National saving schemes and liquidity

The government has finally raised the interest rates on national savings schemes to competitive levels — a measure that it should have taken long ago. Net interest rates on bank deposits rose to 12-14 percent during the recent past, but the net interest earnings on the savings certificates were not appropriately adjusted such that these fell below the bank deposit rates. Consequently, there was an exodus of savings from national savings schemes to bank deposits. A buoyant stock market in 2010 might also have contributed to this exodus. Net sale of the national saving certificates plummeted from Tk 11591crore in 2009-10 to 2056 crore taka in 2010-11. The government managed to sell only Tk 334 crore worth of these certificates during July-December 2011. This might have prompted the government to act. It raised the interest rates of saving certificates first in June 2011. However, it proved ineffective since these rates did not match the rising bank interest rates. Hence, the second hike in February 2012.

It has been reported in the media that the government has raised the rates in order to mobilise more funds from the public directly such that it could reduce the level of its bank borrowing. Such a reduction would avoid crowding out of the private sector from the credit market by increasing liquidity of the banks. A reduction in government borrowing would also help reducing inflation. However, a little reflection should reveal that some of these arguments are not tenable.

If the government mobilises funds through saving certificates, its bank borrowing needs will be obviously reduced by an equal amount. However, this does not necessarily imply that banks will have greater liquidity and lend more to the private sector. To what extent government spending crowds out private spending (investment) depends on the national saving-investment balance. If the government uses up more of the national saving, less will be available for the private sector. How the government raises the funds to spend is not important in this regard.

Borrowing from the public directly instead of the banks does not necessarily increase or decrease liquidity of the banks for onward lending to the private sector. If the higher rates encourage more funds into saving certificates, the important question is where these funds were parked? Most of the funds would have been deposits in banks (unless it is argued that people kept cash buried in holes underground). Hence, an influx of funds into saving certificates implies a corresponding reduction of deposits of the savers. If the government deposits the money in its accounts with commercial banks, total bank deposits remain unchanged. Thus the banking system as a whole will not be more or less liquid as a result of the switch to national saving schemes. The government will of course borrow less from the banks, and hence the share of the private sector in bank borrowing will show an increase, but this will not mean any increase in the amount of loans given out to the private sector or more resources for private investment.

Crowding out of the private sector does not depend on the mode of borrowing or raising funds, it depends on the usage of saving by the government. Only when the government spends the money collected through saving certificates, it becomes unavailable to the private sector. If the government were to raise the funds through saving certificates but not spend the money, then these funds will be still available to the private sector. The impact of government spending money collected through the national saving schemes is no different from that raised through borrowing from the banks.

Raising funds through national saving schemes does not change the money supply of the economy just as government borrowing from banks does not. Since money supply is not affected, funds borrowed from the public directly have no implications for inflation. Such funds could impact on inflation only if these led to spending in excess of what would have happened otherwise; but the same would have also happened if the funds were borrowed from the banks. These saving schemes are not monetary policy tools, and cannot be expected to perform their functions.

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M A Taslim is a professor of the Department of Economics, University of Dhaka.