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The government's net borrowing from state-owned savings instruments continues to rise over the years. The sales of such tools in the first quarter have already exceeded more than 50 per cent of the target set by the government for the current fiscal year.
There is no denying that due to higher yield rates, sales of state-run savings tools have an unprecedented rise over the last few years. As the people do not have better investment options, they prefer the tools to utilise their hard-earned money.
The Department of National Savings (DNS) sells four types of savings certificates and the rates of yield are up to 11.76 per cent. An individual is allowed to buy family savings certificates up to Tk 4.5 million. The thresholds for other schemes are between Tk 5.0 million and Tk 6.0 million.
The government, in the meantime, is introducing a database of savings certificates to check violation of the ceiling by next year. Though different options including National Identity cards (NIDs), passports and birth certificates are open for the identification of savers, they are found to invest beyond their ceiling. After introduction of the databank, NIDs will be made mandatory for the savers to invest their money in this sector.
Due to higher rates of yield, many savers are investing their money especially in Family Savings Scheme using the names of their different female members.
The World Bank believes non-market based interest rates of the saving tools are distorting the savings markets, crowding out private sector banks and the capital markets from the required resources for investments. Due to the high yield rate of savings tools, the government needs to pay a large amount of money every year from the public exchequer, which puts pressure on the government's economic management, it said.
In the absence of a vibrant secondary market for government treasury bonds, there is no credible reference rate and yield curve representative of the true cost of funds. As such, the private sector issuers of bond face difficulties in pricing their instruments and investors are wary of coming forward to buying the bonds.
The World Bank also found there are glitches and incongruence in key laws and regulations in Bangladesh. These are inconsistent with the government's willingness to develop capital markets as a source of long-term financing for development projects.
On savings tools management, the government has taken a good decision to create a central database of the investors under the DNS. It aims at bringing some reforms in the system which will modernise the sales procedure of the savings tools and convert those to a sustainable source of deficit financing.
Updated information will be uploaded in the database after collecting information about investments in high-yielding savings certificates. A separate component is likely to be incorporated into the framework of Strengthening Public Expenditure Management operated by the Finance Division of the government.
Although the country's savings tools have received widespread popularity among the common people, the International Monetary Fund (IMF) advised the government to reduce its borrowing costs by reducing reliance on such instruments. It called for phasing out the savings instruments and increasing the issuance of treasury bonds and bills as an alternative to the tools.
The government, on the other hand, defended the system by saying that the certificates are playing a vital social role by providing support to vulnerable segments of the population in the absence of unemployment insurance and wide pension coverage.
It's true that excessive reliance on the certificates for budget financing not only impedes capital market development but also hampers monetary policy management.
In the circumstances, the government needs to formulate an action plan that would help improve monitoring of the savings certificates sales procedure in order to better identify the beneficiaries, and weigh options for aligning the certificates' rates with the ongoing market interest rates.