Phase out savings certificates | The Daily Star
12:00 AM, June 11, 2017 / LAST MODIFIED: 12:34 AM, June 11, 2017

Phase out savings certificates

IMF suggests govt cut borrowing costs

The International Monetary Fund (IMF) has advised the government to reduce its borrowing costs by cutting reliance on national savings certificates.

The IMF called for phasing out the savings instruments and increasing the issuance of treasury bonds and bills as an alternative to the tools.

An IMF mission recently reviewed the country's latest economic situation and submitted a report to its executive board; the report was made public last week.

The report presented various drawbacks, pointing out that the interest paid has amounted to about 1 percent of the country's gross domestic product.

It said the certificates' interest rates are significantly higher than that of any other savings schemes in the market.

Outstanding stocks already raised the total cost of budget borrowing by an estimated 0.25 to 0.5 percent of the GDP annually and these costs continue to rise, said the IMF.

The IMF said lowering the certificates' interest could dampen household demand for it while a mechanism could be considered that automatically links the certificates' rates to market rates.

It said more targeted and less costly alternatives could be considered such as expanding the social safety net and reflecting the costs on budget that achieve the government's social policy goals without distorting financial markets, hindering monetary policy and impeding capital market development.

The report quoted the government as saying that the certificates are playing an important social role by providing support to vulnerable segments of the population in the absence of unemployment insurance and wide pension coverage, and eliminating the certificates outright would not be a viable option now.

At the same time, the government recognised that excessive reliance on the certificates for budget financing not only impedes capital market development but also hampers monetary policy management, according to the report.

The certificates are currently poorly targeted and misuse of the system is increasing, the IMF quoted the government as saying.

The government is working on proposals that would improve monitoring to better identify the beneficiaries, and is also considering options for aligning the certificates' rates with market interest rates. The government is also open to reviewing the eligibility criteria and limits on purchases.

The IMF welcomed the introduction of the VAT law which has attracted serious debate.

It said mobilising domestic revenue should be a policy priority to allow increasing public investment and strengthen social safety nets.

“To this effect, the directors emphasised that in addition to modernising the VAT, efforts should continue to improve the income tax regime and strengthen tax administration,” says the IMF report.

On another note, the IMF said the cabinet recently approved a proposal to create a “sovereign wealth fund” that would make the central bank's reserves available for financing large infrastructure investment projects.

It said the fund would be allocated $2 billion in foreign exchange per year for a maximum allocation of $10 billion out of $32 billion in total reserves.

The government is in the early stages of its plans and few concrete details of the fund and guidelines on how it would operate have been made public.

If this fund is to be launched, care should be taken in its design and execution to prevent it from encumbering reserves in a way that could harm external resilience or hamper the country's ability to tap global capital markets when called for in the future, said the IMF.

The IMF also identified some risks about the future economy: a resumption of political unrest as the next election cycle approaches, a rise in extremism, a further deterioration in the security situation affecting confidence and investment, a protracted slowdown in key export markets, particularly the EU, and a further weakening of remittances.

It also said a sustained appreciation of the US dollar could require adjustments to the nominal exchange rate to avoid harming export competitiveness.

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