Low savings invite larger foreign funds
Pakistan relies heavily on foreign funds because the country's savings are not enough for investment in economic progress. Savings and investment data for 2019-20 will become with the release of the State Bank of Pakistan's (SBP) annual report for the fiscal year. But heavy foreign funding obtained during the year proves that the country's domestic savings that had been in decline for several years could not pick up enough pace.
According to the balance-of-payments statement, the government sector alone amassed $13 billion foreign funding in 2019-20. That obviously includes funding from the International Monetary Fund (IMF) and other multilateral lending agencies plus foreign exchange funds from countries like China, Saudi Arabia and the United Arab Emirates.
The gap between total investment and gross national savings of Pakistan was not that large back in 2013-14 and 2014-15 - the first two years of the PML-N government. But as the government went into high gear for making big investment in the last three years of its five-year term, this gap widened. Part of the reason was local funding for China-Pakistan Economic Corridor (CPEC)-related projects.
The gap between total investment and total savings stood at Rs322bn in 2013-14. It fell to Rs275.6bn in 201415 with a higher increase in savings than in investment, a closer look at the SBP statistics reveals. But in the next three years, investment kept growing while savings first became stagnant and then fell, thus enlarging the gap between total investment and gross national savings. The gap soared to Rs2.18 trillion in 2017-18, the last fiscal year of the PML-N government.
It has become evident to economic managers that keeping the investment-savings gap at very high levels is not viable Multilateral lending agencies and the SBP kept reminding the policymakers of this fact, but their warnings were conveniently ignored. The PTI's maiden government managed to narrow this gap to Rs1.79tr in 2018-19, its first year in power. But even at this level, the gap was obviously too huge.
That partly explains why local funding of CPEC projects in 2018-19 and 2019-20 slowed down and why the country's annual development plans also became less ambitious.
Now it has seemingly become evident to Pakistan's economic managers that keeping the investment-savings gap at very high levels is not viable even if it may continue to amass foreign funding of the desired size. That is why we see them focusing on boosting remittances, restructuring or privatising public-sector enterprises or PSEs and encouraging national savings on the one hand and allowing only gradual and most essential local funding of CPEC projects on the other while still keeping the annual development plan within sustainable limits.
When remittances continue to rise, they affect positively on net factor income from abroad - an integral part of a country's total savings - and when financial health of the PSE sector is improved, it boosts non-government or private-sector savings of which PSEs form a part.
Keeping domestic savings at high levels requires stricter fiscal discipline so that foreign funding could be utilised solely for the investment into economic development. It also requires greater fiscal and monetary coordination to create a policy mix that promotes domestic savings. But during the past two years, despite some modest gains, the PTI has not been able to create enough fiscal discipline. Part of the reason lies in the fact that the party spends too much energy on lamenting the fiscal performance of the previous governments.
And, though fiscal monetary coordination mechanism has been activated after having been practically forgotten in the PML-N government, ground economic realities are such that it is not yielding the desired results.