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Pakistan has the one of the lowest savings rates in the world. During the past decade, Pakistan’s savings rate has averaged around 13% of GDP which by far is the lowest in the region. To put things into perspective, India and Bangladesh had an average savings rate of 32% and 37% of GDP.

The low savings rate has been the main obstacle to capital availability for economic growth. Urgent reforms must be taken to increase the savings rate which requires choosing long-term investment over short-term consumption. This shift is vital for fostering the growth of large companies that benefit Pakistan’s economy.

While addressing savings rates is crucial, it’s also critical to acknowledge the need for comprehensive reforms across all sectors such as energy, taxation, policies, infrastructure, and governance.

A higher savings rate not only reflects prudent financial behavior at the individual and institutional levels but also plays a pivotal role in driving investment, capital formation, and ultimately, economic growth. An analysis of the savings rate yields that Pakistan lags significantly behind the regional competitors. In 2022, Pakistan’s gross savings rate was a meagre 10.6% meanwhile India and Bangladesh were 30% and 34%, respectively (Figure 1). The world and South Asian average for the saving rate is 28% and 26.3%, respectively.

A key factor contributing to the low savings rate is the country’s widespread poverty and the generally low-income levels. Figure 1 illustrates a correlation: high poverty rates correspond to low savings rates, and vice versa. The World Bank reports that nearly 39% of Pakistan’s population lives in poverty, having the lowest per capita income in South Asia. Approximately 60% of the population lives on just $2 a day. This barely covers subsistence living standard, leaving no room for savings. This stark economic disparity significantly impacts the propensity to save, as individuals with higher incomes typically save more compared to those with lower incomes. Additionally, factors such as inflation and perceived macroeconomic instability further disincentivizes their purchasing power and ability to save.

Increasing the savings rate hinges on boosting income. This can only be achieved through direct government intervention or policy changes, creating a positive cycle. When income rises, the savings rate increases, leading to higher investment and ultimately fostering greater economic growth.

The prevailing culture and consumerist mindset in Pakistan also play a role in discouraging savings. Short-term spending habits are common, prioritizing immediate consumption over long-term financial security. The low savings rate is a culmination of decades of ostentatious living as a result of hyper consumerist culture.

Moreover, there is a lack of opportunities in Pakistan due to the hostile business environment and it is further compounded by the anti-export bias that the policy makers have.

For instance, Pakistan ranks 108th globally in ease of doing business, contrasting sharply with India’s 63rd ranking. This unfavorable environment discourages entrepreneurship and innovation, as entrepreneurs encounter barriers to entry, excessive red tape, corruption, and limited access to resources and support.

Consequently, fewer new businesses emerge, and existing one’s struggle, impacting job creation, income opportunities, and overall wealth generation and savings potential.

Savings, business profits, and investments through the stock exchange are fundamental sources of equity capital for investment. The declining private investment in Pakistan reflects the erosion of investor confidence in the economy. Investor sentiments are heavily influenced by perceptions, and frequent unilateral policy changes by the government disrupt industry sentiments, eroding trust in government policies and hindering the flow of equity capital essential for investment.

The lack of financial capital has direct consequences for businesses, limiting their ability to expand and thus creating fewer employment opportunities. Pakistan’s high unemployment rate in 2023, at 8.5%, stands as the highest in the region, in stark contrast to India’s 3% and Bangladesh’s 4.2%. This low savings rate contributes to low investment levels, impeding economic growth and creating a vicious cycle. In fact, Pakistan’s savings have steadily declined since peaking in 2003 at 24.5%, resulting in this low savings-investment trap.

Historically, savings in Pakistan have leaned heavily towards non-financial assets, notably real estate, and gold, which are often unproductive. In contrast, financial savings encompass a range of productive investments such as bank deposits, mutual funds, bonds, pensions, and insurance.

These financial savings, intermediated by the banking system and capital markets, are directed towards real investments like new factories and infrastructure, driving economic progress. Introducing a capital tax based on fair market value for immovable property could effectively channel investments away from unproductive assets like gold and real estate towards more productive financial savings.

Moreover, Pakistan’s stock market currently paints a bleak picture. In 2019, there were 534 listed companies with a market capitalization of $37 billion. However, as of now, the number of listed companies has dwindled to 524, with a market capitalization of $32 billion. Immediate reforms are essential to reverse this trend, increasing both the number of listed companies and the overall market capitalization.

Globally, companies often receive incentives in the form of tax benefits to enlist on stock exchanges. Unfortunately, Pakistan withdrew these tax incentives for new enlistments. As it stands, the average rate of tax in Asia is 19.8% whereas in Pakistan corporate tax rate is 29%, in addition, super tax up to 10% for tax year 2023 and onwards has also been imposed in the Finance Act 2023.

To encourage privately held companies to enlist on PSX, corporate tax rate should be permanently lowered by giving tax credit of 20% of tax payable for listed companies. Additionally, the dismal situation is further highlighted by the fact that in 2023, only one Initial Public Offering (IPO) took place on the PSX. For comparison, India saw as many as 57 IPOs in 2023.

Furthermore, listed companies face double taxation, first at the corporate tax rate of 29% and then on dividend distribution at 15%, alongside the super tax of 10%. In contrast, unincorporated businesses face varying tax rates from 0% to 35% in slabs. This inequity in taxation discourages corporatization and the documentation of the economy, as unincorporated businesses benefit from substantially lower taxes.

This advantage in tax regime to unincorporated companies must be turned on its head and tax incentives should be granted to listed companies only. Therefore, it is proposed that tax rates for listed companies should be made half of what the unincorporated companies are currently paying to promote corporatization, leading to increased revenue generation, investment opportunities, and savings.

