January 16, 2006	Monday	Zilhaj 15, 1426

Talking of economic indicators, the successive governments have been inclined to talk more about growth numbers and trade and fiscal deficits and less about the more easily understandable things such as the poverty and savings. Unhappily, Pakistan displays one of the lowest national saving rates among countries in the region.

Our rate of savings is officially acknowledged to be 15.1 per cent. Compare that with India’s savings rate of 28.1 per cent and China’s whopping 40 per cent.

According to the World Bank, the average saving rate for East Asia and Pacific is on average as high as 37 per cent. Even for low and middle-income countries the average rate is 26 per cent. Does the situation ring the alarm bell? Is the rate of savings something important enough for our Governments to worry about?

The answer is provided by a recent UN study, which states that there is a need to “provide the necessary internal conditions for mobilizing domestic savings, both public and private, sustaining adequate levels of productive investment and increasing human capacity”.

The UN Report, produced in March 2002  stresses the importance of tapping domestic resources and channelizing these resources for financing of development goals in an efficient manner, particularly in developing countries. It also highlights the need to develop appropriate financial intermediation mechanisms that stimulate savings and investment both for growth and development.

The government has been boasting of an efficient performance of the economy.  But how about the rate of savings? The Annual Report 2004-2005 of the State Bank of Pakistan recorded 4.5 per cent fall in the national savings in FY2005.

Attempting to explain the figure, the SBP report states: “Unfortunately, during FY2005, not only have private savings continued to decline, public savings also fell.

As a result national savings dropped from its FY2003 peak of 20.8 per cent of GDP to 15.1 per cent of GDP in FY2005”. The report, however gave a generalized comment on the causes of such a dramatic drop during last two years of phenomenal GDP growth. All it said and the writer quotes from the report: “At least part of negative growth in public savings during FY2005 is a base effect i.e. FY2004 had seen an unusual jump which could not be sustained.”

The economic document, instead of providing satisfactory explanation and suggesting corrective measures, either for technical limitations or political compulsions gives a confused impression. But look at it anyway, the conclusion, nonetheless is that the savings rate dropped from the earlier year.

The SBP’s cursory comment on such an important issue does not reflect very well on the performance of the economic managers and exposes the ad-hocism at the decision-making level.

Commenting rather casually on the decline in private savings, the report notes: “The decline in private savings probably stem from a number of factors including: (1) low and generally negative real interest rates on national saving scheme (NSS) instruments; (2) the preference for physical rather than financial assets following rising asset prices during both FY2004-05; (3) most importantly a sharp increase in private consumption expenditure.”

A senior Islamabad based economist attributed the sudden drop in saving rates to the current account deficit and to rising trade imbalance. He finds the low savings to GDP ratio disturbing and something that ought to be checked to ensure a domestically sustainable development process.

“Unfortunately the government hierarchy is too happy celebrating the growth numbers to focus on key indicators such as declining saving rates. All energies in economic ministries are focused on proving with a fresh set of arguments on how well the current government is performing as compared to all preceding ones”, the learned technocrat, who asked not to be named, confided.

Some senior functionaries of the concerned ministries, when contacted, were unable even to understand the question about the national saving rates. The casual manner in which those high-ups waved the issue aside confirms the suspicion that the issue does not figure on the agenda of the government.

Dr. Ashfaque Hasan Khan, advisor to Prime Minister on economic affairs, when queried, tried to make up for the ignorance of his colleague by taking pains to explain in detail the basics of national income and placement of savings in the national income equation. On the question of falling saving rates and if it needs to be looked at as a challenge, he opted to be non-committal by insisting that: “There is no simple answer to the question as there are a number of factors that influence saving rates in a country”.

Money is the engine that drives the economy. Traditionally governments have preferred to secure it with loans and foreign direct investments. And in doing so, they have bypassed the difficult path of  mobilizing internal resources to fuel the growth engine through domestic savings. Not only because it is comparatively easier but also for other dividends that the government hierarchy finds it too lucrative to ignore the internal savings and instead looks up to the West for loans, grants and foreign investments.

