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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 coordination 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