While the urgency for stepping up investment and increasing the domestic savings to feed that has been underscored in the recent years of low economic growth, the country is now likely to face a serious savings crisis, with all its wierd manifestation.

The domestic savings rate came down last year to 14.7 per cent, from 16.6 per cent the year before and 15.6 per cent of the GDP in 1999-2000.

And that is primarily because of the falling interest rates on bank deposits and national savings schemes. And the situation may be far worse when the exemption of withholding income tax on the returns from national savings is withdrawn by the end of June as insisted by the IMF.

It is bad enough that the weighted average return on saving deposits came down to 3.21 per cent in January and to 3.04 per cent in February last from 4.02 per cent in July last year, which was far below the actual inflation rate in the country. But when that is far below even the lower official inflation rate of 3.53 per cent in January and February last that is, indeed, very disturbing.

But the State Bank of Pakistan (SBP) and the bank executives are not upset by this development as they find the market is aflush with liquidity and more money is coming in from abroad, while little money is going out, unlike in the past, thanks to international situation after 9/11.

The home remittances too are on the rise as finance minister Shaukat Aziz expected four billion dollars of remittal this year unlike the under one billion dollars three years ago.

The deposit rates are being brought down by banks so as to lend more money for economic activities at low rates of interest in single digit says the governor of the SBP, Dr. Ishrat Husain. But the average landing rate in January was 9.905 and in February 9.36 per cent which is as much as three times the rate of the deposits.

While the banks keep 9.36 per cent as interest on lending for themselves the depositors get 3.04 per cent which is grossly unfair. Efficient banks would have charged an intermediation rate, the gap between the lending and borrowing rates, of 2 per cent, but in Pakistan they still insist on over 6 per cent. In this manner their share of the flesh is not less than the rate they used to charge for themselves earliest when both the rates were far higher. The bankers argue they cannot cut down the high intermediation rate as they have large non-performing loans, large staff, and the cost of administration is high. And the taxation on banks is still excessive.

All that means the government gets all the tad it wants out of the banks, the banks are able to charge too heavily for lending and pay too little to the depositors, while the depositors lose very heavily.

The president of Askari Bank, Kalimur Rahman, says the intermediation cost of public sector banks is about five per cent of the transactions, of private commercial banks 2 per cent and foreign banks 2.5 per cent. But in their dealings with various depositors they don’t show this large gap but only marginal difference with the small banks doing better than the big banks; but the small banks carry their own risks in Pakistan.

The groups affected most by the slashing of the deposit rates are the pensioners, widows and elderly persons supplementing their income with the income from their deposits or other small earnings in a country with few pensioners and very little of insurance cover for the people.

A new group of victims of the fall in interest rates comprise those who retired prematurely after getting golden handshake from their companies and hoped to live on the income from their bank deposits. When they sought the golden handshake they had calculated their income at 18 per from their deposits as that was the prevailing rate then for Khas certificates. But now many of them are struggling for their survival.

In countries like Japan and China the interest rates are very low, and at one point Japanese banks were operating at zero rates of interest. But Japan has a savings rate of 35 per cent and China 40 per cent. Even India has a savings rate of 24 per cent. So even when the returns from savings are low the depositors are able to get enough of returns for their survival and distribute their deposits in various sectors. But in Pakistan with a domestic savings rate of 15 per cent if too little returns come out of them, survival becomes tough for the savers.

The stock exchange in Pakistan is not for the small saver and investor. The NIT and some of the ICP mutual funds are now doing much better than before. And Dr. Ishrat Husain has been urging the banks and others to come up with new products to reward the small savers but they have been too slow in doing that.

Instead the drive of the banks is towards consumer banking, helping consumers to buy today and pay later at pretty good rates of interest for the banks. They are also for larger housing loans. This though essential for a modern society is the anti-thesis of the savings culture except for housing.

The philosophy now is to promote consumption, which will increase the demand pressure on the economy and cause larger investment and produce far more. But the major problem is most of the items consumed in this manner are of foreign origin or foreign-made components locally assembled. And that will inflate the import bill without providing employment to the mass of the unemployed in Pakistan.

Instead, the effort should be to make large industrial investment in Pakistan and produce the needed goods economically and efficiently at home and increase the employment avenues.

The fact is that while the stock exchanges are booming with the KSE index above 2,800 entrepreneurs are not coming up with new shares. Instead they take the easy option of selling their term finance certificates to the banks who are ready to buy them.

The official inflation figure or consumer price index does not seem to take into full account the soaring price of petrol and the rising rates of transportation, the constantly rising rates for various services, including hotels and restaurants, the ever rising prices of medicines or the constantly soaring medical fees. The middle class Pakistani is under a tremendous financial squeeze with age-old customs, too, demanding of him to spend high.

All this in a country without social security or a broad national insurance system. And if to add to that the savings, which are too small in Pakistan, give very poor returns, the lot of the citizen is pitiable. The government should not take the small savers problems lightly as at the moment the market is aflush with liquidity and that is likely to be so for some more time. We need savings for investment, and production and employment promotion. And we have to work on that from a very low base and build up a more rational and prudent society. Consumer banking and hire-purchase of foreign goods is not all the solution for our complex problems.

If the saver does not get a fair return on his savings he may be tempted to invest inn all kinds of phony scheme like the many investment companies we had in the 1980s which vanished with the money. Hardly any saver has been able to get much out of those phony investors who field with the money and shared the loot with the police and intelligence agencies. In the Punjab there was the far larger cooperative scam; but many of the investors there were luckier than those in Karachi. Desperate savers may resort to all kinds of schemes now. It is the duty of the government to reduce the need for such desperation or recklessness.

Meanwhile the savers have come to a predicament in which they find that they are the losers for savings. They are not only not earning any real profit on their savings but also seeing the attrition of their capital. The standard of life of such men keeps coming down as the real inflation is far higher than the officially understated inflation but also their savings are eroding fast. And if they are insured what they get finally is only a part of what they had paid for in real cash. Inflation wipes out their gains. So the savers options are getting narrower and narrower.