Investment policy lacks saving grace

The governments plans to raise domestic investment level by an average $12 billion in the next five years sounds unrealistic, given the nose-diving nature of capital formation in Pakistan - and if this trend continues any further, investment will likely follow suit.
The countrys saving rate is very low and plummeting, with domestic savings as percentage of GDP dropping from about 16 percent in FY06 to just 11 percent last year - exhibiting a backward inclination, compared to other similar regional economies. For example, Indias saving rate has been rising steadily for the past seven years, starting from approximately 25 percent to 34 percent at present, as a percentage of total output.
Domestic private consumption, on the other hand, has been showing an increase, from approximately 74 percent in FY04 to nearly 80 percent in FY09. This increase occurred even while interest rates were climbing. With the expected fall in interest rates in the future, it is safe to say that consumption would shoot up, further dampening any chance of savings that could have taken place. The problem is exacerbated by the recession as consumption is already at a mere subsistence level.
Clearly, attention has to be paid to stimulate domestic savings, but here is the Catch-22: the government needs to develop a package to induce national savings in order to turn these savings into future investments. However, given its constrained fiscal revenue for the coming year, creating such a stimulus would prove extremely difficult.
Existing revenues are likely to be consumed largely by our soaring defence expenditure and debt servicing, which have nearly doubled in the past four years to a budgeted Rs 1.12 trillion for FY10. These disbursements currently represent 66 percent of the current expenditure.
Any further increase in these expenses would be disastrous as, given our fiscal revenue, it would be impossible to cover their payment through National savings, and, hence, investments seem to be a very far way off. A recurring problem is that the current governance structure is acting as a hindrance for private investment. Delays occur in the implementation of policies and programs that constitute opportunity costs.
In public investment, devolution, which had been practised in Pakistan so far, could have potentially been a catalyst. Local governance has proven to be a successful model in India and China, and a similar success may have been observed in Pakistan. But now that it has been halted in Pakistan, the original concerns and impediments have come flooding back in.