Increasing the number of listed companies will significantly impact credit provision for businesses to operate, expand, and undertake research and development (R&D) activities. A larger and more vibrant stock market offers businesses access to capital through equity financing, allowing them to raise funds for operational expenses, expansion projects, technology upgrades, and innovative R&D initiatives.

This access to capital fuels business growth, enhances competitiveness, and drives market development. As businesses expand and innovate, they create new job opportunities, boost productivity, and contribute to economic growth. This, in turn, leads to higher income levels for individuals, increased disposable income, and a rise in the savings rate. Individuals with higher incomes are more likely to save and invest in financial instruments, capitalizing on the economic opportunities presented by a thriving stock market and contributing to overall savings and investment activity in the economy.

Additionally, to increase income, Pakistan needs to adopt an export-centric culture. This approach fosters trade, brings innovation, improves business management, and upskills the workforce. Shared prosperity among the trading partners raises income levels and boosts disposable income, which leads to a higher savings rate.

An analysis of trade openness yields that Pakistan lags behind its regional counterparts. In 2022, Vietnam led the region with a trade openness rate of 185%, while India and Bangladesh followed with rates of 48% and 41%, respectively. Meanwhile, Pakistan’s trade openness stood at 37%, the lowest in the region.

The need for reforms become increasingly significant especially as the country head towards negotiating another IMF program. A fundamental reform that is crucial is to foster an export-centric culture across all sectors of the economy. The government must initiate reforms that cultivate a business-friendly environment to rescue the economy from its precarious state.

Without decisive action one can picture the same problems recurring in a vicious cycle, from struggling before international donor agencies for additional loans, to struggling for the rollover of existing loans and deposits at the State Bank of Pakistan.

To achieve sovereignty and economic stability in the real sense of the word, the government must prioritize strategies that boost savings, such as incentivizing saving behavior and fostering a robust investment climate. By focusing on increasing exports, strengthening the stock market, and promoting a culture of saving, Pakistan can lay a foundation for sustainable growth.

It is high time those in power view the scenario from this perspective and reassess the broad consequences of the policies they propose. As it stands, there is no room for Pakistan’s economy to grow due its internal structural deficiencies. The choice for the future is clear: reform or perish.

Copyright Business Recorder, 2024

Author Image

Shahid Sattar

PUBLIC SECTOR EXPERIENCE: He has served as Member Energy of the Planning Commission of Pakistan & has also been an advisor at: Ministry of Finance Ministry of Petroleum Ministry of Water & Power

PRIVATE SECTOR EXPERIENCE: He has held senior management positions with various energy sector entities and has worked with the World Bank, USAID and DFID since 1988. Mr. Shahid Sattar joined All Pakistan Textile Mills Association in 2017 and holds the office of Executive Director and Secretary General of APTMA.

He has many international publications and has been regularly writing articles in Pakistani newspapers on the industry and economic issues which can be viewed in Articles & Blogs Section of this website.


Comments are closed.

Aamir May 03, 2024 10:24am
With historically saving rates being lower than inflation who will save in rupees?
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KU May 03, 2024 11:36am
In a civilised country with rule of law, these good suggestions would have been valid, but ours is case of mafia run black economy, controlled by the baboos. Our expenses are designed n unaccountable.
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Sohail May 03, 2024 02:56pm
Savings are there but if taxes are imposed on cash withdrawals, who would put money in. If digital payments are not common, whts the incentive for keeping cash in bank. Who can bring inflation down?
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Nasim Beg May 03, 2024 04:49pm
Wealthier members of society have their savings abroad, which add to the savings of Dubai, London etc. Pakistanis, owing to the skewed income distribution, have decent savings, but Pakistan does not
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Nasim Beg May 03, 2024 04:51pm
The GOP runs a deficit and uses up the savings of individuals. It is the government that is the negative saver,
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Az_Iz May 04, 2024 10:50am
As the saying goes, this article 'is on the money'. Every point is spot on.
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Az_Iz May 04, 2024 10:52am
Without savings,and so much focus on consumption, even by those households, that have the incomes large enough to save, it would be very difficult for the country to progress.
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Az_Iz May 04, 2024 10:54am
High taxes on industry is counter productive. It should not be higher than regional competitors.
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Az_Iz May 04, 2024 10:59am
One way to counter the consumption style is by ending subsidies.At least due to pressure from IMF and sensible FM Miftah,the govt imposed petroleum levy,which will generate Rs 1 trillion revenue.
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Az_Iz May 04, 2024 11:03am
More articles should be written on this subject.This is such an important piece of the economic success of individuals and the country,yet,very little is said or done about it.
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Az_Iz May 04, 2024 11:09am
The govt should end subsidies,which will force everyone to optimize consumption of resources,and lead to lesser imports and savings on foreign exchange front.
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Az_Iz May 04, 2024 11:10am
A low income country without huge natural resources, will not become prosperous thru consumption. It has to save, even if that is not an easy thing to do.
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Az_Iz May 04, 2024 11:11am
You will better off saving, than not saving.
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Ease of doing business . The key factor.
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Az_Iz May 04, 2024 09:36pm
One is not able to save because one does not have enough income,inflation etc. Another person with say 20% more income also is not able to save 20% of income,and he too will have the same reason.
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Az_Iz May 04, 2024 09:41pm
Bigger reason for not savings is priorities. Two people with different income levels are not able to save, because they think, they don't earn enough to save, and are struggling to pay their bills.
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Imran May 05, 2024 08:43pm
@Aamir , I agree, who in their right frame of mind would opt for financial assets savings instead of real estate and gold when our currency depreciates 2/3rd of its value in 3 years
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