THE POST-BUDGET reduction in the savings rate is a continuation of the policy of cutting the mark-up on national schemes supposed to encourage investment by making capital less costly.

The rate of return has now been slashed upto 2.5 per cent on maturity basis, while on premature withdrawal the rate of cut is much higher, up to 4.5 per cent. This will further erode the benefit accrued to savers. Already, under various schemes, the rate of return has come down considerably.

Despite high interest rates of up to 16 per cent in many schemes, the average rate distributed remained around 14 per cent after deduction of Zakat and 10 per cent withholding tax on profits.

During January-June 1997, the four state-run banks offered the lowest average return of 7.52 per cent on savings accounts and 11.27 per cent on one-year term deposits. Since these banks claim a very large share of the total number of accounts, the majority of the owners got a negative rate of return in the face of 13 to 14 per cent annual inflation.

On the other hand, the foreign banks operating in Pakistan offered the highest average rate of return of 10.88 per cent on savings accounts and 13.28 per cent on one-year term deposits.

Banks, admittedly, incur costs in maintaining savings accounts, but at the same time they make handsome dividends by investing the savers’ money—particularly the accounts placed with them at the time of opening of savings accounts—in inter-bank market and other business areas. Not all savings account holders frequently withdraw money from their accounts, leaving sizable amounts with the banks to earn profit.

The decision to further clip profit rates of saving schemes apparently stems from pressure applied by banks which earlier agreed to cut down mark-up on lending by 1.5 per cent for lowering interest rates on savings. The banking sector thought that savings schemes provided the government with easy capital, distorting the economy. The money thus raised was used not for income generation but for covering budget deficits.

The government gave high profits on these schemes but borrowed at low rates from the commercial banks. But, the banks had also increased the interest rates on loans which stalled investment.

The question is whether previous reductions in premium have promoted any notable rise in investment and employment opportunities. The Nawaz Sharif government by cutting interest rates by up to four cent claimed a reduction in bank rates of up to 18 per cent as an achievement. But no substantial improvement in the economic situation, much less increase in investment, was discernible. If the economy is refusing to come of recession, the reasons for it have to be seen in the broader perspective.

Savings in the government sector are generally negative which is why the government runs fiscal deficits year after year. Almost all public sector corporations are in the red and the private sector’s contribution is also minimal. The lowering of profit and levy of income tax on earning mainly affect household savings which constitute 90 per cent of the total national effort. The worst affected will be the pensioners, elderly people, the unemployed and underemployed as well as widows and orphans and retired and retrenched employees who depend on profits from savings.

In a country where there is hardly any social security, returns on savings constitute an important instrument for meeting the basic socio-economic needs. Most people lack the skill and entrepreneurship to invest in risk-carrying ventures and run them successfully. The recession has greatly reduced the purchasing power of the people and is creating acute dissatisfaction among the masses. If the amount deposited in savings schemes went to the government exchequer and was not used for further generation of capital, it was not the fault of the small saver.

There would therefore be questions regarding the equity and fairness of the decision, especially in view of the likelihood of the benefit of it going to the rich and influential classes. Most of the loans earlier sanctioned went to big business, with credit disbursed to small business constituting an insignificant part of the portfolio. The banks have not paid adequate attention to project financing, nor have efforts been made to realize the potential of rural savings. Coupled with default and infected portfolio, the cost of their management has increased, thus raising pressure for cutting savings’ rates.

Reducing the profit of savers seems to be the easy way out. Indicative of the short cuts earlier relied upon for reduction in profits were schemes like ‘crorepati’ and ‘lakhpati’, but no matter how uneconomical the banks may consider the small savings, it is these that add up to make huge sums and play a crucial role in sustaining the banking sector. Short shrift to savers can drive them into the arms of the market lenders who are already mobilizing enormous funds. Earlier, counterfeit companies had sprung up in the absence of an adequate regulatory mechanism. Similar occurrences cannot be ruled if profits go on declining.

Pakistan has one of the lowest savings rate in the world. The average domestic savings rate during the late 80’s and early 90’s was about 10 per cent, which is relatively low compared with that of other Asian countries. According to an Asian Development Bank report (1997), Pakistan’s gross domestic savings and investment in relation to gross domestic product in 1996, was 14.2 per cent and 18.6 per cent, respectively. The report quoted India’s savings and investment rates in 1996 to be 26.1 per cent and 25.2 per cent respectively. China and South Korea have savings and investment rates even better than India’s.

During the late eighties, the investment rate, despite low savings, remained at about 17 per cent. The resource gap was more than five per cent of GDP and foreign capital inflows constituted an important source of investment. Foreign capital flows were mainly the grant of ODA loans. As a result, about 76 per cent of its long-term debt was on concessional terms. The debt situation of Pakistan continued to deteriorate in the past. Compared with other South Asian countries, Pakistan depends more on short-term debt. In 1989, the share of short- term debt in total debt was 15 per cent, which was the highest among the South Asian states. Bilateral flows from western countries and Japan have been important but these have fluctuated and also subjected to sanctions, which reflects the tendency of the major donors to concentrate on political concerns stemming from Pakistan’s position as a key regional strategic link. Hence the vulnerability of the country’s economy in the event of denial of adequate multilateral flows.

The government not only wants to revive the economy, but also has plans for important development and infrastructure projects. But without an accompanying increase in savings, there can be little promise of encouraging investment in such schemes. In the past, official assistance has accumulated in the pipeline primarily due to the lack of local currency matching funds and problems with project implementation. Pakistan, therefore, must take steps to bridge the imbalance between savings and investment and accelerate the pace of economic development by creating a conducive environment for investment and alleviating poverty so as to generate employment opportunities.

The government must take steps to reassure the savers and foster a culture of saving both at the official and the household levels, instead of relying on short-sighted measures exemplified by recurrent cuts in savings profits.