IT is now the turn of the World Bank, a major lender to Pakistan to drive home to the government, not only the need for higher domestic and national savings, but also the urgency to move effectively in that direction.

The bank says that even if the foreign direct investment, which is relatively low now, is doubled, the efforts to sustain the high rate of economic growth can fail in the medium term, in the absence of adequate domestic savings to reinforce it.

If Pakistan wants to sustain a hvigh growth rate, it has to rely more on its own domestic savings and at an accelerated pace of investment, now 18 per cent of the GDP. Larger external borrowings/FDI can be offset by heavy interest payments and remittances of the high dividends by foreign companies.

While Pakistan takes the current dividend payments lightly, it can become cumulatively too heavy as a result of the foreign external flows; hence the World Bank has chosen to stress the importance of relying on our own resources, more particularly following the accelerated privatisation where the new owners of companies are foreign investors.

The national savings touched 10.3 per cent of the GDP last year after dropping as low as 2.5 per cent of the GDP in 2001-02, while the domestic savings is around eight per cent. The domestic savings rate in Pakistan is one half that of India, and one- third that of China, says the bank.

The bank’s report entitled, “determinance of savings in Pakistan” wants that higher economic growth and larger per capita GNP do not mean higher domestic savings in Pakistan. In fact, while the per capita GNP increased by one per cent, the domestic savings increased by 0.6 per cent only. That means that higher economic growth will not solve all the major economic and social problems, particularly as they affect the poor.

In fact, what is more true of the rural areas, except for the land owners is the high rural indebtedness and not large domestic savings. Higher agricultural support prices help the rich farmers and not the teeming subsistence farmers. Hence they borrow heavily at high interest rates and default, and some of their families become bonded labour with their endless privations.

The World Bank says that rapid economic development in Asian countries took place initially with the help of foreign direct investment (FDI) and later the high growth was sustained by large domestic savings, particularly the high corporate savings which were re-invested instead of being repatriated as dividend income on FDI. Hence Pakistan’s industrial expansion has to be sustained by robust domestic savings inclusive of large corporate savings.

Many of the benefits of higher domestic savings as India is seeing now, though earlier it was dubbed as the Hindu rate of savings. Japans savings in the earlier years went u p to 40 per cent of its GNP. Even in recent times, making the Japanese consumer spending re-float the economy has been a tough task for the government.

To begin with, savings has reduced inflation in a country marked for its high inflation over decades. Even now we have real double digit inflation, although the officials may say that relates to the Sensitive Price Index, or the food basket.

High savings is an effective means for reducing consumption, particularly among the middle income groups and reduce the pressure on the market. Such consumer behaviour can certainly bring down the prices of essential goods.

Less domestic consumption would mean more of exportable surplus and eventually higher exports which we desperately need.

High inflation often results in high exports prices in rupees and eventually results in the devaluation of the rupee following exporter’s pressure. The rupee is now touching almost Rs61 to a dollar after staying around $58. Rupees 61 for a dollar is a psychological barrier which should not be crossed.

Large savings would mean higher investment, faster development and a self- sustaining economy and less visible disparities between the poor and the well-to-do. And that is certainly far better than hankering after foreign investment at any price. Thailand is now facing the problem of unbridled freedom for foreign investors at the cost of domestic investors.

The foreign investors as a group have become too powerful there and hence remedial measures are being sought in the post Thaksin era to correct the imbalance. As we follow Thailand in many areas of development, its unattractive features should also be borne in mind. With a foreign exchange reserve of only $11.5 billion our ability to negotiate with foreign investors is limited, particularly with those coming from countries where a large number of Pakistanis are employed. But this is a period in which the highest priority is being given to high economic growth after having achieved a growth rate of 8.6 per cent in 2004-05.

And this is the period of merry consumer banking to promote high growth and this is too good a period for the banks, foreign and local, which are making 70-100 per cent profits. Hence the banks share prices are very high and foreign banks want to buy some of the local banks to profit by the banking boom.

The consumer credit is mostly used to buy foreign goods like luxury automobiles, expensive electronics and high priced watches and to finance wedding extravaganzas, a part of that credit is however used for house building which is a good thing.

Consumer credit as it operates now is not really helpful to the domestic industry except those in the housing sector. And that is unfortunate. At the same time, banks are reluctant to give long- term industrial investment loans which is hurting the industrial growth and curtailing the employment avenues.

A major reason for the poor domestic savings is the low interest rates offered on bank deposits which is just nominal or far below the inflation rate. In fact, while adjusting for real inflation, the saver is the loser and the judicious spender the gainer.

At the same time, the bank charges very high interest rates on the loans they provide- a gap of one to four with the banks earning three times more than the depositors. In addition , the banks impose all kinds of arbitrary charges on the depositors and lower their earnings further.

Some banks are however liberal with depositors who make very large deposits for a long time and they have no time for small depositors with small savings. Banks do not think the Bangladesh example is valid for Pakistan where they prefer million rupee account holders.

Gone is the practice of 1960s when a bank exhorted the students to begin their deposits with a Rs1 account. Instead, we have the consumer banking with the lure of all the foreign luxuries to spend on.

The government is now exploring the means to reduce the iniquitous banking spread and get a fair deal for the depositors. It has sought the help of the State Bank of Pakistan which ought to be more positive in this regard.

The State Bank is also looking into the means to increase bank lending for long -term industrial investment, but is taking a long time to come to a decision which needs the co-operation of banks, preoccupied with consumer lending.

Anyway, it is obvious the country needs far larger domestic savings for a variety of good reasons. In a period of high profits, and higher share prices the corporations should use more of their profits for re-investment instead of distributing them as generous dividends. An economic growth financed by our own resources, and through their prudent use, can sustain itself far better than if the external dependence is excessive. Clearly, higher savings alone can save the higher economic growth and keep it in the right trajectory for long.