ISLAMABAD: The government’s decision to slap ban on institutional investment into the National Savings Scheme (NSS) has created Rs650 billion cushion that would either be parked into banks or invested into market of government tradable securities.
However, this decision on imposing ban with effect from July 01, 2020 has sparked a heated debate among staunch supporters and opponents of this move. Some critics argued that the government deprived institutional pension funds from getting benefits from NSS offered schemes.
But the Ministry of Finance officials who are looking after debt management were of the view that it was the right move of the government for removing distortions which existed in our debt market.
They argued that NSS served as one of the sources of government borrowing so it provided various schemes to individual investors. In year 2000, the government slapped ban on institutional investors from investing into NSS. This decision was appreciated by the International Monetary Fund (IMF) as an important step towards market based borrowing operations, enhancing competitiveness and liquidity in capital markets and market-based pricing of government debt.
In 2008, this decision was partially reversed and certain institutions including pension, provident, gratuity superannuation funds and NGOs as well as Trusts money were allowed to invest into NSS. They were of the view that public auction of government securities is a process whereby institutions bid in competitive market by offering the rate at which they are willing to lend to the government. Increasing the institutional base participating in these auctions allows the government to borrow at lower rates. The diversion of portion of institutional funds away from the auction hampers competition and results in lower liquidity and higher interest cost for the government.
They further argued that allowing certain institutional investors to invest in NSS “distorts the pricing” of tradable government securities. The institutions tend to participate less in competitive auctions of government securities and instead resorts to NSS. “This results in lower participation and competition in auction of tradable government securities and higher borrowing rates for the government,” they added. They were of the view that the cost of domestic borrowing market distorted and it became more expansive for the government.
Lower investment by these institutions in government securities also leads to lower stock of such securities and hence lower trading and liquidity in secondary markets. Allowing certain institutions’ investors to invest in NSS investments has also become a source of interest rate arbitrage whereby these institutions move funds from tradable government securities (PIBs, T-Bills) to NSS schemes to exploit the interest rates differential between the tradable securities and NSS instruments.
Finally, they stated that institutional investors possessed the resources and capacity to participate in primary and secondary market of government tradable securities. Allowing such institutions to participate into NSS is not justified as these schemes are meant for individual investors lacking the resource and expertise to participate in the tradable securities market.
But those who are all out opposing this move of slapping ban on institutional investment into NSS schemes took stance that NSS offered instrument does not create interest rate distortion as the rate is fixed at 95 percent of way of comparable tenor of PIB. Actually interest rate distortion has been witnessed during last couple of years in T-bills rate where rate of three month T-bill has been higher than three years PIB. But since powerful banks are beneficiaries of this distortion causing huge cost to exchequer, nobody bothered to talk about it.
They further say that only employees-related funds and trusts were eligible to invest in NSS and government all over world give some incentive for private pension funds, hence banning these funds from investing in Sovereign NSS securities cannot be justified.
They were of the view that small pension funds and trusts, NPOs, social welfare bodies neither have capacity nor opportunities to invest into PIB/T-bills, hence this embargo will left them with no choice but to park their funds into banks on less competitive rates.
The bank would have more funds to invest in T-Bills/PIBs as the small funds will park these funds in banks. Ultimately, the cost of borrowing would increase for government as those funds would naturally be invested into PIBs and T-bills in the wake of ban on NSS investment on 95 percent of PIB/T-bills, now the government has to pay 5 percent extra and banks would enjoy this liquidity.