A Wiseman once said, "A penny saved is penny earned". While, on a general scale, the adage has been religiously followed; however, as a nation we are following it in a way contrary to what it is teaching us. Pakistan stands amongst the countries with lowest savings-to-GDP ratio, standing at a dismal 14.2% in 2015 compared to the global and emerging economies average of 25.6% and 31.4% respectively. Resultantly, we have been bearing the repercussions of low savings in the form of slow economic growth, high unemployment, double-digit inflation and many other chronic issues. The low level of savings in our economy paint a very bleak picture of our country's potential to grow in the long term as savings provide a major impetus to economic growth in the form of investments.
Why savings lie at the heart of the economy and how do they affect economic growth? The answer lies in the fact that investment ("I"), an essential driver of national income highly depends on savings available in the economy. What happens in reality is that entities in need of capital access available savings from households or other companies through financial intermediaries (banks or capital markets). If there is a dearth of savings in the economy, then eventually the economy will struggle to meet its financing needs, which in turn will lead to suboptimal economic growth, insufficient job creation and inferior living standards. Empirical evidence shows that countries with higher savings-to-GDP ratio have recorded exceptional economic growth compared to countries with lower savings-to-GDP ratio. The table below provides a comparison of economic growth of regional countries with their level of savings-to-GDP ratio.
Pakistan is conspicuous at the last row of the list with poor relative economic growth, and there is a reason behind it; lower level of savings compared to other nations. Even with such a low savings-to-GDP ratio, Pakistan has managed to post an average GDP growth close to 4% during the period owing to foreign financing (foreign investment) as it can be witnessed from the fact that average Investment-to-GDP ratio in Pakistan has exceeded the average savings-to-GDP ratio. Generally, if domestic savings are inadequate than a country can get a portion of foreign savings to finance its investment needs. Indeed, we have been extensively using foreign savings to fund our investments; however, the notion has lost its significance. Foreign investments which were seen at a record high of USD 7.0 billion in FY07 have plummeted down to USD 1.8 billion in FY15. Foreigners have taken flight as global recession coupled with deteriorating law and order situation in our country has compelled them to believe that Pakistan is no more an attractive place to invest. Hence, it is jeopardous to rely on foreign investors as they tend to be fickle and any bit of bad news or concern over the health of economy can result in abrupt withdrawal of funds, which typically results in currency slump, higher inflation and economic downturn. Thus, we cannot afford to be dependent on foreign inflows and there is a dire need to inculcate a culture of domestic savings.
The ideal way to boost domestic savings in our economy will be to increase public savings. Public savings have been abysmally low in our country as the government has proved to be a major dissaver. Huge fiscal deficits have been incurred by the government on account of its low tax collection and high current expenditures. The tax-to-GDP ratio has been too weak at close to 11.0% compared to global average of 14.0%. Furthermore, these deficits were mainly incurred to finance the current expenditure portion rather than the investment (development) expenditure. The deficits could have been indeed justified, had the government used it to finance investment expenditures which typically help in fostering economic growth. Hence, to enhance public savings, it is imperative for the government to narrow down its fiscal deficit by enhancing its tax revenues or by taking austerity measures.
Countries with high tax to GDP ratios follow a policy with focus on progressive taxes (taxation at rates which rise with income) as it corrects income inequality and precludes enduring differences in society. In order to improve its tax-to-GDP ratio, government has to step up and pursue stringent reforms in its tax structure. The undocumented sectors should be brought in to the tax net and any resistance should be vehemently opposed as it is a do or die situation for us.
Another promising way to increase national savings would be to concentrate on household savings as they carry a significant portion of national savings. The theme of consumerism has been evident in a Pakistani's lifestyle and our economic growth has primarily been driven by consumer-led growth. According to the Economic Survey of Pakistan 2015, an average consumer in Pakistan allocated PKR 91 out of PKR 100 to consumption expenditure, implying a marginal saving rate of only 9%, compared with over 30% during the period FY01-08. There is no harm in consumerism as long as it is at a sustainable level; however, beyond a certain level it is detrimental to economy since it gobbles out all the available savings. Thus, as individuals and a nation we have to restrict our unnecessary expenditures. The Pakistani nation has been distinguishing itself by its ruthlessness, indifference and disregard for the future. The headline numbers indicate an economy in an abysmal state, but everywhere one looks, there are people shopping like there is no tomorrow. Palatial homes have become our symbols of distinction. For FY15, the imports of textile, food and transport group amounted close to USD 10.2 billion. Do all of these imported items are deemed relevant for consumption? I am not saying that we should stop importing these items, but imagine even a 20% reduction in imports of these products can contribute 1% to the savings-to-GDP, which means a lot to our economy.
In defence of an average Pakistani, I am bound to say that the incentives to save are not too high as soaring inflation leaves the masses with no choice but to consume. The banking products, which are the most popular means of savings, offer returns that are insufficient to beat inflation. According to data provided by SBP, the average deposit rate on fresh deposits for the latest period stood at 3.7%, while the core inflation number was close to 4.7%. In such a negative real return scenario, an average Pakistani is better off in consuming today rather than saving for tomorrow. Mutual funds can, to a great extent address this problem by providing competitive risk-adjusted returns and purchasing power protection to the masses. However, there is a strong need to increase awareness of these products (through advertisements, seminars etc) in order to increase their retail penetration as majority of the population is not cognisant of mutual fund and its advantages.

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                 AVERAGE DURING 2006-2015 (10 YEARS)
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COUNTRY       Savings as a   Investment as  Economic
                % of GDP      a % of GDP  Growth (%)
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China             49.28          44.57          9.54
India             33.72          36.09          7.52
Sri Lanka         23.63          28.11          6.26
Bangladesh        28.91          27.41          6.17
Vietnam           30.81          32.15          6.12
Indonesia         30.99          32.58          5.79
Philippines       22.82          19.22          5.41
Pakistan          13.56          16.49          3.87
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