Site icon Pakistan & Gulf Economist

Savings – savior of the Pakistan’s economy

Savings - savior of the Pakistan’s economy

Pakistan’s economy is characterized by low levels of household savings which play a very crucial role in stimulating sustained economic growth. At the same time consumers borrow in order to consume. Households are the backbone of any economy. This is not different in Pakistan because their consumption account for about 60-70 percent of the gross domestic product (GDP). However, the recent past has been characterized by significant economic impacts on households. In particular, the financial health of households have been affected in many ways, including a decrease in household savings, increase in household debt through massive financing in the form of credit extensions and leasing finance thus a decrease in economic growth.

Domestic savings represent the stock of savings which residents of a country and its public institutions accumulate without taking into account the net factor incomes flowing from abroad. As a rule, high savings show a trend of seriousness about wealth creation and long term commitments. We as a nation are extravagant and like spending unnecessarily, if we have some money. As a matter of fact, spending and savings behavior of the community is determined by various factors such as the material and social needs people have, tradition, the standard of living and the age distribution of the population. Over the years, Pakistan has accumulated more debt than savings because it normally borrow in order to consume, which has then cultivated a culture of dis-savings in the country.

Domestic savings are essential for attaining a sustained level of economic growth and play a crucial role in promoting strong and sustained economic growth if channeled towards profitable, sound and appropriate investment opportunities. In comparison with other emerging markets, Pakistan’s saving rate is considered to be relatively low. As per economists, such low levels of national savings contribute to increases in resource constraints pressures and impedes investments that can potentially enhance growth. Access to credit is critical to businesses and individuals. This is because access to financing is crucial to their survival, sustainability, growth and ultimately to a country’s economic growth, employment and asset formation. At the same time, the development of banking sector can also be achieved.

In a nutshell, Pakistan is experiencing low levels of economic growth coupled with low levels of household savings. Also, the demand for credit is high and many individuals find themselves being heavily indebted and have difficulties financing their debt. It is believed that is might be because individuals have relatively easy access to credit which makes it hard for them to put money aside for savings. Therefore, there is a need to investigate the impact of household savings and financing on economic growth in order to assist monetary authorities to come up with suitable policies to mitigate problem.

The role of saving is very critical in capital accumulation and economic development that is recognized in various established economic theories. Pakistan has been facing many critical problems in the present many years. In 2003, Pakistan achieved a very high growth of 7.5 percent, where foreign saving was negative with a very high domestic or household savings. Later, domestic savings started declining and Pakistan thereafter achieved average growth rate of just 3.5 percent. That is relatively low due to less domestic savings.

In the history of Pakistan, domestic or household savings have played an important role in capital accumulation and attaining high growth rate, as domestic savings decrease, capital accumulation also decreases and hence low growth rates of Pakistan.

As per the World Bank data, savings as a percentage of GDP from 1976 to 2018 shows that the average value for Pakistan during that period was 22.49 percent with a minimum of 14.66 percent in 1976 and a maximum of 30.43 percent in 1983. It was 18.5 in 2018. Recent high inflation has badly affected the savings of middle class and then State Bank has increased the interest rates thus it has become a strange mix of things where people don’t have much savings but want to put in banks to get higher deposit rates.



Increasing savings-investment gap highlights the country’s dependence on foreign savings and building up of vulnerabilities. As per the Economic Survey of Pakistan, the State Bank of Pakistan has made a sizeable adjustment in the interest and exchange rates to contain the aggregate demand and ease the pressure on the balance of payments. These efforts helped in reducing saving-investment gap, which has been contracted by 27 percent during July-April FY 2019 compared to 70 percent expansion during same period last year. It happened mainly because, trade deficit declined by 7 percent primarily due to containment in imports while last year it had recorded 23 percent growth. Imports declined by 5 percent while workers’ remittances posted a growth of 9 percent during the period under discussion. The high consumption thus leading to very low domestic saving while as a percent of GDP, domestic saving is also falling. Domestic saving in FY2019 remained at 4.2 percent of GDP much lower than the level achieved in FY2004 where it was 15.6 percent of GDP.

Pakistan’s investment-to-GDP ratio is low and has been continuously declining despite immense potential for profitable investments considering its strategic location and prospective market size, says the World Bank. The low saving-investment equilibrium, at around 15 percent of GDP, poses a key challenge for Pakistan’s long-term growth prospects. The World Bank states that Pakistan’s economy is on a declining long-term trend, both in potential and actual growth. Perhaps of more concern than the inability to sustain growth spurts over extended periods of time is the steady fall in the economy’s growth potential. Pakistan’s savings rate of 13.8 percent of GDP (2011-15 average) compares unfavorably with that of its neighboring countries. For example, the savings rates in Bangladesh and Sri Lanka were 29.7 and 24.5 percent, respectively, during the same period. The trend in the real savings rate during the past decade in these economies suggests that Pakistan’s savings rate was not only low but also volatile. One key binding constraint has been low domestic savings, which continue to decline and pose significant policy concerns. While Pakistan can access foreign savings to close the domestic saving-investment gap, it can be observed that low domestic savings have contributed to low investment levels (on average, over the past four decades, the investment-to-GDP ratio has remained below 20 percent and, in the past 5 years, this ratio has hovered at around 15 percent).

Pakistan is categorized among countries with low national savings therefore, it is safe to say that much of Pakistan’s economic woes (both current and historic) center around low savings and investment rates in the country. As per SBP report, Pakistan seems to be stuck in a low-saving low-investment trap, which has seriously hampered its growth potential: a low savings rate reduces the volume of investible funds; low investments make growth spurts unsustainable; and low growth generates fewer domestic savings.

The increase in inflationary pressures in the economy reduces the purchasing power of its stake holders both private and public, which then forces them to lower their saving. Inflation is thus a byproduct of private and public savings. Private sector saving behavior in Pakistan indicates positive responsiveness not only to income but also numerous other demographic, fiscal and monetary factors such as labor force participation rate, exports, inflow of external capital, real interest rates and government spending. On the other hand, imports, rate of inflation and government saving consistently show a negative correlation with private saving. Whereas, the factors such as trade, consumption of luxuries (such as cars), income from abroad and collection of taxes show a negative association with the private savings therefore, the country is stuck in present day economic crisis.

[box type=”note” align=”” class=”” width=””]The writer is a Islamabad based infrastructure investment consultant and can be reached on Twitter @ aroojasghar.[/box]

Exit mobile version