 Sunday, January 28, 2018

https://dailyasianage.com/news/105824/undue-privilege-from-savings--instruments

Undue privilege from savings instruments

M. S. Siddiqui

Government adopts different measures to overcome budgetary deficit. Budget deficit is a situation
when government spends more than its revenues. Budget deficit can be financed by printing new
currency, domestic borrowing and external borrowing.

The first option of printing of currency increases money supply creates inflationary pressure. The
second way of financing budget deficit can be through domestic borrowing, sale of treasury bills,
defence saving certificates, etc. This type of finance usually crowds out private investment if the
interest rate fixed by certain authority rather than market mechanism. The third option is external
borrowings from overseas banks and development partners.

External borrowing is a widely used method to finance fiscal deficit in many developing countries
because in most of the developing countries, domestic capital markets are too small and internal
borrowing possibilities are also limited. Now, due to globalization of financial market the interest rate
on overseas loans are relatively lower than FIs in developing countries. But there is a debate on
foreign loan on terms and conditions of the overseas development partners.

Rather, the excessive use of any financing procedure of deficit creates the macroeconomic
imbalance. Therefore, the Public debt management can be explained as the process of executing a
strategy for managing the government's debt to raise the required amount of borrowings, pursue
cost/risk objectives, and also meet any other goal that the government might have set (IMF, 2003).

High government debt influence interest rate, which can change the level of saving, investment and
consumption. A long term debt put upward pressure on interest rate, which in turn changes the
consumption and saving behaviour which create a vicious circle. Increase in interest rate caused by
increase in government debt lead to decline in investment and reduces investment capacity for
development projects.

Government may take loan from banks and saving instruments. In order to maintain stability in
demand, supply and the interest rates for both the options should be same on the basis of market
demand and supply. The bank interest rate determined by market mechanism with some distortion
and the interest rate on savings instruments are fixed by the government have negative impact in the
market.

The monetary policy of central bank has a control over money market. The central banks are able to
restrict the money circulation and need adjust with the fiscal policy of the government. Central Bank
may restriction on a ceiling on central bank credit to government promotes monetary restraint. The
central bank may decide to manipulate financial markets to reduce the interest rates at which
government debt is issued. Debt management has an impact on monetary policy through asset
prices and on fiscal policy through interest payments.
In many countries like Bangladesh, the authority of Central Bank is taken over by government to
decide on interest rate and amount of credit from Savings certificates. This is a conflict between
different economic policies of the government and monetary policy of the Central Bank. The classic
conflict between monetary and debt management policy relates to the fixation of interest rates.

The Bangladesh Bank (BB) is the regulator and supervisor of the financial system, including banks,
and also of the money, government securities and foreign exchange markets. The BB has to
balance the needs of the markets (manage liquidity), government requirements (fiscal requirements),
balance sheet of the banks (asset prices and interest rate movements) and general price level
(growth of money supply).

The main objective of debt management is to minimize the cost of borrowings over the medium to
long run, consistent with a prudent degree of risk. To achieve this minimization of cost, promotion
and development of efficient primary and secondary market for government securities are also
important complementary objectives for debt management. But the responsibility has been taken
over by Ministry of Finance to determine the rate of interest and amount of loan from Savings
instruments and other options.

Bangladesh government has four types of savings certificates - Five Years Sanchayapatra, Three
Monthly Sanchayapatra, Pensioner Sanchayapatra and Poribar Sanchayapatra - are now on the
money market for public subscription. The Sanchyapatra project of Bangladesh has dual purposes
meet the budget deficit and support the elderly persons. They believes these savings certificate
project is to support retired government official and their families ignoring millions of citizen out of
pension and additional savings certificate project. There is no social security for 17 crore citizens of
the country except a limited social security scheme of elderly citizens.

The management and developments in the financial markets such as the savings instruments,
require specialized training to monitor mark-to-market positions and pricing by the central bank or
independent debt management authority, which would require competent and qualified
professionals. The important issue in this context is the relationship between debt and monetary
management. A number of countries with liberalized financial markets and government credit debt
manage by professional debt management and specialized techniques to save cost and efficient use
to available resources.

Many countries assigned priority to public debt management by central bank and a number of
countries chose to separate debt from monetary management. The experience of many countries
during financial crisis in east and west find the debt management difficult particularly the co-
ordination between monetary policy and debt management assumed significant. The issue of
separation of monetary policy, fiscal policy and debt management has re-emerged.

Government use to fix the interest rate and regulate the public debt policy. Currently, average
interest rate on deposit, offered by the commercial banks, is around 8.50 per cent, while the rate for
savings tools averaged 13 per cent. This is a regulated higher interest rate than bank interest rate
prevailing in the financial sector. A Directorate of formed under the Public Debt Act, 1944 is
governed with Sanchapatra rule, 2015rule.The National Savings Directorate (NSD) certificates under
Ministry of Finance are not serving the real purpose of balance between monetary and fiscal policy.

The fixed and higher interest rate from market rate ignore the fundamental principle of savings
instruments is that market interest rates and prices of savings certificates generally move in opposite
directions, if those traded in the security market. The statistic of sales of The National Savings
Certificates (NSC) in the first 11 months of just-concluded Fiscal Year 2016-17 crossed the target by
around 240%.According to the latest data of National Savings Department (NSD) revealed from July
to May of the outgoing fiscal year the government had sold savings certificates amounting to Tk46,
967 crore while the target set for the fiscal year was Tk19,610 crore.

Budget deficit has been projected at 5.0% of GDP. The budget deficit can easily be financed through
foreign funds with cheaper interest rates in the age of globalisation. The recent experience of
opening up of overseas bank finance for private sector investments has given a boost to local
investment and also reduction in interest rate of local credit. FIs are now looking for alternate income
rather than only on interest on credit. They are yet to be competitive in the global market with their
value added products. The interest rate of sanchyapatra also should determine similarly though
market mechanism.

According to study of CPD on Budget of current year, total foreign aid received by Bangladesh
during July-February FY17 was USD 1.38 billion which was 2.9 % lower than that of the
corresponding period of the last fiscal year. It is presumed that government borrowing as percentage
of GDP is at a reasonable state for Bangladesh - may increase to some extent in FY18 largely due
to rise in external debt. The percentage share of Budget for interest payments are domestic
proposed 16% of revenue budget (in BFY18).

At present about 63% of the public debt is attributable to domestic source. The composition is
expected to change further - by FY20 about 64.7% of the total debt will be incurred from domestic
sources. At this point government needs to use low-cost borrowings.

The interest liability of Tk 33 thousand crore in the budget is more than one third of our ADP. Interest
payment on Shanchyapatra is a major share of it. The share will keep growing day by day and will
gradually squeeze the growth of the development budget in the future.

The interest payments for domestic debt has already risen substantially and debt servicing for
borrowing for large infrastructure projects may put further pressure in future in case of both domestic
and foreign sources. The government should have a pragmatic policy to borrow at low costs while
the central bank will consider monetary and financial stability.

There are better ways to ensure welfare for the poor, widows, and pensioners adapted by many
other countries rather than trying to support them through income from Shanchayapatra. India has
started the sale of pension funds, we can develop numerous pension products with longer maturity
and thus enable the government to use the funds for long-term infrastructure buildup.

A separate debt management authority is a step removed from the political process of budget
making and generally would not succumb to the political and insider pressure to trade-off long term
debt management goals with short-run budget goals.

The writer is a legal economist.

Email: mssiddiqui2035@gmail.com