In 1971, my father took us to Meghalaya where our painful refugee life began. We were on daily rations. As a little boy, I used to stand in the queue and sometimes rations ran out before I reached the counter. Allegedly, some people in the distribution of rations changed their fortune overnight by expropriating a huge amount of aid and relief, which the Indian government targeted for the subsistence of the devastated Bangladeshi refugees. The National Savings Certificates (NSCs) or Sanchaypatra is a similar case, exemplifying a travesty of justice. The government designed the saving instrument to support the poor, widows, and have-nots of society. Now it is serving as the biggest governmental charity for the upper-middle class and the super-rich, ensuring a gradual but drastic decline of the vulnerable in the relative share of the fund. What a sweet parody!

Sanchaypatra, whose net annual sale was less than Tk. 1,000 crore, did not deserve to be a pressing issue even a few years ago. No one at that time ever thought that the government-sponsored scheme would one day turn into a monster to eat up a major share of the government budget. A once tiny fund has now turned into a Titanic and it will sink soon for sure unless we fix it. Although the government has estimated less than Tk. 20,000 crore to be the net sale of Sanchaypatra for the fiscal year of 2016-2017, the actual net sale may hit as high as Tk. 50,000 crore as the tide signals. 

Not only will ballooning of the interest liability endanger the budget, but it also creates a moral hazard in that the government is backing mostly the privileged. More damagingly, the Sanchaypatra directorate is massively turning the potential investors into idle savers by offering them sky-high and non-market interest rates on NSCs. We are gradually turning into a saving society by depositing more fat in the name of saving. Now the 31 percent saving-GDP ratio is higher than 29 percent investment-GDP ratio – a bad sign of baby fat a developing economy should not display. Rather, the saving-GDP ratio can be 4 to 5 percent less than the investment-GDP ratio for a developing economy like Bangladesh, while the low-rate foreign borrowing can fill the gap. 

The Sanchaypatra scheme is also debilitating the stock market indirectly. No one would like to venture in the risky capital market when you can earn a guaranteed return over 11 percent by purchasing saving certificates. This abnormally high return is double the inflation rate of 5.53 percent and thus renders a real return (= nominal return – inflation) of 5.5 percent which you never see in any comparable country around us. In a growing economy where risks are high, investors expect higher risk premium, say around 5 to 8 percent, on top of the risk-free rate. If Sanchaypatra already offers a risk-free rate of over 11 percent, investors are happy to remain lazy savers. They may consider rushing to the stock market only if the market delivers return from 16 to 19 percent.

Since the stock market cannot offer that return, a conservative or moderately aggressive investor will find it more lucrative to invest his fund to purchase Sanchaypatra. Thus, the NSC scheme is deliberately killing the animal spirit of the investors, and helping the adolescent economy be lethargic with premature fat. The private credit growth, which reached close to 17 percent in June 2016, is now below 15 percent – a sign of premature weakness. The market capitalisation in Bangladesh is around 20 percent, which is more than 60 percent in the Indian counterpart. A saving-encouraging society can never have a vibrant stock market.

High Sanchaypatra rates are also ruining the future of a bond market, which the government must endeavour to develop for the future funding of infrastructure. The five-year bond rates are over 6 percent. Even a child will not go to the bond market when saving certificate rates are over 11 percent.  India had similar Sanchaypatra-type instruments, which they targeted for the poor, women, retirees, lower middleclass people, and peasants. But they tagged the saving instrument rates with the bond market, and the interest rates on those instruments maintain a slimmest margin by around 50 basis points over the bond rates so that the bond market remains quite operational and attractive. 

Any distortive interest rate is harmful for the smooth functioning of the market economy. This is more so when the rate is coming from the omnipotent government that signals severe stubbornness by ignoring all lessons of economics. The damage has a far-reaching effect particularly on the banking sector whose recent excess liquidity is largely attributable to the high-yielding Sanchaypatra. In the FY2016, the saving certificate sale went unexpectedly high. It prevented the government from borrowing Tk. 30,000 crore from the banking sector. The overall banking health would have been tight and robust had the government soaked that excess liquidity. The budget indicated to take around Tk. 40,000 crore from the banking sector this fiscal year, but that is impossible when the floodgate for NSC sale is completely open, and people perceive NSC rates as manna from heaven.

The government should not use Sanchaypatra as a welfare-making instrument. There are other ways such as pension funds or social safety support to do so. Even direct donation to the target group would not hurt the economy the way saving certificates are affecting it. It ruins the basic functioning of a market economy while the country has been reaping maximum benefits from deregulation and the market economy since the early 1990s. 

If Sanchaypatra rates are injuring an already problem-ridden banking sector, the bond market, and the capital market, the best way to find a solution is to dismantle the saving directorate and give the task of deposit mobilisation in the hands of the banking sector. We need this consolidation so the government can borrow from the banking sector directly. The only way to keep NSCs supportive to the effectiveness of monetary policy and market efficiency is to tie their rates with the bond rates by a clear-cut rule. Otherwise, paying for the phenomenal growth in NSCs will be unsustainable and partly unethical, limiting our resources for speedier growth and development.  

The writer is Associate Professor of Economics at the State University of New York at Cortland and a guest faculty of the Institute of Business Administration, Dhaka University. 

Email: birupakshapaul@gmail.com