Incentivize savings - now!

Virtually all the economic targets have been missed, and by a large margin. Unachievable targets were set by the previous government, and then the incumbent's below average performance led to an almost embarrassing performance. The economy has shifted back from the top to second gear as the system can only let low growth to sustain without deepening the crisis. The story is same which virtually every government has adopted in the past - consolidate the deficits accumulated from the previous government, and let the growth spur close to elections, and leave the mess for the up-comers.
The institutional derailment started around three decades back, and in the last decade, especially in the previous regime, the debt fueled growth was the answer to everything without delving into the much needed structural reforms. This government right from day one started reciting the economic literature prepared in the past two decades, but failed to implement any out of the box solution.
Now the reigns are in the IMF's hand and all structural reforms or tough measures are to be implemented under the IMF. The same has been advised by top economists from the day one that there is no systematic will to do reforms in the country adjustments can only take place from the platform of the IMF. Same story, every time.
The only difference this time is that the absolute magnitude of losses, debt and deficits is growing disproportionately whilst the Pak-US relations are worsening. That is making the task difficult as the usual waivers may not be the case as of now. Either, there will be a premature exit from the programme or the relations with the US will improve. The first case is scary and could lead to a default while the latter is not on horizon seeing the geopolitical situation.
The problem is of high saving and investment gap which has widened this year. Just to put things in perspective, back in 2002-04, a brief time in the last two decades, when the current account was actually in surplus and fiscal deficit was under 4 percent of GDP, the national savings were 17.7 percent of GDP and the investment was 16.4 percent of GDP. The gap was low and the deficits were not there.
Fast forward, in FY18, the savings, to support 16.7 percent of GDP investment, were a mere 10.4 percent of GDP. To fill in the gap, higher foreign savings (read high CAD) were required. This is what is meant by debt fuel growth or consumption led growth ie. due to low domestic savings, foreign money has to plug in and that create external imbalances.
The core of the problem is low domestic savings and within it, the negative savings of the government. The domestic savings reduced to 4.2 percent of GDP in FY19 versus 15.6 percent of GDP in FY04. The need is to correct the gap and once that is done, the twin deficit problem is gone. However, the problem has worsened in FY19 versus FY18. And the main issue in falling domestic savings is negative savings by government (read high fiscal deficit).
The demand driven growth structure has to be shifted to supply led - by revitalizing industrialization. That is the resolve of this government with limited success though. The numbers tell the tale - total consumption increased from 82.6 percent of GDP at market price in FY04 to 94.8 percent in FY19. The consumption has even increased in FY19 despite all the currency and interest rate hikes.
Saving has to be incentivized and channeled to productive sectors- the saving parked in real estate and abroad to productive sectors. The trend has to change. The banking credit has to be robust and new attractive saving avenues have to be identified.
It is a tall task. Nonetheless, high interest rates can attract private domestic saving, but reducing fiscal deficit is the key for creating public saving space. That requires FBR's miracle performance of around 40 percent growth. A midway has to be negotiated to phase the reforms in three years. Give economy time to breath and slowly tighten the screws.