Savings tools vs monetary policy management

Shahiduzzaman Khan | Published: July 17, 2019 20:41:00

The government's net borrowing from state-owned savings instruments registered a hike by about 8.0 per cent in the just-concluded fiscal year compared to that of the previous fiscal. 

According to reports, net sales of savings tools in the July-May period of FY 2018-19 stood at Tk 467.31 billion, up from Tk 433.63 billion in the same period of the last fiscal. Official data show sales of savings tools have surged in recent years due to their higher yield rates.

There is no denying that due to higher yield rates, sales of state-run savings tools have been rising for last few years. As the people do not have better investment options, they prefer to buy the tools with 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 has introduced a database of savings certificates partially to check violation of the ceiling. Buyers now require National Identity cards (NIDs), tax certificates and birth certificates to submit at the time of buying savings certificates. Still, some are found to invest beyond their ceiling.

Due to higher rates of yield, many savers invest their money especially in Family Savings Certificates using the names of their different female members. Investment by institutional savers in a particular savings certificate is also very high.

The World Bank opines non-market based interest rates of the savings 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 the buyers a large amount of money every year from the public exchequer, which puts pressure on 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.

The government's decision to create a central database of the investors of the savings tools under the DNS is nevertheless a good gesture. It aims at bringing some reforms in the system by modernising the management of the savings tools and converting those to a sustainable source of deficit financing.

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 cutting 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 savings certificates for budget financing not only impedes capital market development but also hampers monetary policy management.

As such, the government should formulate an action plan to 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.


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