Sav­ings & in­vest­ment

The Pak Banker - - FRONT PAGE -

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.

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