few years, the government took various measures to rationalise the National Savings Schemes, including linking profit rates on major NSS instruments with the State Bank’s policy rate, levying withholding tax on profits, service charges/penalty interest on early redemption, and introducing new schemes to meet diverse investors’ base demand.

The government revised downward the interest rates on NSS investments since January 1, 2013, in the wake of considerable slash in the discount rate by the State Bank. The interest rates on various schemes were again reduced by the government in June, in accordance with the government’s policy to provide market-based competitive rates of return.

But the State Bank is reportedly critical of the feature of risk-free high returns paid on various schemes, and considers this to be one of the major impediments in the development of a bond market.