Aug 11 - 17, 2008

One of the prerequisites for putting Pakistan on a high growth path is a substantial rise in domestic saving. This will require tighter fiscal policies and strong structural reforms, including liberalization of financial markets. The double task of alleviating poverty and keeping up with fast-growing Asian neighbors prompted the Pakistani government to announce a target of 6 percent or more for annual GDP growth. A key question is whether Pakistan will be able to finance the investment necessary to reach this target through increased domestic saving and avoid a much greater recourse to foreign saving with its associated risks on the external front.

According to Economic Survey of Pakistan of 2007-08, the contribution of national savings to the domestic investment is indirectly the mirror image of foreign savings required to meet investment demand. The requirement for foreign savings needed to finance the saving-investment gap simply reflects the current account deficit in the balance of payments. National Savings at 13.9% of GDP is the lowest ever level since 1999- 2000 and has financed 64.5% of fixed investment in 2007-08 as against 77.7% last year. National savings as percentage of GDP stood at 13.9% in 2007-08 which is far below than last year's level of 17.8%. Domestic savings has also declined substantially from 16.0% of GDP to 11.7% of GDP. Pakistan's domestic savings in 2000-01, 2001-02, 2002-03, 2003-04, 2004-05, 2005-06, 2006-07 and 2007-08 was 17.8%, 18.1%, 17.6%, 15.7%, 15.4%, 16.3%, 16.0%, 11.7% of GDP respectively, which is not very encouraging.

The federal government has revised upwardly the rates of profit on National Saving Schemes (NSS) instruments with effect from June 25, 2008. The government had announced 2% increase in profits on national saving schemes to enable the investors to meet inflationary pressures. The government has decided to revise the profits on NSS on quarterly basis and their profits would be made market based according to the profit available on Pakistan Investment Bond. According to an official statement issued here on Tuesday, the rates of profit have been raised on Defense Saving Certificates from 10.15% to 12.15%, Special Saving certificates (R) from 9.25% to 11.25%, Regular Income Certificates from 9.54% to 11.52%, Behbood Saving Certificates from 11.64% to 13.56%, Special Saving Accounts from 9.25% to 11.25% and SA form 6.5% to 8.5%. The number of prizes and prize money on all denominations of prize bonds has also been increased. The National Savings Organization is moving fast towards automation in line with the Government's policy to provide better and efficient services to the investors at its outlets.


Saving and investment are two key macro variables which can play a significant role in the economic growth, inflation stability and promotion of employment. For self reliance and growth objectives, mobilization of domestic resources and their efficient utilization should be the two major policy oriented focuses. National savings are critically important to help maintain a higher level of investment which is a key determinant for economic uplift. Thereby, necessitating the analysis of saving investment behavior and its determinants for policy implications; this is a demanding area because of continuing debate on the potential role of their determinants.


Increased GDP growth rates led to increase in savings rates. Similarly a negative growth rate for national saving proceeds by a decline in growth of GDP. In case of the domestic investment, Pakistan is facing the similar situation as of saving (as in most part of Pakistan history there were not much funds to invest due to low saving in the country). In 60's Pakistan's Domestic investment (proxy by Gross fixed Capital Formation here) was almost the same as that of Korea, Malaysia and Thailand. Only Japan had 29.1% of GFC as a percentage of GDP, then in 1965 still Pakistan was ahead of them, but afterwards it dropped. In whole from 1990 till 2006, Pakistan's closest country was almost spending thrice as much as Pakistan for its investment expenditure (Indonesia with over 35% of GDP vs. Pakistan's over 10% of GDP). Thus indicating that countries which were at par with us in terms of investment in 1960's have increase their investment spending much more that Pakistan both in absolute and relative terms. Pakistan was having domestic investment at 14% as a percentage of its GDP in 1970, and it was moving around the same figure till today. If we see the other countries sited above, Singapore had an investment rate of 42% of its GDP in 1980. All of other countries are having their investment rates in the range of 22% to 46% in the above mentioned years.

Similarly on the Gross Domestic Savings (GDS) front it is even worse. Again in 1960's Pakistan was much ahead of Korea and Singapore, but these countries witnessed a good deal of increase in domestic savings level. Where Korea went up to 36.5% of GDP for domestic savings in 1990 and Singapore had almost half value of GDP as domestic savings in 1995. Japan and Hong Kong, China witnessed most stable rates of GDS. Japan has more than four times the domestic saving rate as compared to Pakistan in 1970, then in the year 2000 it was still almost twice of the Pakistan's rate. The closest was Indonesia with a rate of 14% of GDP as domestic saving in 1970 as compared to 9.0% of Pakistan's, but the differential grew to 25% and 14% in 2000. After 1965 no country had a single digit GDS, but Pakistan witnessed it in 1970's and 80's. Even Thailand went from 14.1% to 35.4% in 2003 where as Malaysia showed a continuous increase from 25.9% in 1960 to 54.3% in 2005. These figures could be taken as an indication as to how these economically developed countries been formed by a sustained high growth rates of savings investment and how they achieved the high economic growth rates. These countries have high saving and investment on sustained basis which is a pre-request for sustainable economic growth. Pakistan despite its pronounced efforts could not gear up to achieve the targets of high saving and Investment and resultantly could not thrive economically as much.


