Promote domestic savings

Eureka. The government is working on a new and improved policy formula to attract local and foreign investment in the country, which in turn would help achieve 7 to 8 percent annual GDP growth. But knowing that policy visions by government officials tend to be used more for anxiety relief and wooing voters than for adequate policymaking, here are a couple of factors, the mandarins should be seriously taking into account before finalizing their strategy for the next five years.
First, promote domestic savings to reduce the savings investment gap and excessive reliance on foreign inflows. The countrys domestic savings as percentage of GDP have slid from about 16 percent in FY06 to just 11 percent last year. That compared to other regional economies, for example, India where saving rate has jumped to 34 percent from 25 percent in the last seven years, shows an unwanted regression.
To ensure future investment, it is imperative for individuals to save more to increase the gross capital formation. Unless this obsession with consumption is reduced, the country will keep relying on foreign savings, which may or may not come in the desired sectors. And if even they do, the outcome might not necessarily be in favor of domestic economy in the long run. Second, and on a related note, the government must ensure that foreign investment in the country is channeled into the right sectors. So far, the FDI inflows have concentrated around telecom, mostly cellular, and financials - both of which have contributed to high marginal propensity to consume; the former being a daily use item and the latter being a major driver of credit-led consumption.
In the developed economies such as the US, where there has been adequate impetus of savings in the past amid high per capita income, these service oriented growth models make more sense. But, in case of developing economies like Pakistan, there should be more focus on setting up real sector industries to take advantage of value added products of our rich indigenous resources.
The only significant area where foreign investments have grown has been energy, including power, oil and gas exploration/production and refineries, from $307 million in FY02 to $1.03 billion last year. But as a percentage of total foreign investment, it has remained flat, at around 28 percent in the last seven years - showing the misdirected nature of priorities.
Third and perhaps central to the idea of attracting both foreign investors and increasing public-private partnership, is the much needed eradication of corruption and inefficiencies in the governments own house.
Its quite paradoxical that the government aims to achieve the 50th rank in the Global Competitive Index by 2030 without working on any apparent plan to eliminate corruption, political instability and inefficiency in the bureaucracy which have been cited as few of the most problematic factors in doing business in Pakistan by the World Economic Forum. What the government needs first is to get its operations in shape before aiming for rather ambitious goals.