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Effects of interest rates on the saving and investment behavior in Pakistan

Effects of interest rates on the saving and investment behavior in Pakistan

In the wake of widening external deficits, dwindling reserves and uncompetitive exports in the back drop of political uncertainty, the million-dollar question that arises is where to invest in 2019? While the economic managers are still busy understanding the sector-wise impact of the recent fall in the rupee’s value, meanwhile, investors keep themselves away from taking long-term positions in stocks. Even foreign investors, whom everyone expected to swoop in to pick up stocks in the event of rupee depreciation, have continued to keep their wait and watch policy.

Conventionally it is considered that when people get high return in terms of interest from banks on their money, they tend to deposit more in banks. It could be an alternative of investment in various projects. Interest rate influences habit of customers to save the money and collectively it shows the saving habit of any nation. Saving is considered the pillar for economic growth; sufficient saving leads the increment in aggregated fixed capital that helps the economy to be sustained. Savings shows the strength of a nation and it establishes capital formation that is the reason behind innovative technological development. Productivity of the labor could increase by the help of technological diversification that induces the increment in GDP. The perception of saving money reflects the purchasing power of customers and wages rate in the country. If people have remaining money after spending, they tend to save it and these deposits increase the average deposit of banks. The deposited money is invested by banks and they get profit, which is usually more than they pay back to customers in terms of interest or banks may also lend the deposited money to earn the difference of interest paid and received, hence the system of cash cycle runs. The high interest rate increases the deposit and profitability of the banks.



The investment and saving rates in Pakistan could not achieve significant growth in the past three decades and resulted in slow economic growth. A variety of factors are responsible for a low savings rate in Pakistan. Generally, the factors which influence the rate of savings in the economy include economic growth, rise in per capita income, favorable demographic structure, prudent fiscal stance, positive real returns, expected inflation rate, development of the financial sector, and cultural and psychological issues. A comparison with the Asian economies reveals clearly that Pakistan has a long way to go. To be at the same level of growth with these fast-growing economies, Pakistan needs to finance the desired investment through increased domestic saving without undue reliance on the foreign resources as these introduce an element of unsustainability. So, it is essential to get the saving rate up to 20–25 percent, if we want to follow the model of these countries. There is need to boost up the saving and investment in the country through effective policies giving due consideration to the effectiveness of the potential determinants.

Savings in Pakistan are not significantly affected by the budget deficit and government investment. However, by the increase in the government’s current expenditures more resources are transferred towards the people in the form of increased wages, and more liabilities are cleared on the part of government. Most people save to cover the future expenditures, i.e. education, marriages, etc. so, re-structuring of the financial market is needed to lure more savings. Remittances are contributing towards the higher savings in the country and more effective policies are needed for transfers of remittances and further job creation for Pakistanis abroad. Return on investment is an important determinant of investment in Pakistan. Its role in investment decisions-making carries such a weight that it outweighs negative impact of increased rate of borrowing. Expectations and uncertainties play a major role in investment decisions in Pakistan. Whereas domestic saving is a major source of investment, foreign saving is not effective for investment in Pakistan.

[box type=”note” align=”” class=”” width=””]The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan[/box]

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