SAVINGS RATE AT ITS LOWEST EBB
TARIQ AHMED SAEEDI
Dec 19 - 25, 2011
National savings rate has always been under discussions of economists since decades. Low savings rate has the power to deal a severe blow to the economic performance. Generally, luxurious life style or living beyond means is a cause of low national savings rate as seen in US. However, Pakistan is a country where a major portion of a monthly average household income is used in consumption expenditure due merely to price inflation.
Inflation rate denotes trend of prices compared against the buying power capacity. High inflation leads to decline in real income of fixed income group of the society.
Inflation in Pakistan has been on the upward trend since 2003, and has reached its peak of above 25 per cent in 2008. In fact, for last eight years (2003-11), an average inflation in Pakistan stood at over 10 per cent.
Consumer price index inflation that is general inflation, jumped by 10.2 per cent year-on-year in November 2011 compared with 11 per cent in October and 15 per cent in November 2010, according to the monthly review of price indices by federal bureau of statistics (FBS). Core non-food non-energy inflation (NFNE) rose by 10.4 per cent in November and October and 9.4 per cent in the same month last year.
The government's borrowing is termed as the prime cause of high inflation in Pakistan. By end of November, public debts from the central bank and commercial lenders reached somewhere near Rs720 billion, showing a 100 per cent jump over last year.
There are popularly three theories presented to define inflation: demand-pull, cost-push, and structural, according to Pakistan institute of development economics (PIDE). Demand-pull theory signifies that inflation is increased when either money supply ramps up or spending increases 'in excess of full employment level'.
Normally, former incident happens because of excessive government borrowing to reduce fiscal deficit. Latter case has rarely appeared in Pakistan. However, cost-push factor is a considerable catalyst of general, food, and non-food inflation. Increases in oil prices, wages, interest rate, indirect taxes, energy tariffs, and subsidies bring cost-push factor in action, suggested the PIDE's report. Lastly, currency depreciation also results in rise in cost. Structural problem that is food shortage may and may not be the sole cause of jump in particularly CPI inflation in Pakistan.
In recent times of global economic meltdown, the economic planners have added force to the publicities of importance of savings. US, the world's largest economy, started to show the sign of anaemic growth and its every fiscal policy under Obama's administration tried to push up savings rate from its lowest level of about 13 per cent of GDP since great depression. In comparison to other economies, the rate is a very low.
According to the international monetary fund (IMF), Japan's national savings rate is approximately 25 per cent. Europeans save about 20 per cent. China has the surprising rate of national savings. Half of the income in the leading Asia's economy is saved.
Pakistan is one of the countries having the lowest savings ratio to gross development product (GDP) of 14 per cent. Even if the ratio is not considered as an accurate indicator of saving trend in the country, the latest detailed household integrated economic survey (HIES) 2010-11 conducted by FBS should remove any doubt.
Nationwide, an average household income is utilised towards consumption expenditure (90 per cent), liquidation of liabilities and payment of interest (1.31 per cent), deposits/savings (3.95 per cent), etc., as per the findings in the survey report. A national monthly average disposable income per household was calculated at Rs21,721.
There were differences in household incomes, consumption and savings in rural and urban areas.
While monthly average disposable income per household in urban centres was estimated at Rs27,596, it was Rs18,650 in rural settlements, suggests a table. In the same way, consumption expenditure accounted for 88 per cent of an average household earning in cities, whereas it stood at 92 per cent for rural people. However, deposits/savings by rural population were found better than that by urban inhabitants. Former saved 4.52 per cent of total monthly receipts whereas latter managed to save only 3.2 per cent, according to HIES 2010-11.
At provincial level, the savings/deposits rate was also found dissimilar with Balochistan and Khyber Pakhtunkhwa (KPK) having the lowest savings rates in the country.
A monthly average disposable income per household in Punjab was estimated at Rs22,781 and saving rate 4.84 per cent. In Sindh, income was recorded at Rs20,561 and rate of savings 3.25 per cent. In KPK, income was registered at Rs20,076 and savings 1.81 per cent. The survey found Balochistan at a low ebb both in terms of monthly average disposable income per household (Rs18,492) and deposits/savings (0.72 per cent).
Unquestionably, low savings rate means fewer investments in the productive sectors of the economy. The government with runaway expenditures has to take funds from the banking channels to correct its fiscal imbalances. On the other hand, it has to cut social spending or development expenditures, which the government of Pakistan is doing at present. Withdrawal of subsidies on consumer essentials such as electricity was also aimed at to fill the fiscal gap, even though controlling non-development expenditures or savings would have created a fiscal space for the government.
Encouraging people to save more is justified only when they have enough incomes left in possession after footing the bills in lieu of groceries and transports.
However, corporate sector should be encouraged to make an investment instead of spending. An expert said consumption on research and development and technologies is an investment to attain growth in the end. Similarly, government should consider spending on education and health as an investment rather than consumption, he advised.