Savings & investment
As is well known, Pakistan has one of the lowest savings rates in the world. In 2016-17, as per the State Bank of Pakistan data, the gross savings-to-gross domestic product (GDP) and gross investment-to-GDP ratios were 12% and 16.1% respectively, with savingsinvestment gap of 4.1% of GDP.Final savings-to-investment data for 201718 is not available. However, the last financial year ended with $17.99 billion (5.7% of GDP) in current account deficit and $36.24 billion (11.88% of GDP) in trade deficit. Therefore, on the basis of parity between the savings-investment gap and current account balance, we can presume that in 2017-18 national savings had lagged behind investment by 5.7%.
Pakistan depends on foreign investment and loans to bridge the gap between its exports and imports, and thus it becomes a net debtor.On average, the investment-to-GDP ratio in Pakistan during FY15-FY17 was 15.7%, while the average savings-to-GDP ratio was 13.4%. On an average, the savings lagged behind investment by 2.3% of GDP. During the same period, the country ran current account deficit of 2.26% of GDP, which confirms that the difference between savings and investment equals the current account balance.In FY17, the current account deficit increased Rs7.5 billion (2.4% of GDP) over the previous year. The same year, the difference between savings and investment went up 2.3% of GDP over the previous year.
Since over the years Pakistan has received low foreign direct investment (FDI) inflows, the difference between savings and investment has been financed mainly through foreign debt.At the end of FY17, the total stock of external debt was recorded at $62.6 billion or 27.3% of GDP compared with 24.3% of GDP at the end of FY15. At the end of 2017, the external debt had gone up to $66.9 billion.Historically, in Pakistan, the share of savings in GDP has been quite low. During the 1960s, the average savings-to-GDP ratio was 10%, which increased to 11.2% in the 1970s and to 14.8% during the 1980s, before falling to 13.8% in the 1990s. During 2000-2010, the ratio rose to 16.6% before falling to 13.6% between FY11 and FY17.
Even the periods of rapid economic growth were not accompanied by a corresponding increase in savings. For example, between FY03 and FY07, the economy grew 6.6% on average, but the average savings-toGDP ratio was 16.1%. The low level of savings is one of the major reasons why growth was dependent on foreign credit and could not be sustained when loans dried up. The economy registered its highest-ever current account deficit of 8.5% in FY08. In the same year, the difference between savings-to-GDP (13.6%) and investment-to-GDP (22.1%) ratios was 8.5%.
Savings are an important source of investment and thus underpin export and economic growth as well as employment generation. Total savings in an economy have two components - government savings and private savings. Governments in Pakistan (both federal and provincial) typically do not save or register very low savings. In FY15, FY16 and FY17, the government savings as a percentage of GDP were 1.5, 0.5 and 1.7 respectively. A big chunk of savings comes from households, the overwhelming majority of which are small savers.One of the major determinants of savings is the interest rate. The higher the interest rate, greater is the propensity to save. A typical household prefers to put money in the National Savings Schemes (NSS) run by the government.
During Musharraf era, the NSS rates were drastically reduced. The PML-N government also cut NSS rates. The cut in interest rates did not have an appreciable impact on private-sector investment. As a percentage of GDP, private-sector investment went down from 10.4 in FY15 to 9.9 in FY17.On the other hand, the cut in interest rates discouraged household savings. It is hoped the new government will adopt special measures to promote savings in the economy.