Pakistan continues to struggle with a persistent fiscal deficit as government expenditure regularly exceeds revenue. The country already carries a heavy burden of foreign debt, and further external borrowing is neither desirable nor easily available. A sustainable path forward lies in mobilising domestic savings.

Recent fiscal data illustrate the challenge. In FY24, the fiscal deficit reached Rs7.2 trillion, while interest payments alone exceeded Rs8tr. To bridge this gap, the government relied heavily on domestic borrowing, crowding out credit to the private sector. Public debt has now climbed above Rs80tr, pushing the debt-to-GDP ratio to over 70 per cent. One of the key reasons for this situation is Pakistan’s extremely low savings rate, which stood at just 6.8pc of GDP in 2024.

There are, however, some encouraging signs. In FY25, the fiscal deficit narrowed to about 5.4pc of GDP as revenues improved and the government achieved a primary surplus. Importantly, the deficit was financed largely through domestic markets rather than external borrowing. The national savings rate also edged up to around 7.4pc of GDP; while still very low by regional standards, this indicates that progress is possible.

Domestic savings are the backbone of long-term financial stability. China is a striking example. With a savings rate exceeding 40pc of GDP and household deposits running into the tens of trillions of yuan, the country has built a deep financial system that supports sustained economic expansion.

When businesses generate higher profits and face a predictable tax environment, they are more likely to reinvest domestically, expand operations and distribute dividends

Pakistan possesses the basic institutional structure needed to mobilise savings. The Central Directorate of National Savings already manages more than Rs3tr through a nationwide network of branches and is gradually expanding digital access.

At the same time, the rapid growth of digital finance offers new opportunities. Mobile banking apps now serve millions of users, branchless banking wallets have expanded rapidly, and the State Bank’s Raast instant payment system is processing hundreds of millions of transactions. These platforms provide a ready pathway to attract millions of small savers into formal financial channels.

Capital markets are also showing renewed momentum. The Pakistan Stock Exchange recently crossed the milestone of half a million investors for the first time, with many of the new participants being young retail investors.

Meanwhile, the mutual fund industry continues to grow, managing assets worth more than Rs4tr. Plans to tokenise a portion of domestic government debt could further broaden access by allowing smaller investors to participate in sovereign securities.

Another important development is the ongoing reform of the pension system. The federal government has introduced a contributory pension scheme for employees hired after July 2024, replacing the old unfunded model that had created massive long-term liabilities. Under the new framework, both employees and the government will contribute to professionally managed pension funds, gradually building a pool of long-term domestic capital. Similar reforms are also underway in Khyber Pakhtunkhwa.

The Voluntary Pension System and the expanding insurance sector are additional channels through which household savings can be mobilised. Over time, these institutions can play a critical role in financing infrastructure and long-term investment.

Financial literacy remains an equally important challenge. Many households still prefer to hold savings in informal forms such as cash or gold. Although Pakistan deals in large quantities of gold each year, most of this activity occurs outside the formal financial system. Limited financial inclusion is a major reason: a large proportion of adults still lack access to formal banking services.

Recognising this gap, the State Bank of Pakistan has launched an ambitious programme to improve financial literacy and expand access to financial services over the coming years. Early results are encouraging. The digital payment initiative linked to the Benazir Income Support Programme has already brought millions of women into the formal banking system within a short period of time. This demonstrates that when access and awareness improve, even previously excluded groups are willing to participate in modern financial channels.

An equally important but often overlooked factor in promoting domestic savings is the structure of the tax system. Recent reform proposals by the Overseas Investors Chamber of Commerce and Industry highlight how tax policy can influence saving behaviour and investment decisions.

One of the chamber’s key recommendations is to broaden the tax base by bringing under-taxed sectors (retail trade, agriculture and real estate) more fully into the formal tax net. A wider tax base would allow the government to reduce the burden on documented sectors and create a fairer system that encourages economic activity in formal channels where savings and investments are more easily mobilised.

The chamber has also recommended a gradual reduction in corporate tax rates and phasing out temporary levies, including the super tax. When businesses generate higher profits and face a predictable tax environment, they are more likely to reinvest domestically, expand operations and distribute dividends, all of which contribute to higher national savings.

Improving tax enforcement and curbing illicit trade is also important. When smuggling and informal activity dominate certain sectors, legitimate businesses suffer, and government revenues decline. Stronger enforcement would not only improve tax collection but also encourage economic activity to move into the documented economy. A larger formal sector naturally strengthens financial intermediation and expands the pool of savings available for investment.

Published in Dawn, The Business and Finance Weekly, March 23rd, 2026