Need to promote domestic savings
The gross domestic saving is what we get after deducting final consumption expenditures from the gross national disposable income. When these savings remain low as a percentage of GDP - and that, too, for a long period - it means that a country is spending fast, not leaving enough for the expansion in national wealth in the future. Pakistan kept doing this between 2005 and 2019. But the situation is changing now.
Between 1990 and 2004, Pakistan's gross savings ranged between 13.2 per cent and 17.4pc of GDP. During this period, the size of its GDP increased from $40.1 billion to $107.8bn, gaining additional mass of more than two and a half times. From 2005, gross saving rates started declining and ranged between 14.2pc in 2005 and just 5.4pc in 2019, according to the World Bank. The State Bank of Pakistan (SBP) has revised the 2018-19 gross domestic savings rate to 4.1pc. During these 15 years, the size of Pakistan's GDP grew from $120bn to $278bn or a little less than double - but more on the strength of domestic consumption than exports.
Reliance on foreign funding over an extended period of time hides structural weaknesses that keep savings rates low and damage sustainable growth potential Over an extended period of time, a change in the range of gross domestic savings rates may not necessarily have an identical impact on economic expansion. As the above statistics establish, the economy may keep expanding - though not as fast as earlier - even when there is a big decline in savings rates. But why? Because when national savings rates start declining, countries can opt for higher foreign funding to finance investment where it is required and keep gross fixed investment high enough for a desired pace of economic growth.
But reliance on foreign funding over an extended period of time hides structural weaknesses that keep savings rates low and damage the sustainable growth potential of such countries. That is exactly what we are experiencing now. Gross fixed investment during 1990 and 2004 ranged between 20.7pc and 16.4pc of GDP when gross national savings rates were high. But in the next 15 years - i.e. between 2005 and 2019 when savings rates kept sliding - gross fixed investment still ranged between 17.7pc and 14pc, thanks chiefly to foreign funding.
As we have apparently entered another long-term periodic cycle of gross domestic savings, our economy is caught in a kind of foreign debt trap right at the beginning of this cycle. The country needs net non-debt-creating foreign exchange inflows and, in the absence of it, foreign funding not just to invest in the economic development but mainly to service old foreign debts. In 2019-20, Pakistan spent $14.58bn, or equal to 65pc of merchandise export earnings, on foreign debt servicing.
In 2019-20, Pakistan spent up to 65pc of its merchandise export earnings on foreign debt servicing It is heartening, however, that the bulk of this $14.6bn i.e. $11.34bn-plus was used for principal repayment and less than $3.24bn for interest payment. This is appreciable. If this trend continues and the country keeps retiring the principal amounts of old foreign loans, it should decelerate the growth of foreign debts in volumes. That, in turn, can enable the country to get out of the vicious cycle of "get foreign funding to pay foreign debts".
The most recent cycle of low gross domestic savings that began in 2005 has already ended in 2019 - or so it seems. Pakistan is re-entering another periodic cycle of high savings rates. According to the SBP, gross domestic savings stood at 6.8pc in 201920. It is expected to rise further in this fiscal year, with the ongoing expansion and documentation of the economy.