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Domestic savings to wean Pakistan off external dependency

  • April 22, 2023

ISLAMABAD-The economic conditions in Pakistan call for a multi-pronged strategy to promote a culture of domestic savings rather than relying on foreign sources and loans for sustained economic growth, said experts while talking to WealthPK.

Dr. Javed Iqbal, Associate Professor at the School of Economics, Quaid-e-Azam University said, “One of the root causes of problems affecting Pakistan’s economy is its nature as a consumption-driven economy. While consumption is an element that focuses on boosting aggregate demand in an economy, which, in turn, drives up production, the fundamental issue arises when an economy becomes dependent on an exorbitantly high rate of consumption with subpar levels of savings.’’

“In Pakistan, 75% of household income is utilized for private consumption. As a result of high consumption, the investment is being sacrificed, dampening the country’s growth. Domestic or household savings have played an important role in capital accumulation and attaining high growth rate. As domestic savings decrease, capital accumulation also decreases, and hence low growth rates of Pakistan,” he said.

“Currently, Pakistan’s middle class has been hit hard by unemployment and inflation.  High inflation erodes the purchasing power. As a result, people’s real income, which is their income adjusted for inflation, also declines. Individuals find it difficult to save money, as they have less disposable income available for savings after meeting their basic expenses,” he said.

“The government should provide protection to all private savers against theft, fear of inflation, and collapse of the financial system and reward the savers. This can be done by strengthening the local financial institutions, controlling the inflation rate, and increasing the role of market signals in deciding the allocation of savings and investments,’’ he suggested.

Mehmood Khalid, a research economist at the Pakistan Institute of Development Economic (PIDE), said, “Pakistan remained trapped in a low-savings and low-investment situation, which constrained its economic potential. Domestic savings can serve as a buffer against external shocks and uncertainties in the global economy. In times of economic crisis or external shocks, countries with higher levels of domestic savings are better equipped to manage and mitigate the impacts of such shocks.” He said, “Pakistan has one of the lowest investment and savings rates in the region and the world, obstructing progress toward a sustainable and inclusive economic growth.”

“In order to reduce external dependency, Pakistan has to improve its domestic savings rate. Policies that promote financial inclusion, such as expanding the reach of formal financial institutions, simplifying banking processes, and promoting financial literacy can encourage households to save and invest their income,” he said.

“The current government needs to address these issues and make concrete efforts that break the country free from the shackles of low savings and investment trap and put it on the road to economic growth and prosperity,” he suggested.

According to data available from the World Bank, Pakistan’s domestic savings as a percentage of GDP fell from 6.9 percent in 2020 to 4.5 percent in 2021. The country’s savings rate compares unfavourably with East Asian countries and its South Asian peers. Bangladesh and India have seen their savings rates increase over the same period.

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