savings and investment
There is an urgent need to
increase domestic savings
From SHAMIM AHMED
Jul 10 - 16, 2000
National savings and investment are crucial for economic development of
Pakistan. The greater the rate of saving the greater will be the funds available for
capital formation and investment in the country.
Unfortunately, however, Pakistan is moving in the reverse direction.
The rate of national saving is on the decline instead of an increase which is dire need of
the time. During the Financial year 1999-2000 has seen almost a fall of Rs.70 to 75
billion in the volume of saving because of reduction in the rate of profit on the national
savings scheme bringing its percentage to about 11.5 per cent of GDP from 14.7 in 1997-98.
The government collected nearly Rs.555 billion in 1997-98 against Rs 459 billion in 96-97
when Nawaz Sharif government had reduced the rate of profit on savings. The decision was
reversed in view of the short fall in the volume of savings and this had a saluatory
effect on the declining saving rate.
The government of Gen. Pervez Musharraf, during its tenure of 9 months
so far, has twice reduced the rates of profits. In December last they reduced by 2 per
cent. Under pressure from IMF they ordered another cut of 1.5 per cent w.w.f.1.7.2000 on
national saving schemes perturbing retired officials, old people, students, trusts and
orphans as National Savings Schemes are the safest mode of investment other than stocks
and real estate.
An official said that International Monetary Fund wanted to steadily
remove the subsidies to inject market orientation in the economy. The measure is aimed at
cutting the lending rates charged by the banks. Both state-run and private banks have
expressed their willingness to slash the lending rate if government reduces rate of return
The present government reduced the interest from NSS by 200 basis
points, which resulted in cut in the lending rates from 18 per cent to 16 per cent in
January. It was expected that the cheap money available to industrial and manufacturing
sector would help revive the economic activity in the country. But the latest report of
SBP showed that the manufacturing sector growth was nominal at 1.5 per cent of the GDP in
nine months ended March 31 from 4.7 per cent of the same period last year.
Several retired officers and old people when contacted said that the
move to cut the interest rates on NSS had shaken their confidence. The NSS was a safe
investment. Several trusts, orphans, and the elderly, getting money from their sons and
daughters living abroad, students and retired officers invested their funds to get monthly
income from NSS. The NSS is safer compared to real estate business and shares market. In
the real estate business people needed large sum of money for investment as a plot,
bungalow or a flat cost a fortune, while the volatility of the share market makes it an
usage place to invest. On several occasions, speculators and manipulators increased share
prices without any positive development and when small investors entered the stock market,
the equities started to commence their downward journey.
The already low confidence level has been deteriorating gradually and
as there is a dearth of viable savings products available to the public, the savings rate
has, therefore, been gradually declining. People do not have many options for saving.
Interest rates on National Savings Schemes have been constantly declining, rupee deposits
have low yields while foreign currency deposits are virtually yielding a zero return to
By the simple reason of lack of choice, a lot of money has found its
way into prize bonds, that yield a zero return to their holders. Although we are a highly
consumption-oriented society, the propensity of the people to save was reflected in the
new defunct lottery schemes launched by local banks in 1998. Similarly, a lot of money
found its way into the stock market recently because of a lack of choice for the investor.
However, due to the volatility in returns, stock are not always a suitable investment
option for many people, including pensioners, retired employees and widows.
Absence of attractive avenues for savings is a cause for concern for
the country's already low savings rate. The SBP governor's dislike for dollarisation of
the economy is another impediment towards increasing the country's savings rate. It is not
the fault of the people of Pakistan if the country's banking system is flawed. Until June
1998, foreign currency mainly dollars, was brought in by banks and deposited with the
State Bank. Against the foreign currency deposits, the SBP would provide rupees to the
banks, which were later lent out to credit-seekers. Now, if for some reason or the other,
these funds were disbursed as loans to parties out of vested interests or otherwise and
the projects failed, why punish the people whose life savings were at stake. Why are the
people being victimized, for no fault of theirs, for bank loan defaults.
After the announcement of December 15, 1999 the operation of dollar
account has been further complicated. Foreign currency account holders now need to open
extensions of their existing accounts to deposit any fresh funds into such accounts. The
reason is that interest earned on a foreign currency account is now subject to a 10 per
cent withholding tax. One questions the logic behind such actions as they deter people
from saving. It is the fundamental right of any person to save in whatever way he prefers,
be it NSS, foreign currency or stocks. Why is one being forced to save in options that may
not be suitable for our risk-profile or that do not Conform to his return requirements.
While addressing a pre-budget seminar recently, Mr. Ishrat Hussain
stated that there is an urgent need to increase domestic savings. How true. But the
question that needs to be answered is whether the current policies are conducive to
encouraging savings or not. With limited avenues available for investment, it is unlikely
that savings can be increased. Unless yields on domestic instruments are made attractive,
people will continue to save less and consume more, further deteriorating the already
difficult situation. The low yields are justified by stating that inflation has been
declining. Inflation may be in the single digit category. But not 4 per cent as being
claimed by the government. A common man who visits markets almost every day does not
believe these figures to be correct. A market survey reveals that the prices of the
kitchen items are on the increase for the last few weeks. The latest decisions of the
government increasing the prices of diesel, gas levy of GST on gas and electricity bills
and services and turnover tax on shop keepers are all going to fan inflation and the
financial year may end up with an inflation rate of 7/8 per cent making life miserable
specially of pensioners and retired people who, are living on the profit of their savings.
The government should have mercy on them and at least exempt them from payment of