Abysmal savings rate

In a report titled "Determinants of savings in Pakistan", the World Bank has argued forcefully that if the country wants to sustain its growth and increase investment without paying out an increasing share of its income in interest or dividends, it has to finance investment by raising its domestic savings rate.
The Bank has also questioned how, with low domestic savings rate and low foreign direct investment (FDI), Pakistan would be able to finance its rapidly growing economy in the medium term. The flow of foreign savings is always uncertain due to cyclical movements, fluctuations in exchange rates, external shocks and a host of other factors.
In the long run, reliance on foreign capital is also unsustainable as international liabilities erode the national income base. The experience in most of the developing countries suggests that while foreign savings give an initial boost to growth, domestic savings have been the key to sustained domestic investment later on.
The World Bank's report argues that the recent decline in household and public savings rates in Pakistan juxtaposed to increasing domestic investment needs in a fast growing economy, suggests that unless savings go up, economic growth will suffer.
To sustain its current growth momentum, without incurring the expenses of heavy international borrowing, Pakistan will need to reverse the current low (and declining) trend of domestic savings and resolve its geopolitical challenges in order to attract FDI. Foreign direct investment cannot fill the domestic resource gap even if it is doubled; hence, domestic saving is the only feasible source of extra funding. Pakistan is currently facing a domestic resource gap of around 3.5 percent of output which is quite huge.
Not only the domestic savings rate is substantially lower in Pakistan than in other East Asian economies, the responsiveness of the country's domestic savings rate to changes in GDP, per capita growth is also less than that of the comparable economies. The estimated coefficient for Pakistan (5.52), for example, is lower than for China (12.42), Indonesia (7.97) and Malaysia (7.55). This suggests that the elasticity of savings rate to changes in the level of income in Pakistan is smaller than in other fast growing economies.
As for sector-wise contribution, while the rate of household savings in Pakistan has been moderate for the last three decades (although still lower than the one in East Asia), corporate and public savings rates have been considerably lower than in other fast growing Asian economies. Based on regression analysis, it was found that demographic, financial development, fiscal, and economic growth variables are statistically significant determinants for Pakistan's domestic and private savings rates; hence, policy recommendations must focus on these four factors.
There is absolutely no doubt, in our view, about the validity or suitability of World Bank's findings in the current economic environment of Pakistan. The emphasis on domestic savings highlighting all the related issues is definitely right and to the point. It needs to be remembered, however, that the subject has also been previously studied in detail and the conclusions have been pointed out to the policy makers a number of times, but without much impact.
In fact, the situation on the ground has been quite the reverse in recent years and domestic savings as a percentage of GDP have declined from 18.1 in 2000-01 to 14.4 in 2005-06, forcing the country to rely on foreign savings for financing its investment effort. Since the contribution of national savings to domestic investment is indirectly the mirror image of foreign savings required to meet investment demand, the extent of recourse to foreign savings reflects the saving-investment gap as measured by the level of current account deficit.
Obviously, reliance on foreign savings, as has been mostly the case in Pakistan, would add to the debt burden of the country, mortgage the income of future generations and widen the current account deficit in the coming years. The more worrying aspect is that contrary to expectations, elasticity of savings is very low in Pakistan compared to the other countries. Therefore, any hope of financing investment from domestic resources as a result of higher GDP growth would also be misplaced. This suggests that the prospects of a self-propelled and sustainable growth, which are propagated day in and day out by the government, are largely non-existent.
The key to sustaining or fostering development can of course be found in increasing domestic savings rates to approximately 20-25 percent of GDP. This is difficult but achievable. Most of the comparable economies in South East Asia are already generating this level of savings. The only condition is that we, as individuals and as a nation, have to change our attitudes and habits. Thrift has to be encouraged and consumerism discouraged at all levels and in every situation.
Unfortunately, we are not accustomed to it but we have to promote such a culture to survive and for future prosperity. Strange though it may seem our policies are also far removed from attaining such a goal. Budgets, which are meant to shape the direction of the economy, give a wrong signal when the fiscal deficit is not under proper control and, instead of contributing to domestic savings, preempt a considerable part of it to balance the public accounts. The monetary and credit policy of the country is also not conducive to promotion of financial savings at the moment.
The will to save is hugely undermined by the low rate of returns on deposits which are not even sufficient to cover the erosion of purchasing power of the rupee. In the last few years, our credit regime has also been geared to promote consumerism in the society. It is the level of savings in the economy and not the flashy cars and energy guzzling air conditioners purchased through loans which set the pace for future development. The policy makers of the country need to realise the importance of increasing the rate of domestic savings to a respectable level as early as possible through a mix of policies, otherwise the future of the economy would remain in limbo.