IN an environment of otherwise growing consumerism, it is relieving to note that a large number of citizens are saving and investing in the state-run National Savings Schemes, despite a decline in profit rates.
Described as record savings, an amount of Rs180 billion was received by the Central Directorate of National Savings (CDNS) in the first four months of the current financial year as against the target of Rs75 billion. A similar trend was witnessed in the July-September period when over Rs150 billion was invested in National Saving Schemes (NSS) against a target of Rs56.5 billion. Earlier, the surpassing of the target for 2009-10 was seen as a milestone by the CDNS for it happened despite the liquidity crunch in the economy.
The middle class sees the the NSS instruments as the safest investments with attractive profits. They do not find return on bank deposit so much feasible to invest.
The volume of bank deposits much bigger than those in the NSS, have been on the rise, but most of it was placed in deposits of less than six months. However, the deposits for over one year and less than two years showed a big increase, rising to Rs662 billion from Rs254 billion in June 2008. But fixed deposits for three, four and five years witnessed a decline. Which means the banks are unable to make advances for longer periods.
Their lending to private sector has plummeted to a meagre 0.7 per cent in the last fiscal year. One reason for this anomaly is that the banks are now lending much more to the government which is safer than risking lending to businessmen in a sluggish economy. In fact many corporate bodies and non-bank financial institutions prefer to invest in government papers.
However, the new savings trend is unlikely to increase national savings-to-GDP ratio which continues to move between12 per cent to 14 per cent. Currently, it is 13 per cent. It goes without saying that saving and investment are two key variables which can play a significant role in economic growth. But in most part of Pakistan’s history the savings rate was not enough to meet the growing needs of investment.
The policymakers found an easy substitute for savings in the shape of foreign direct investment, borrowings from multilateral institutions, credit and grants by foreign governments. But these alternatives never worked on a durable basis and sutainable development remained elusive.
What is urgently needed is a major expansion of the network of National Savings throughout the country and marketing of its schemes in the rural areas as well. Some economists blame the banks for their utter indifference to promote domestic savings and domestic investment.
One finds a cyclical pattern in Pakistan’s saving industry. There was a notable increase in the savings rate in the early 1990s, from an average rate of eight per cent of the GDP in the 1980s to 17.5 per cent of the GDP in 1991. High returns on the NSS instruments, especially during 1993-99 period attracted individual and institutional deposits. But from 1999 to 2004, there was a significant drop in the profit rates after Shaukat Aziz took over as finance minister and then as PM. He was lukewarm towards the NSS and too warm towards banks.
There occurred a big setback to the NSS schemes during 1999-2004 period. The profit was subjected to 10 per cent withholding tax and some compulsory deductions were made in the event of withdrawal before maturity period. As a result, the NSS became unattractive and most of its investment shifted to banks. But the banks did not promote savings; they promoted consumerism.
In April, 2008, seven major banks were fined a total of Rs205 million by the Competition Commission of Pakistan for operating ‘like a cartel’.
The banks had advertised a joint ‘Enhanced Saving Account Scheme,’ in an effort to wean away NSS account holders to their deposit schemes.
The savings rate in South Asia has generally been quite low as compared to some other developing countries, particularly China and those of South East Asia where the savings rates have usually been in the range of 30 to 40 per cent. The Japanese are known to have been saving half of their monthly incomes. Among the South Asian countries, the savings rate in India has been the highest where it increased from 12 per cent in 1960s to 23 per cent in 1990s and further increased to 29 per cent by the end of 2004-05.
Pakistan’s savings rate was among the highest in South Asia in the 1970s, it suffered a decline from 1983 to 2000. It showed some recovery in 2000 and by 2004 it was the second highest in South Asia. In Sri Lanka, the savings rate was almost equal to that of India during the 1960s, but after the mid-1970s, it came down to about 15 per cent. It has dipped further during the last 10 years.
Pakistan had a domestic investment rate at 14 per cent as a percentage of its GDP in 1970, and it hovered around the same figure till 2000. Only five years ago, the investment rate had reached an all-time high of 22.5 per cent of the GDP but again nosedived to 13.4 per cent in 2010-11.
A 2006 World Bank report had suggested to Pakistan to focus on raising domestic savings instead of relying on foreign savings (international borrowing and foreign investment ) to achieve higher economic growth.
What makes the fast growing economies of East Asia so different and vibrant is the fact that while inflow of foreign savings did give an initial boost to growth in these countries, domestic savings played a key role in sustaining rapidly increasing domestic investment.
Therefore, what Pakistan needs is to reverse the current trend of low domestic saving and resolve its geopolitical challenges in order to attract FDI.