PAKISTAN relies heavily on foreign funds because the country’s savings are not enough for investment in economic progress.
Savings and investment data for 2019-20 will become with the release of the State Bank of Pakistan’s (SBP) annual report for the fiscal year. But heavy foreign funding obtained during the year proves that the country’s domestic savings that had been in decline for several years could not pick up enough pace.
According to the balance-of-payments statement, the government sector alone amassed $13 billion foreign funding in 2019-20. That obviously includes funding from the International Monetary Fund (IMF) and other multilateral lending agencies plus foreign exchange funds from countries like China, Saudi Arabia and the United Arab Emirates.
The gap between total investment and gross national savings of Pakistan was not that large back in 2013-14 and 2014-15 — the first two years of the PML-N government. But as the government went into high gear for making big investment in the last three years of its five-year term, this gap widened. Part of the reason was local funding for China-Pakistan Economic Corridor (CPEC)–related projects. The gap between total investment and total savings stood at Rs322bn in 2013-14. It fell to Rs275.6bn in 2014-15 with a higher increase in savings than in investment, a closer look at the SBP statistics reveals. But in the next three years, investment kept growing while savings first became stagnant and then fell, thus enlarging the gap between total investment and gross national savings. The gap soared to Rs2.18 trillion in 2017-18, the last fiscal year of the PML-N government.
It has become evident to economic managers that keeping the investment-savings gap at very high levels is not viable
Multilateral lending agencies and the SBP kept reminding the policymakers of this fact, but their warnings were conveniently ignored. The PTI’s maiden government managed to narrow this gap to Rs1.79tr in 2018-19, its first year in power. But even at this level, the gap was obviously too huge.
That partly explains why local funding of CPEC projects in 2018-19 and 2019-20 slowed down and why the country’s annual development plans also became less ambitious.
Now it has seemingly become evident to Pakistan’s economic managers that keeping the investment-savings gap at very high levels is not viable even if it may continue to amass foreign funding of the desired size. That is why we see them focusing on boosting remittances, restructuring or privatising public-sector enterprises or PSEs and encouraging national savings on the one hand and allowing only gradual and most essential local funding of CPEC projects on the other while still keeping the annual development plan within sustainable limits.
When remittances continue to rise, they affect positively on net factor income from abroad — an integral part of a country’s total savings — and when financial health of the PSE sector is improved, it boosts non-government or private-sector savings of which PSEs form a part.
Keeping domestic savings at high levels requires stricter fiscal discipline so that foreign funding could be utilised solely for the investment into economic development. It also requires greater fiscal and monetary coordination to create a policy mix that promotes domestic savings. But during the past two years, despite some modest gains, the PTI has not been able to create enough fiscal discipline. Part of the reason lies in the fact that the party spends too much energy on lamenting the fiscal performance of the previous governments. And, though fiscal monetary coordination mechanism has been activated after having been practically forgotten in the PML-N government, ground economic realities are such that it is not yielding the desired results.
The SBP had to keep monetary policy tight a bit longer than what the government had desired but, according to the central bank, this was necessary in view of the projected build-up in inflationary pressures. That kept the domestic debt servicing requirement of the government high in for the large part of the PTI’s first two years in power, making difficult for it to cut current expenses. Had the government been able to mobilise enough tax revenue during this period, it could have eventually reduced expenses and cut the fiscal deficit by a wider margin, thus creating opportunities for the government-sector savings. But that did not happen. A tight monetary policy regime could also have been used to promote the National Savings’ long-term accounts and certificates as the rates offered on them were attractive enough at that time. But that, too, did not take place.
Now that after massive monetary easing, the lowering of interest rates on national savings products became inevitable, the blame cannot be passed on to the central bank for not creating a conducive environment for the promotion of national savings products.
However, with some improvements in the delivery of these products, savings mobilised through national savings schemes in the last fiscal year remained higher than the preceding year. In the first eleven months of 2019-20, national savings schemes mobilised net additional savings of Rs341bn, exceeding the full 2018-19 level of Rs306bn. More heartening is the fact that this happened alongside running a wise campaign of shifting bearer prize bonds to registered bonds to check the parking of ill-gotten money into these bonds.
In fact, in the first 11 months of 2019-20, net savings parked in prize bonds remained negative by Rs158bn whereas in full 2018-19 people had invested Rs43bn in these bonds when the drive for documenting these bonds was weak and not as comprehensive.
The launch of a wider and fuller documentation drive is required not only within the financial sector to avoid blacklisting by FATF but also across the entire economy to contain the size of the parallel economy. That would help boost the levels of domestic savings on a sustainable basis.
Published in Dawn, The Business and Finance Weekly, August 4th, 2020