Finally, the government has decided to re-fix interest rates on National Saving Certificates (NSCs) or Sanchayapatra. Hopefully, it will not form another body like the high-level Quota Review Committee with an extension of 90 days' time to brood over the optimal rate on NSCs. Although this will be an unpopular move for the regime with the election only months away, it would have been much better had the government done it at least three years ago, when NSC sales just began to skyrocket. I remember the days when, while serving at Bangladesh Bank, I tried to convince the ministry to portray how bad NSCs will be in ruining the climate for other interest rates in the banking sector.

Eventually, I resorted to writing a column at The Daily Star in late 2015 branding Sanchayapatra as a “Trojan horse”. I remember having received phone calls from the higher-ups after the publication of the piece, with a note of caution that I shouldn't write against the government while being a part of it. They failed to distinguish between economics and politics, where acceptance of everything that is being done seems to be the default. But for me, pointing to a policy mistake that kept on breaching fiscal and monetary discipline felt like the right thing to do.

Sanchayapatra is a government-run savings scheme that helps the buyers earn unusually higher interest rates than other bank deposits do. It used to earn more than 12 percent before 2015. In an attempt to prove that the finance ministry is partly responding to the declining trend of interest rates in all markets, it lowered NSC rates to 11.5 percent, which was still abnormally higher than other deposit rates in the banking sector. During the excess liquidity period between 2015 and 2017, bank deposit rates slid to as low as 3-4 percent, but NSC rates still remained close to 12 percent, brushing all economic rationales aside. That type of interest-rate differential between government and market instruments was one of the highest in the world—something not even seen in North Korea, which barely seems to care about market reality.

What went wrong? Economics is ruthless and it followed the law of the sixteenth-century British economist Thomas Gresham: “Bad money drives out good.” For example, if there are two forms of commodity money in circulation such as gold and silver coins, both of which are accepted by law as having a similar face value, gold coins will gradually disappear from circulation, because people will hold gold coins in their family vaults and throw the inferior silver coins into circulation. In the same vein, people would rush to buy the higher-yielding NSCs, making bank deposit unappealing. And that is exactly what happened here. A liquidity glut in the banking sector soon turned into a liquidity crisis, unmasking the consequences of irrationally high saving rates on government instruments. 

Banks, which deem deposit to be their oxygen, soon began to pay high on deposit rates, first to quench their thirst for liquidity and then to continue their lending business. Bank deposit holders were happy but that made the country's investment prospects grimmer because lending rates, which sit on deposit rates plus the spread, had to jump up, making investment more expensive than before. Bangladesh, being a growth generator, can't afford to see investment growth slackening. It will upset all our aspirations and political goals; a timely sense induced the prime minister to instruct the bank sponsors or BAB (Bangladesh Association of Banks) to bring down lending rates to single digits as soon as possible. All these troubles happened because of nonmarket NSC rates at the root. And the lowering of lending rate to 9 percent, though seemingly alluring, will never be affordable as long as NSC rates stay above 9 percent. Why?

Because NSC rates are comparable not to lending rates, but to bank deposit rates, which are now instructed to remain at 6 percent. So, the only way to let the banking sector function well is to bring Sanchayapatra rates closer to 6 percent or slightly above. This is called the rationalisation of government interest rates with the market. And a government committed to empower market economy for the sake of higher investment growth ought to do that. Another way to fix NSC rate is to look at the medium-term bond rate. Giving a little premium on that may be acceptable. Still NSC rates shouldn't exceed 7-8 percent. If the premium is too high to justify it, the government's effort to build a healthy bond market will simply take a nosedive. We believe the high-powered committee will take these vital factors into consideration while re-fixing the NSC rates.

We can imagine that the resistance to reducing NSC rates will be high mainly because of two reasons. First, income from NSCs is now a big earning source for the upper-middle class and the superrich although it's claimed to be a safety net for the poor (what an irony!). Its total outstanding is now close to Tk 2.4 trillion and the poor possess a tiny slice of that gigantic pile of wealth. Second, the finance ministry itself will be incapable of feeding the budget deficit if NSC sale suddenly stunts due to a close-to-market interest rate. For the last two years, the ministry is scooping up around Tk 50,000 crore from NSCs which have been used to plug the big hole of budget deficits and to repay public loans. This is an example of inefficient and expensive deficit financing, which shows why our fiscal capacity is so poor.

In a rare move, the finance parliamentary committee has recently held the finance ministry responsible for the weakest tax-GDP ratio of the region. Since the budget management is now living off inputs from Sanchayapatra, the budget managers would be resistant to lower NSC rates close to the market. But we expect that the government will re-fix NSC rates in keeping with the fiscal and monetary discipline so that lending rates decline automatically by market forces to support the country's investment and faster growth.