Pakistan''s domestic savings have remained low, relative to peers, over the last decades or so; it nose-dived in FY08 and continued till the available numbers of FY11. The investments, therefore, were partially supported by foreign component of savings, which on average contributed 35 percent of total investment in FY08 and FY09.
However, foreigners'' savings were in negative last year. No wonder, gross investment as a percentage of GDP was at its lowest level since FY74. The issue on philosophical grounds is graver; savings are principally to spur tomorrow''s growth by investing in infrastructure, education, industrial units and other avenues and by forgoing today''s consumption.
In Pakistan, most of domestic savings, primarily of households, are being deposited in commercial banks or in national savings schemes and lately, with the bulk of bank credit being advanced to the government. The government in turn is using this money to finance its deficit on today''s expenditure including defence spending, debt servicing and running government machinery.
The issue becomes worse when Rs120 billion is being injected from fiscal resources to plug in ever growing devil of energy circular debt. This is to use savings for yesterday''s consumption - i.e. a regression in principle.
There has to be a debate amongst policymakers to disallow such hard earned savings of households and companies from being used in inefficient and regressive government expenditure.
Although it''s not as swift and efficient as private sector investment, the public sector development programme has been generating employment and building infrastructure to spur economic activities across the country.
Sadly, the development expenditure within the government budget is shrinking amidst tight fiscal space. In fact, lately it''s being used to cater certain expenditure that should have been classified as current expenditure, like the spending on sick public sector entities, machinery and infrastructure.
This will further hurt investment and growth prospects and employment generation as a consequence. This year, a deficit close to a trillion rupees is expected while the foreign component of funding might just be a little fraction of it. The onus of its financing is primarily falling on domestic sources - NSS might raise Rs200-250 billion, the rest cannot all be financed by commercial banks considering that only a modest growth in deposit base is expected.
However, taking all the money from commercial banks will not only crowd out private investment, which grew by a mere 4 percent last year, but also enhance the rollover risk, regardless of the direction of interest rate movement. This can dry up liquidity in the market as well.
Then the government may have to go to central bank for the missing financing and therefore anchor inflationary expectations. Although, the government finished last year borrowing at much lower (Rs1154 bn) than the promised September-end level of Rs1290 billion, most of the time the government used September-end level as the floor, instead of using it as ceiling.
It will be interesting to see how the government will manage its central bank borrowing target this year; there is a debate with the IMF to redesign the target as average zero-target for the quarter rather than the end-zero target. For the government, it seems, both will be hard to maintain.
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