KARACHI - The federal government is likely to slash NSS profit rates by 150 basis points to 200 basis points by the end of current financial year 2008-09. The government may cut the rates of return on National Saving Schemes (NSS) by 1.5 per cent to 2 per cent in its quarterly review ending on June 30 ahead of obtaining fresh credit disbursements from the multilateral lending and donor agencies and international financial institutions. In addition to that, keeping in view the non-IMF credit inflows, the govt seems to be relied on non-banking sources of borrowings to pay its debts and finance budget and fiscal deficit in upcoming financial year 2009-210. This move would ease pressure on banks deposit growth, private credit growth and liquidity condition of the sector furthermore; it holds positive outlook for equity and bond market including mutual funds and real estate market. The government could take this decision in better prospects of improved liquidity position of the banking sector and slowdown in fiscal deficit growth during the months to come as the external flows for the remaining part of this year and next year is intact, said Muzzammil Aslam, Research Analyst at JS Research. The country is expected to receive $1.5 billion worth inflows by June 30th, 2009 while the size of governments domestic financing (borrowings) from commercial banks would be amounted to 80 to 90 billion rupees, he said, adding that pressure on banks deposit growth and interest rates will continue till government revises term structure of NSS as additional liquidity is projected to direct to NSS schemes due to attractive rates being provided in its products and declining expectation of market interest rates, he added. It must be recalled that Pakistan Investment Bonds (PIBs) cut off yields have witnessed substantial decline in all maturities. Earlier, Ministry of Finance (MoF) reported fiscal deficit at 3.0 percent for 9MFY09, down from 5 percent of GDP reported last year. The key to fiscal accounts is financing mix of reported budget deficit of Rs405 billion. Also as per official statistics, non-bank borrowing has sharply increased to Rs143bn (up Rs114 billion in 3QFY09) compared to bank borrowing of Rs176 billion (down Rs4 billion in 3QFY09), while net external inflow has increased by Rs47 billion- led by robust program loans disbursements. It must be noted that currently, government is offering 16.1 percent on Behbood Scheme and 13.6 percent on Regular Income Certificate. Analyst believes the risk to commercial bank deposits is the higher NSS rates. This can be validated from Rs155 billion inflows witnessed in 9MFY09 and Rs106 billion in 3QFY09 in NSS. However, the commercial bank deposit growth is mere flat at Rs6.9 billion during July to May 16th, compared to Rs196 billion recorded in the corresponding period last year. This reinforces the view of that private sector growth is primarily led by squeezed commercial bank ability to finance private credit.