The national saving rate can improve only when public and private savings increase or acceleration in one more than offset the fall in the other. For the public savings to escalate either the government has to broaden the resource base, cut expenditure or achieve a trade surplus where export earning surpasses import payments by a good margin.

Each of these options are either dependent on factors beyond government’s direct control or demand a major shift in economic policies being pursued. Any meaningful shift in policy framework can hurt the short term interests of the elite class with a potential to upset the applecart of power. Therefore only when the country happens to be on the wrong side of the western powers and is doing its time in isolation internationally that people get to hear the talk of economic nationalism and self reliance.

When in good books of the West,  Pakistan gets access to world finances at competitive prices. All through the 1980s when Pakistan took upon itself the role of  the front line state, easy money came rolling in and country despite inherent structural weaknesses performed well.

In 1990s, as the world became unipolar, the West ditched the erstwhile old pals.  And on the contrary, in the eyes of the beholder West, the beauty of Pakistan faded and it began to discover everything that was or was perceived to be wrong with the economics of the strategically located South Asian country.  The West thus became angry and stingy. This period saw a drastic fall in net capital formation to GDP ratio and growth rate dropped and became erratic. Economic sanctions clamped in 1997, after Pakistan opted to go nuclear to match the Indian initiative, was the toughest period through which the country had to survive in the recent past.

Many renowned local and international economists even floated the idea of Pakistan turning into a “failed State”.

However, in 2001 Pakistan broke out of isolation by joining forces with the West in its so-called war on terror. Once again West rediscovered Pakistan and excused its earlier disobedience. In a changed political scenario world capital loosened its purse strings again and sympathetic donors came back to Islamabad with attractive offers. There were quite a few other factors too but the single most important factor that led to turn around in the economy is favourable shift in the international scene that lead to a reverse of the flight of capital that for ages had been parked outside Pakistan. 

Other benefits were in the form of concessionary borrowings, more market access, increasing foreign direct investment, etc. Pakistan responded by answering calls of donors such as the World Bank, the IMF and the ADB on improving management of the economy.

As for the private savings including the corporate and household savings, the situation is hardly any better. The very small percentage of the deep- pocked individuals and corporates  do not like to declare its earnings and thus the corporate savings are said to be under-reported, whereas, majority of people living below or around poverty line cannot afford to save at all.

To augment household savings, the disposable income of this largest segment of population needs to improve. This again calls for a shift from elitist economic policies to people friendly policies promoting economic justice. This requires political will which seems, sadly to be lacking until this point in time.

The middle class and upper middle classes do manage to save some of their income and their savings are reflected in the household saving rates. The growing economic polarization, inflation, consumerism and falling interest rates act together to shrink this possibility as well. The creation of environment to promote household savings again is difficult.

In contrast to these difficult possibilities the foreign direct investment and loan arrangements earn international goodwill and open up avenues of opportunities for the enterprising. It bridges the saving investment gap to achieve a decent growth rate at least in the short- run.

And as for the long run as our ex-finance minister said “Who has seen the long run?”. And it was an eminent economist of old who first remarked in answer to what would happen in the long term: “In the long term, we shall all be dead!”

The  governor of the State Bank, who recently stepped out, Dr Ishrat Hussain, in one of his speeches at a gathering in Karachi defended the policy of promoting consumerism through bank financing in a country of weak saving habits. He said that the policy actually promotes saving for creditor is forced into saving as he has to repay the loan through regular monthly instalments.

However, when the credit is used for consumption it cannot be treated as a saving.

One may wonder why our international development partners _ the World Bank, the IMF and the ADB who pose to have deeper insight of the Pakistani economy than locals have also ignored this major shortcoming of a drifting savings rate?

The current voluminous IMF country report highlighted the need to increase investment including in water management to maintain growth rate. The falling saving rates have not been commented upon. May be it is asking for too much to expect donors to suggest measures that would reduce the country’s dependence on them.

The donors have expressed implied suspicion on whether the “current growth acceleration will be sustained”. The fact is that if national saving rate is allowed to shrink there is the grim possibility that Pakistan could miss the rising Asian economic tide that is now gathering momentum.