The economic literature on saving provides a long list of factors affecting the saving rates. Economic and demographic factors are important determinants of saving behavior. Saving can be promoted by ensuring the security of banking system and improving excess by small savers. By having independence of state bank, increase in financial deepening, increasing the range of financial products and banking reforms would also lead to greater savings. According to an estimate, average income and savings of an urban household are more than those of rural. But on the other hand propensity to save for rural area is more than those of urban.


It is suggested that increase in real interest rate provides an incentive to private household to save more induce corporate sector to generate its own savings due to high cost of borrowing, thus overall saving would increase. But the effect of interest rates on consumption is ambiguous, being subject to potentially offsetting negative substitution and positive income effect, thus the net result depend on their relative strength whereas it is said that interest rates have a significant positive impact on savings rate. Saving seems to be positively correlated with income growth in developing countries. A rise in per capita income above subsistence level may lead to higher savings in developing countries. Likewise, a rapid growth of income leads to a rapid growth of savings as people tend to save more out of transitory income. Whereas in Pakistan, things didn't move according to this theory, rather in past few years people were more inclined towards huge spending mainly sourced from bank's consumer credit.


Few years back, leading economist in Pakistan mainly imported were of the view that, age structure of population effect saving rates. According to them, if a high proportion of the population is of working age then the economy will have a high rate of private saving. Higher proportions of the young and elderly in relation to persons of working age-dependency ratio are associated with lower saving rates. Such hypothesis might work in any other society, but in Pakistan, around 20% of the population is below 20 years of age and based on this theory, interest rates were not very attractive and public saving was not promoted in past. As explained above, the Pakistani society has significantly converted into a consumer spending society against the more prudent approach of first-saving-then-spending society.


Economist in Pakistan has been working "hard" since long to bring down the inflation rates. For this purpose, they split inflation rate calculation mechanism into two inflation rates, one was named Food Inflation and other was named as Non-Food inflation. It was done mainly to present good picture along with bullish food inflation rate. As a matter of fact, higher inflation leads to lower savings by increasing uncertainty and in order to maintain the real levels of consumption, higher spending takes place resulting in low levels of saving (household savings). Presently, food inflation in Pakistan is over 20% therefore in this situation, how is it possible for people to save their limited earnings. Hence, there is lesser likelihood of increase in saving rate and related economic growth.


Public saving has direct relations with investment in the country. Provision of good infrastructure, law and order situation, creation of a favorable investment climate by adopting stable macroeconomic policies and by providing stability, secure property rights and good industrial relations are one of the important factors for raising rate of investment. Pakistan has offered lucrative incentives to the investors in past but so far no major investment has flown into the country. It was aggressively argued that investor will not invest in Pakistan unless lucrative incentives were not offered to them, this was stated when Pakistan had one of the best GDP growth rates in Asia. If Pakistan has failed to attract investment in those good GDP growth rate years with lucrative incentives then policy makers should seriously review the whole investment strategy.


While higher domestic saving is needed to finance faster growth, policies aimed directly at mobilizing saving are not necessarily the best instrument to achieve this target. In the case of Pakistan, it has been argued that growth has suffered less from a low saving rate than from inefficient investment, in part because of the dominant role of the public sector in the economy. The main policy focus should be on initiating a virtuous growth-saving circle by fostering growth through fiscal consolidation and strong structural reforms, including privatization and financial liberalization.


While instruments to directly raise private saving have proven largely ineffective, structural reform measures could have a large impact on growth and, indirectly, on private saving, mainly by improving the efficiency of resource allocation and raising total factor productivity growth. Broadly, the reform agenda should include public enterprise restructuring and privatization; increased private involvement in infrastructure; agricultural reform; labor market reforms and exit policies; lifting of privileges for smaller enterprises; and financial reform. The impact of financial sector reform could be large. In Pakistan, the link between low growth and the inefficient allocation of saving has become increasingly relevant, particularly in infrastructure. Although overall investment has increased in recent years, investment in infrastructure has declined, and worsening infrastructure conditions have become a major obstacle to growth.


How should Pakistan raise its domestic saving rate? Traditional tax and interest rate incentives are unlikely to lead to a strong response of the private saving rate. Instead, the most promising way to boost domestic saving is through increased public saving and a strong structural reform program, including financial liberalization, which would initiate a virtuous circle in which higher growth would prompt further increases in private saving. The investment led saving rates in Pakistan could not achieve significant growth in the past two to three decades and resulted in moderate to slow economic growth. Moreover, comparison with the East Asian economies reveals clearly that Pakistan has long way to go. To be at the same level of growth with these fast growing economies, Pakistan needs to finance the desired investment through increased domestic saving without undue reliance on the foreign resources as these introduce an element of non-sustainability. So, it is essential to get the saving rate up to 20-25%, if we want to follow the model of these countries. With the increase in the Government's current expenditures more resources are transferred towards the people in the form of increased wages, and clearing of more liability on the part of Government and other related heads thus increasing their savings as well, hopefully. Saving behavior is insensitive to the interest rate. Most people save to cover the future expenditures, i.e. education, marriages etc. So there is a need of restructuring of financial market to lure more saving. Usually, foreign remittances effect the saving positive and significantly. More effective policies for transfers of remittances and further job creation in abroad should be explored. In short, Government should make policies supportive of increase in domestic saving rather than looking at the foreign reliance and assistance.