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NSSs rate cut may reduce debt servicing burden: analysts

RECORDER REPORT

KARACHI: The Current cut of 200 basis points on the National Saving Schemes is likely to reduce the total debt servicing burden of the federal government by Rs 10 billion. However, to keep the deposit base intact, banks may cut deposit rates by 50-100 basis points soon, analysts and bankers said.

Since the NSSs are a major source of the government's non-bank borrowings, as a result, the share of the borrowings through NSS rose from 27.8 percent of total domestic debt to 33.7 percent in 1998-99.

During 1998-99 the government borrowed Rs 95 billion through these instruments. Due to reduced interest rates, the total debt servicing is expected to be slashed by Rs 10 billion.

"In the long-run the reduction in rates of return on T-bills and NSS would reduce the government's cost of debt servicing and help reduce the budget deficit. Moreover, a rational interest rate structure would boost economic activity in the country," an analyst from Taurus Securities said.

According to a report prepared by ABN AMRO Securities, as part of its economic policy reforms agenda, the Chief Executive had in his speech on December 15, 1999, announced an across-the-board reduction in interest rates. The move was aimed to revive the ailing economy while bringing out financial sector reforms at the same time.

The report added that in line with the government's plan, the State Bank of Pakistan recently cut its discount rate by 200 basis points, followed by a similar cut in the government-sponsored NSSs. Acting in congruence with the SBP, the five big commercial banks reduced their lending rates by 145-200 basis points.

On the deposit side, the report expects a less than proportional cut of 50-100 basis points in returns so that banks could keep their deposit bases intact. As the demand for credit is interest elastic, lower rates would enable more borrowing from the banking system.

Interest rates in the country rose sharply in mid-90s after the government followed the policy of liberalisation and deregulation. High inflation rate of 12-13 percent resulted in the maximum bank lending rates rising towards 24-25 percent per annum. The ratio of loans extended at interest rates above 20 percent increased from 1.6 percent in December 1994 to 20.9 percent in December 1998.

However, over the past year, interest rates have fallen sharply on account of decline in inflation rate to six percent, a four percent reduction in the NSS rates and slow demand for credit. Current maximum lending rate of 16.8 percent per annnum indicates sharp fall since 1997 when maximum rates were as high as 24 percent per annum. After the fall in loans rate, the deposit rates are also likely to fall.

Sabiha Rizvi of ABN AMRO Securities said that an across the board reduction in interest rates was mainly aimed to kick-start the dormant economy. The government hopes that lower rates would generate fresh demand for credit, which would in turn spur productivity in the economy.

She believes that simple reduction in interest rates in unlikely to achieve the objectives, honourable as it might be, instead what is really needed is the enhancement of the government spending on development expenditure.

"Over the years the development expenditure to GDP ratio has fallen from 6.5 percent in early 1990s to merely 3.8 percent last year," Sabiha said. The renewed focus of the government towards retirement of expensive domestic debt and channeling of savings on debt-servicing towards development expenditure projects is a step in the right direction, she added.