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Mounting Savings rate, a key to Economic Growth: MG Opinion

November 20, 2018 (MLN): The declining contribution of national savings is one of the key factors that weighs down economic growth, as the country’s own savings are the most reliable source of funds for investments.

There is a dire need to increase savings rate as this will act as a fuel for economic growth.

The persistently low level of national savings underlines several of Pakistan’s macroeconomic problems including those related to balance of payments.

According to the World Bank data, Pakistan’s saving rate is about one-third of middle-income countries’ and half of the South Asian average.

Historically, Pakistan invests more than it saves, which appears to be a major reason behind its current account and trade deficit, as one of the most well-known equations in international economics states that the difference between total savings and total investment in an economy equals to its current account balance.

In FY18, as per the SBP annual report 2017-18, at current prices, the national savings were around 12% of GDP, while gross fixed investment (GFI) was around 15% of GDP whereas, the total investment stood at 16.4% of GDP.

Source: SBP Annual Report 2017-18

A country’s increase in Saving-Investment gap in turn resulted in higher current-account deficit.

During FY 2018, current account deficit remained higher than FY 2017 which resulted in increased borrowing from the external sources.

Source: Economic survey of Pakistan 17-18

The low level of savings have been one of the major reasons why the healthy growth of Pakistan is dependent on foreign credit and could not be sustained when loans dried up.

Historically, in Pakistan, the share of savings in terms of GDP has been quite low. During the 1960s, the average savings-to-GDP ratio was 10%, which increased to 11.2% in the 1970s and to 14.8% during the 1980s, before falling to 13.8% in the 1990s. During 2000-2010, the ratio rose to 16.6% before falling to 13.6% between FY11 and FY17.

Even the periods of rapid economic growth were not escorted by a corresponding increase in savings. During the period between FY03 and FY07, the economy grew 6.6% on average, but the average savings-to-GDP ratio was 16.1%.

Total savings in an economy have two components – public savings and domestic (private) savings. Governments in Pakistan typically do not save or register very low savings. In FY15, FY16 and FY17, the government savings as a percentage of GDP were 1.5, 0.5 and 1.7 respectively. A big chunk of savings comes from households, the overwhelming majority of which are small savers.

In the last three years, Pakistan has experienced a declining trend of domestic savings. Domestic savings are imperative for sustainable growth, because inflow of income from abroad (remittances and other factor income) is uncertain due to cyclical movements in world economies, exchange rates, and external shocks.

Source: Ceicdata

The Musharraf government followed an unwise policy of consumption stimulating economic growth. It proved to be short-lived and fueled both inflation and balance of payments crisis, which ultimately brought down the growth rate.

The only sustainable way of achieving a high rate of domestic investment and economic growth as well as employment generation is via a higher level of domestic savings.

One of the major determinants of savings is the interest rate. The higher the interest rate, greater is the propensity to save.

A typical household prefers to invest money in the National Savings Schemes (NSS) run by the government. On the other hand, the cut in interest rates hampers household savings.

Admittedly, interest rates should not be too high to discourage investment, but at the same time, they should not be too low to discourage savings.

Copyright Mettis Link News

Posted on: 2018-11-20T16:59:00+05:00

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