Stimulating domestic savings

Of the many differences between the US and Chinese economies, one stand out rather more striking than others; the US spends tomorrow's money today, whereas the latter spends today's money tomorrow. And it is this very savings rate, which drives the Asian giants' ballooning current account surpluses year after year, which enabled China to withstand the global economic crisis in a fashion much secure than the developed world in the West.
And herein lies an important lesson for Pakistan. So far, Pakistan's saving rate has been dismal and falling. Domestic savings as percentage of GDP dropped from about 16 percent in FY06 to just 11 percent last year -- exhibiting a backward inclination, compared to other similar regional economies. For example, India's saving rate has been rising steadily for the past seven years, starting from approximately 25 percent to 34 percent at present, as a percentage of total output.
The fall in savings can also be mapped with the money going out of the system; the currency-in-circulation (CIC) has increased from 18 percent of the aggregate M2 flows in FY05 to 38 percent in the last year. Domestic private consumption, on the other hand, has been showing an increase, from approximately 74 percent in FY04 to nearly 80 percent in FY09.
This increase occurred even while interest rates were climbing. With the expected fall in interest rates in the future, it is safe to say that consumption would shoot up, further dampening any chance of savings that could have taken place. "The persistence of a high saving-investment gap has meant that crucial investments have had to be financed through debt creation as opposed to access to increased savings. The impact of these two vital developments is not only reflected in the fiscal deficit, but also the increasing debt burden of the country" the central bank pointed out in monetary policy statement earlier this year.
Hence, clearly, attention has to be paid to stimulate domestic savings, but here is the Catch-22: the government needs to develop a package to induce national savings in order to turn these savings into future investments. However, given its constrained fiscal revenue for the coming year, creating such a stimulus would prove extremely difficult.
This leaves much at the helms of capital market participants and private financial institutions inter alia, the brokers, investors, asset management firms and also perhaps latest banking innovations such as the m-banking model in the absence of strong banking penetration in the country.
BOOSTING EQUITY MARKET: Pakistan's equity market has grown persistently over the last many years. On an average, the market has yielded return of 12-14 percent per annum. The number of companies listed at the country's main bourse, Karachi Stock Exchange, has also risen over the course of years. But much still remains to be done.
There is a need to get more firms listed at the exchange and also perhaps at the OTC market to ensure that real capital formation takes place than just exchanging the hands from the government to public. But for that, experts argue, there is a need to develop the market itself, citing the need for leverage. "Leverage is necessary for market development because it increases the ability to trade in the market; it makes the market more liquid," says Nasir Bukhari, Chairman of the KASB Group.
Quite simultaneously there is a need to increase the number of market participants." The biggest problem with brokerage houses is that they haven't expanded and they never ventured into advisory services to boost placement of capital," Bukhari aptly points out.
However, one way to expand investor base, currently being explored by the industry, is attracting youth through online trading services marketing via universities and social media.
"We are trying to attract overseas Pakistanis using Google, Yahoo and so forth, whereas a campaign using Facebook and other networking websites is also under consideration," says Muzzamil Aslam, Head of Business Development at brokers JS Global Capital Limited.
Aslam who expects people to start trading through mobile phones soon says his plan to target the youth through educational institutions such as the Institute of Business Administration, (IBA) College of Business Management (CBM), Indus Valley School of Art and Architecture and so forth.
"The aim is to hit those computer literate students who can help their parents trade through our systems," says Aslam. In addition, many brokers are now expanding to increase their research services to identify the under researched firms and help investors find real value.
OUTSIDE EQUITIES: Pakistani corporate bond market is under $3-4 billion, which is minimal compared to the country's stock market size of around $30 billion. This comes in stark contrast to global capital market, where bond markets are several times larger than the stock markets.
This has made it difficult for companies to finance their expansion, whereas internationally, large corporations rely on the strength of their balance sheet to issue commercial paper and bonds. In Pakistan, even AA-rated companies go to banks for their financing needs, which crowds out the small and medium size businesses from bank financing.
A big impediment in the growth of the bonds and commercial paper market is that the SECP takes months to grant approval for their issuance, whereas taking a loan from a bank is much quicker. Since the bond/TFC gets a rating before the firm applies to the SECP for listing purposes, the regulator should take days instead of months to approve the issuance of such securities.
Then there is the issue of high savings rate offered by the government on NSS schemes, which is crowding out the private sector and encouraging investors to lend to the government rather than the private sector; hence the hurdle in capital formation. Albeit, some recent developments are promising as regards the expansion of the banking net. These include PRI Scheme, which currently attracts workers remittances, and is planned to be channelled to investment avenues.
For instance, the KASB Bank has created a liaison with AJK Bank and the Bank of Khyber to transit remittances, and is considering to strike a similar deal with Punjab Co-operative bank. In turn, these banks would help KASB sell their recently launched gold fund.
On a related note, the JS Group has also started offering commodity breakage services, which they plan to expand, through their online trading terminal once activity picks up.
These moves are in addition to the latest trend in banking; m-banking, which is termed quite healthy for the broader economy, by providing low cost services with greater accessibility, especially in the unbanked far flung areas.
According to a recent study, mobile service facility reduces poverty using microfinance and cash management facilities. Another report points out that adding ten extra cell phones per 100 people in a typical developing economy, GDP growth per person boosts by 0.8 percentage points.
But whatever the products the key would remain in savings; if the unbanked become banked, then there are hopes that savings would increase. Unless savings are increased, the nation would continue borrowing, and by now it is pretty evident that, "he who goes borrowing, goes sorrowing".