Government Policies’ Impact on Savings Certificates and the Economy: Decline, Inflation, and Borrowing Challenges – Towfiqul Islam Khan

Originally posted in The Business Standard on 31 July 2023

Savers withdraw Tk3,296cr more than they invested in savings tools in FY23

Data from the central bank revealed that customers purchased new savings certificates worth Tk80,859 crore during the just concluded fiscal year, while the government had to disburse Tk84,155 crore as the principal amount for savings certificates sold to customers.

In fiscal 2022-23, savers took out Tk3,296 crore more from savings certificates than they invested, indicating a declining interest in these instruments due to changes in government policies and the impact of soaring inflation.

Data from the central bank revealed that customers purchased new savings certificates worth Tk80,859 crore during the just concluded fiscal year, while the government had to disburse Tk84,155 crore as the principal amount for savings certificates sold to customers.

Initially, the government set a borrowing target of Tk35,000 crore from savings tools for FY23, but this target was later reduced to Tk20,000 crore. Despite this adjustment, the borrowing target remained unmet, as the pressure for redemptions exceeded the sale of new savings certificates.

In FY23, the government had aimed to borrow Tk32,000 crore from savings certificates but could only secure Tk19,916 crore.

Towfiqul Islam Khan, a senior research fellow at the Centre for Policy Dialogue (CPD), attributed the decline in savings certificate sales to various government policies, including the implementation of an online monitoring system for these certificates, which curbed the ability to exceed limits by concealing information.

Additionally, there is now an obligation to purchase savings certificates above a certain limit.

Due to these policies of the government, the super-rich are not able to invest in savings certificates as before, he observed.

Khan pointed out that middle-class consumers are redeeming their savings certificates due to inflationary pressures.

The increasing prices of goods in the market have outpaced the growth of people’s incomes, leading to a higher rate of redemption for savings certificates. As a result, many people are finding it difficult to save as they did before, and new investments in savings bonds have declined.

The economist believes that the government had to increase borrowing from banks due to less borrowing from savings bonds.

He also said that the government cannot increase loan amounts from savings certificates at will.

“If customers don’t buy savings certificates, there is no way for the government to force them. On the other hand, the government can borrow from banks. In this case, the government is unable to borrow from commercial banks due to liquidity stress. Hence, government debt has increased through development from the central bank.”

A central bank official said, “The government has been paying higher interest against saving certificates compared to bank loans. Now it is reducing borrowing from the sector to decrease interest costs and follow the advice of the International Monetary Fund.”

According to the finance ministry, interest costs for savings tools were initially estimated at Tk42,675 crore for the current fiscal year. It was later increased to Tk45,100 crore in the revised budget. However, the government has to pay interest on savings bonds of Tk44,800 crore in FY23.

Meanwhile, the scope for investment in savings certificates is set to be squeezed further as the government has cut the target of borrowing from the tools by 49% year-on-year to Tk18,000 crore for FY24, according to finance ministry officials.