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Savings rate is understated

Updated February 12, 2018

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ECONOMY watchers believe that Pakistan’s savings rate is grossly understated. Official circles blame it on weak documentation, but independent economists say there’s a method in this madness.

All experts hammer the need for a greater focus on savings for a better insight and to improve the accessibility of local funds to feed investment needs.

The country’s savings rate is about one-third of middle-income countries’ and half of the South Asian average, according to World Bank data. According to latest official data, the savings rate is not just low in the last reported year but actually falling.

A limited interview-based survey shows urban families with disposable monthly income of Rs100,000 and above set aside a quarter of their earnings

According to the latest Pakistan Economic Survey, the national savings rate was 13.1 per cent of gross domestic product (GDP) in the 2016-17 fiscal year, down from 14.3pc a year earlier. Private/domestic savings dropped to 7.5pc from 8.2pc a year ago.

Dr Ishrat Husain, a former governor of the State Bank of Pakistan (SBP), agrees that the savings rate was underreported, and attributed it to flawed computation methodology.

“A more insightful reading of the savings rate could emerge if all three components — household, corporate and government savings — are estimated separately,” he says.

He says the savings classes in the country tend to understate income and savings for obvious reasons. “In course of my research I discovered that half of the country’s new wealth accrues to the top 20pc bracket where propensity to save is higher,” he told Dawn over the phone. “Besides, rural savings used by farm households for self-financing is hard to gauge. If the government’s dissaving of 8pc is discounted, the collective savings rate of households and the corporate sector scales up to 21pc compared to the declared rate of 13pc.”

A disheartened front-line economist of the country who served in senior positions fiercely criticises the government for putting its own spin on data. “The government was determined to show an economic growth rate of over 5pc in 2016-17 and (now it wants to) scale it up to over 6pc this fiscal year ahead of general election,” he says, but asks not to be named.

“When the collective growth of all sectors failed to add up to the pre-determined GDP growth rate, the spin doctors had no option but to inflate the consumption component to arrive at the target. To my mind, there is no way for consumption to shoot up by the declared 9pc in the 2016-17 fiscal year. Balancing the equation necessitated chopping the savings aggregates,” he says. “The ruling mafia is ready to bet anything and everything for political ends. For them, compromising the sanctity and credibility of national data is a small price.”

A limited interview-based survey of potential savers — urban families with disposable monthly income of Rs100,000 and above — depicted the savings rate close to the regional average of 25pc.

“People are generally not reckless with money, especially when it is earned income. Besides, the luxury of social security net is not available in Pakistan. Except for the family, there is no fallback structure if income stream halts. Who can afford to be irresponsible here?” the economist says.

“Anyone and everyone I know saves. They save for old age, rainy days and education and marriage of their children. There might be some exceptions but exceptions prove the rule,” says a young colleague who saved roughly 30pc of his income. “Friends who often ask for help towards the end of the month are found to be investing in multiple ballot committees [informal, interest-free savings schemes popularly known as BCs] that leave them empty-handed,” he adds.

Another economist articulates his perception from a different angle. “A country in such a diplomatic isolation as Pakistan can’t post over 5pc GDP growth rate had the national savings not been higher than the declared rate. It’s true that the growth-promoting investment is not exclusively dependent on national savings, as a country can tap into global savings to close savings/investment gap via foreign direct investment and global borrowings. However, in Pakistan the public investment that drives up the growth is financed primarily by depositors’ money in the local banking sector,” he argues.

For better understanding of savings and an insight into its relationship with key variables in Pakistan, the deconstruction of national savings to identify their constituents was necessary. Most officials reached over the phone in the ministries of finance and planning and in the Pakistan Bureau of Statistics were initially evasive.

A well-reputed SBP economist agrees that the savings rate is understated because of the low level of documentation in Pakistan. “Why stop at savings and not assume that even the growth rate and in fact the size of Pakistan’s economy is understated. In the absence of complete data we work with whatever is available,” she says.

She points out that a distinction needs to be made between private savings locked in options that block access to use them for investment. “All private savings do not induce growth. Wealth locked in vaults and under mattresses does not circulate in the market, therefore, not potent. Financial savings invested in government schemes, bonds and deposited in banks can fund investment and contribute to national growth.”

Defending the savings data, a senior official of the Ministry of Planning says the standard deduction method — gross national income minus total consumption (private + public) — is used to get the number that reflects national savings.

A retired banker laments the lack of focus on private savings in economic policymaking forums. “It is an irony that on the one hand private savers with bags full of investible funds complain about the lack of viable options, but on the other, the country’s investment potential is wasted owing to a paucity of money.”

Published in Dawn, The Business and Finance Weekly, February 12th, 2018