CDNS received only 7.28B investment. The Express Tribune

The global health crisis has forced people to save more to face unforeseen challenges but the steep fall in the benefit rates of savings schemes has prevented investors from investing their savings in formal schemes.

Development has given a new challenge to the government which wants to attract new investment in savings schemes. The investment received is used to meet the budget deficit.

The Central Directorate of Savings (CDNS), which offers several savings schemes and certificates, received an investment of only Rs.7 billion in the first two months (July-August) of the current financial year 2020-21, according to the State Bank. Pakistan’s (SBP) latest number.

In the last financial year, people invested an average of more than 30 billion rupees a month in savings schemes.

The low investment in the early months of FY21 is partly due to the pull of capital from the Defense Savings Certificate (DSC) and withdrawal of savings from award bonds and other schemes.

People pulled out a total of 1.63 billion rupees from DSC in the first two months of FY21.

A CDNS official believed that the decline in investment in DSC was mainly due to the maturity – completion of the investment period. The maturity period of DSC is 10 years. He said that people can still sell premature savings certificates for any reason. However, people may not have reinvested due to a significant drop in the rate of profit evident in the certificate. The government revised the rate of profit for DSC to 8.49% in August from 10.4% before April.

The drop in the profit rate corresponds to a 625-base-point decrease in the benchmark interest rate from March – June to 7%. The central bank cut policy rates to allow individuals and businesses to avoid default on bank loans and to inject new investment into businesses to support economic activity in an otherwise sluggish economy. The CDNS official said that people would not have reinvested to hold hard cash to meet any challenge during Kovid-19.

He said that after the government banned institutional investors from parking capital in these schemes, investment in savings schemes could naturally be lower this year.

However, people invested Rs3.9 billion in a short-term (three-year maturity) Special Savings Certificate (SSC) during July-August, despite a lower profit rate of 7.77% compared to DSC.

Those withdrawing investments from DSC may have reinvested in short-term certificates in hopes of increasing the rate of profit.

Further, people invested a net Rs2.46 billion in prize money in August compared to withdrawing investment of Rs 474 million in July. The official said that people kept investing and splitting from bonds between the lucky draws. Economists have suggested a high return on savings to encourage people to save and increase investment in new projects going on as a witness in developed economies around the world.

He said banks had made huge profits for many years but offered very little on savings accounts.

“Low national savings increase dependence on external financing for investment,” said the Annual Plan 2020-21. “The savings rate has consistently been below the required level, which prevented investment from reaching the level required to accelerate the (economic) pace.”

CDNS raised an investment of about Rs 371 billion in the last financial year. The savings-to-GDP ratio increased to 13.9% in FY20, compared to 10.8% in FY19. However, the investment-GDP ratio deteriorated to 15.4% for the second consecutive year in FY 2020.

Published in The Express Tribune, 18 OctoberTh, 2020.

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