By Muhammad Soban

ISLAMABAD, August 2 (INP-WealthPK): Pakistan is primarily a low-income country, which results in low levels of savings, as the country’s saving rate is just 11.1% of GDP compared to over 20% to 40% in regional countries.

Despite the record levels of interest offered by the commercial banks and saving institutions due to tight monetary policy, Pakistan’s savings could not grow enough as compared to the regional peers. There are multiple reasons contributing to low levels of savings.

Low savings reduce the number of investable funds; low investments result in unsustainable growth spurts, and low growth generates fewer domestic savings.  

There are multiple reasons for Pakistan's low level of savings that WealthPK has explored.

The first is the income level. Incomes and savings are positively correlated. The economic literature generally agrees that low-income individuals have a lower propensity to save and vice versa. Real GDP growth has been persistently low in Pakistan in recent years, resulting in collapsed savings rates.

The second factor, which affects the savings is inflation. Pakistan has been facing a surging inflation over the years. The persistent increase in the general price levels is resulting in decrease in the purchasing power of people. The decrease in purchasing power is more than the increase in income.

The third and the most important factor is the behaviour of society, which is generally consumption-based. Pakistanis consume around 90% of their incomes, and save less for the future. Whatever the savings, they are converted into other foreign currencies or invested in real estate.

Talking to WealthPK, Dr. Mahmood Khalid, a senior research economist at Pakistan Institute of Development Economics, Islamabad, said that traditional national income theories suggested that as savings increased in an economy, overall investment increased since GDP was a function of consumption, investment, government expenditure, and net exports. “It is assumed that rational agents would save for a certain rate of return, which they would receive by investing in an economy.”

“However, in reality, things are a little different. In the interplay of savings and investments, neither economic agents nor government policies are rational.”

He maintained that investment increased with the rise in savings. “When investments are directed towards export-oriented activities, they increase national income, which in turn increases consumption (higher employment and higher disposable income), and increases exports.”

On the question of how Pakistan can increase its savings rate, Dr. Mahmood Khalid said that in recent years, there had been much discussion about the savings rate and how they could be increased. “This perception is wrong that Pakistanis do not save. They save but in non-formal ways. They save in other avenues, including gold, foreign reserves, etc. to maintain the value of their savings.”

He said that conventional savings were also necessary as financial institutes would be able to finance investment in the country. “To increase savings, there is a need to maintain price levels in the country. The rapid increase in prices adversely affects the value of money. Pakistan has to focus on price stability.”

He maintained that Pakistan’s economy was basically an informal economy, and that the governments should work on documentation this economy. “This transition to the formal economy would improve savings,” he said, adding that the State Bank of Pakistan’s measures to enhance financial inclusion would help in the long-run.

“There is a need to formulate policies to redirect savings towards the formal economy through taxation, disincentives, or changes in real estate regulations. Without these steps, the country will continue to suffer from anemic savings rates and will never be able to generate the growth capital required for sustainable industrial growth,” he concluded.

Credits: Independent News Pakistan—Wealthpk