HAVING achieved one of the highest GDP growth rates of 8.4 per cent during FY-05, the question now arises whether the existing rate of savings is enough to sustain investment levels required for the projected 7-8 per cent economic growth rate.
As per latest Economic Survey, the highest growth in GDP was achieved due to a corresponding growth rate in industry, agriculture and services sectors and the emergence of a new investment cycle supported by strong credit growth that included consumer financing.
While the agriculture sector has recorded a remarkable growth rate of 7.5 per cent during FY05 compared to the actual growth rate of 2.2 per cent in the preceding year, the growth rate in the manufacturing sector declined from 14.1 to 12.5 per cent over the year. The deceleration was more pronounced in large-scale manufacturing where the growth rate declined from 18.2 to 15.4 per cent.
Similarly, the acceleration in expansion of services sector from six to 7.9 per cent over the year occurred largely due to the growth rate of 21.8 per cent in sub-sector ‘finance and banking’.
The claim that the average standard of living in the country has improved is based on the increase in per capita income from $657 in FY04 to $736 in FY05. The per capita income is estimated by the planning division by dividing gross national product with the number of total country’s population at a given point of time. However, independent sources reckon that the official rate of population increase at 1.9 per cent was under-estimated.
Needless to state that for a sustained economic growth essential prerequisite is the existence of a stable macroeconomic environment in which rate of inflation remains reasonably low and the exchange rate, in real terms, remains stable and competitive.
The ground reality is somewhat different. The rate of inflation measured by CPI stood at 7.8 per cent during FY98, just before the Musharraf government assumed power in October, 1998. In subsequent years, the new government successfully controlled price situation and the rate of inflation was brought down to record level of 3.1 per cent. However, the rate of inflation increased to 4.6 in FY04 and further to 9.3 per cent in FY05. The price situation is now worse than at the time when the present government came into power (in October, 1998).
A significant development is that the present government has brought down the budget deficit from 7.1 in FY98 to a reasonably low level of 3.2 per cent of GDP in FY05. Nevertheless, it was made possible only due to prudent public debt management and the accommodative easy monetary policy.
While the government fully utilized the benefit of low interest rate policy in curtailing budget deficit, it utterly failed to augment the level of fixed investment which is the key to sustain growth momentum. Instead, its focus remained on strengthening consumer demand for durable goods through liberal consumer financing. Consequently, private consumption expenditure increased to 83.7 of GNP in FY05 compared to 81.9 per cent in FY00.
On the other hand, the ratio of domestic fixed investment to GNP declined from 17.4 to 15.9 per cent in the same period. Considering the likely fallout of higher aggregate demand on credit allocation, the economic managers will have to shift their investment strategy from liberal credit for acquiring consumer goods towards fixed capital formation. Along with tight monetary policy, adequate fiscal space should be provided to increase the development expenditure by exercising restraint in incurring the non-development expenditure particularly in defence and subsidies. The reduction in aggregate demand would tend to improve the current account of the balance of payments and put downward pressure on inflation.
For sometimes past, a healthy and positive development is discernible in the policy of sectoral investment decisions. The private sector as compared with the public sector has been more active in participation of fixed investment activities.
The share of private sector in total domestic fixed investment increased from 64.9 in FY00 to 71.4 per cent in FY05. As a percentage of GDP, the private sector fixed investment also increased from 10.4 per cent to about 11 per cent and the public sector investment declined from 5.6 to 4.4 per cent during the same period.
The sector-wise distribution of fixed investment revealed that the private sector undertook more investment in the manufacturing, construction, transport and communication, ownership of dwellings, finance and insurance sectors. The public sector has traditionally been making investment in the agriculture and mining and quarrying and social sectors under the public sector development programme (PSDP).
Unfortunately, the budgetary allocation for PSDP has been quite vulnerable during the past six years. Since the PSDP spending is largely labour-intensive and pertains mostly to rural areas, an increase in the budgetary allocation for PSDP will go a long way in increasing the level of income in rural areas and meeting the unemployment challenge.
Apart from augmenting fixed investment in commodity producing sectors, the human development has now become an important ingredient of investment strategy in developing countries including Pakistan. Investment in health, education, women empowerment and population welfare are the important sectors.
The existing savings–investment gap has been subject to wide fluctuations during the past five years. In FY05, the gap has further widened as the ratio of gross fixed investment to GDP stood at 15.3 per cent while that of domestic savings ratio was 13.7 per cent. The gap has widened due to extremely low domestic savings rate. This development can be attributed to conspicuous consumption.
No government including the present one has prepared a long-term strategy to mobilize domestic savings and induce people to observe austerity in their daily life. Instead of adhering to the approach of ‘self reliance’, the governments heavily banked on the inflow of external resources in the form of remittances, foreign credit or aid and grants. The easy availability of foreign resources particularly after 9/11 has made the present government complacent about mobilization of domestic resources.
Apart from lacklustre approach towards long-term planning, the lack of the institutional arrangements and adequate incentives in the form of rates of return on saving instruments are other basic reasons for low savings rate. At present, commercial banks and national savings centres with their branch network across the country are the two categories institutions which receive deposits from public. However, savings in banks and through NSS instruments are for short period and as such cannot be effectively used for long- term investment purposes.
In early 1990s, Federal Investment Bonds (FIBs) were issued for 3,5 and 10 years maturity with lucrative rates of return on investment going to 15 per cent per annum. The FIBs was discontinued as the debt servicing cost was putting heavy burden on the national budget.
Now, Pakistan Investment Bonds (PIBs) are issued for a longer maturity of 20 years with a relatively much lower rates of return. To strengthen the local bond, the development of secondary market for long-term fixed income government securities is essential.
The capital market has now assumed the catalytic role in providing investment related funds.