Pakistan increases profit rates on saving schemes

Pakistan increases profit rates on saving schemes

Pakistan has increased the profit rates on various saving scheme after massive raise in benchmark interest rate by the central bank.

The Central Directorate of National Savings (CDNS) has revised the rates of return on several national saving schemes to make them more attractive to investors.

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As per the report, the rate of return on Special Savings Certificates (SSC) has been increased by 4.13% to 17.13%, while the rate on Savings Accounts (SA) has been revised by 4% to 18.50%.

The rate of return on Short Term Savings Certificates (STSC) has been increased by 3.86% to 19.82%, while the rate on Bahbood Savings Certificates (BSC) and Pensioners Benefit Account (PBA) has been surged by 2.64% to 16.56% each.

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The institution has also increased the rate of return on Defense Saving Certificates (DSC) by 2.61% to 14.87% and on Regular Income Certificates (RIC) by 0.24% to 12.84%.

The lack of a revision in the rates of return for national saving schemes by the government resulted in individual and institutional investors withdrawing their investments and opting for other more profitable instruments like fixed deposits at banks.

This is because investors expected the government to raise the rates in line with the significant surge in rates on other instruments where CDNS reinvests its investors’ money.

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The investors’ premature withdrawal from the national saving schemes reflects a loss of confidence in the schemes due to the lower returns. The government’s recent move to increase the rates on various national saving schemes aims to make these schemes more attractive to investors and encourage them to invest in these schemes instead of other instruments.

The data from the State Bank of Pakistan (SBP) shows that investors have withdrawn a significant amount of money from saving schemes, with disinvestment of Rs285.73 billion ($1.7 billion) in the first eight months of the current fiscal year 2023.

The outstanding investment in saving schemes (net of prize bonds) reduced to Rs2.92 trillion ($17 billion) in February 2023, compared to Rs3.48 trillion ($20 billion) in the same month of the previous year, showing a drop of 16% (or Rs565 billion) in one year.

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The data also suggests that investors pulled out Rs26.68 billion ($157 million) from Defence Saving Certificates (DSC) during Jul-Feb FY23, withdrew another Rs26.76 billion ($158 million) from Regular Income Certificates (RIC), divested Rs71.89 billion ($423 million) from Special Savings Certificates (SSC), and disinvested another Rs167.26 billion ($983 million) from other schemes. It is likely that individuals were divesting due to the low returns being offered on the saving schemes.

The decrease in investment in CDNS saving schemes may be due to a combination of factors, including the government’s decision to bar corporate investors from investing in CDNS schemes, the failure to raise rates in line with other investment opportunities, and the possibility that investors are withdrawing prematurely to invest in more lucrative instruments such as treasury bills and Pakistan Investment Bonds (PIBs).

It’s worth noting that CDNS reinvests funds taken from individuals into PIBs and distributes profits from these investments among its investors. The law requires that the weighted average rate of return on national saving schemes be 95% of the return on PIBs.