The gross domestic saving is what we get after deducting final consumption expenditures from the gross national disposable income. When these savings remain low as a percentage of GDP — and that, too, for a long period — it means that a country is spending fast, not leaving enough for the expansion in national wealth in the future.

Pakistan kept doing this between 2005 and 2019. But the situation is changing now.

Between 1990 and 2004, Pakistan’s gross savings ranged between 13.2 per cent and 17.4pc of GDP. During this period, the size of its GDP increased from $40.1 billion to $107.8bn, gaining additional mass of more than two and a half times.

From 2005, gross saving rates started declining and ranged between 14.2pc in 2005 and just 5.4pc in 2019, according to the World Bank. The State Bank of Pakistan (SBP) has revised the 2018-19 gross domestic savings rate to 4.1pc. During these 15 years, the size of Pakistan’s GDP grew from $120bn to $278bn — or a little less than double — but more on the strength of domestic consumption than exports.

Reliance on foreign funding over an extended period of time hides structural weaknesses that keep savings rates low and damage sustainable growth potential

Over an extended period of time, a change in the range of gross domestic savings rates may not necessarily have an identical impact on economic expansion. As the above statistics establish, the economy may keep expanding — though not as fast as earlier — even when there is a big decline in savings rates. But why?

Because when national savings rates start declining, countries can opt for higher foreign funding to finance investment where it is required and keep gross fixed investment high enough for a desired pace of economic growth.

But reliance on foreign funding over an extended period of time hides structural weaknesses that keep savings rates low and damage the sustainable growth potential of such countries. That is exactly what we are experiencing now.

Gross fixed investment during 1990 and 2004 ranged between 20.7pc and 16.4pc of GDP when gross national savings rates were high. But in the next 15 years — i.e. between 2005 and 2019 when savings rates kept sliding — gross fixed investment still ranged between 17.7pc and 14pc, thanks chiefly to foreign funding.

As we have apparently entered another long-term periodic cycle of gross domestic savings, our economy is caught in a kind of foreign debt trap right at the beginning of this cycle. The country needs net non–debt-creating foreign exchange inflows and, in the absence of it, foreign funding not just to invest in the economic development but mainly to service old foreign debts. In 2019-20, Pakistan spent $14.58bn, or equal to 65pc of merchandise export earnings, on foreign debt servicing.

In 2019-20, Pakistan spent up to 65pc of its merchandise export earnings on foreign debt servicing

It is heartening, however, that the bulk of this $14.6bn i.e. $11.34bn-plus was used for principal repayment and less than $3.24bn for interest payment. This is appreciable. If this trend continues and the country keeps retiring the principal amounts of old foreign loans, it should decelerate the growth of foreign debts in volumes. That, in turn, can enable the country to get out of the vicious cycle of “get foreign funding to pay foreign debts”.

The most recent cycle of low gross domestic savings that began in 2005 has already ended in 2019 — or so it seems. Pakistan is re-entering another periodic cycle of high savings rates.

According to the SBP, gross domestic savings stood at 6.8pc in 2019-20. It is expected to rise further in this fiscal year, with the ongoing expansion and documentation of the economy.

Domestic savings tend to rise with economic expansion and documentation. They represent the supply of financial capital, and economic expansion and documentation generate this supply. But there must be a matching or higher demand for this financial capital as well.

That demand becomes strong when the private sector and the government both need larger funds to finance extended businesses activities and public-sector development plans. For the current fiscal year, such demand is also expected to remain strong and that would become visible in the gross fixed investment number. Gross fixed investment in 2019-20 had slid to 13.8pc of GDP from 14pc a year earlier and is expected to remain high, mostly owing to increased demand by the private sector for financial capital. Easy monetary policy, concessional financing schemes, including the most-incentivised scheme for the housing sector, are sure to keep this demand high. The trade deficit has also started growing — amidst still low national savings rates — and that is a sure sign that the gross fixed investment rate is going to remain in the same vicinity seen in 2019-20 or can increase further.

Prudence in the economic policymaking demands that gross domestic savings should come closer to the gross fixed investment rate. Because that means a country is capable of financing its national economic development and growth agenda primarily through its own resources with least dependence on external borrowing. But to reach that point, Pakistan may take a long, long time. For the time being, gradually reducing the gap between gross domestic savings and gross fixed investment could be a good strategy. But this gap minimising is good for the economy only if it happens in the backdrop of strong economic growth and increase in the non–debt-creating foreign exchange inflows — and not due to economic slowdown.

After all, national investment represents demand for financial capital and that is bound to remain low when the economy slows down or shrinks. A reduced gap between gross fixed investment and domestic savings in 2019-20 (to seven percentage points against 9.9 percentage points in 2018-19) is an example. Pakistan’s economy shrank 0.4pc in 2019-20 after growing 1.9pc in 2018-19.

The economic recovery is in progress now albeit at a slow rate, remittances are rising fast and exports are also growing. This should help in reducing the gap between gross fixed investment and gross domestic savings, thus reducing the level of consumerism and encouraging capital formation in the areas that can help meet future challenges of sustainable growth.

Published in Dawn, The Business and Finance Weekly, February 22nd, 2021

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