The missing budget debate: Pakistan’s savings collapse

In 1992, Pakistan saved 17.4 percent of its GDP. By 2024, it had fallen to only 6.4 percent. Over three decades, across different governments, economic upturns and downturns, IMF programmes and short periods of stability, the country had lost its domestic savings base.

The consequence? An economy unable to fund its investment needs has to rely on foreign savings, resulting in a balance of payments crisis each time. This is not a tale of saving money or living frugally.

This is one of the most important, but also the least discussed, macroeconomic disasters of our time. It needs attention in the upcoming budget debate for FY2026-27.

The country cannot finance sustainable growth by taxing more and borrowing more; it needs to rebuild its domestic savings base for sustainable growth.

The current performance of country savings looks very dismal when compared with the regional peers. Pakistan has been saving on average about 11 percent of its GDP for the past 35 years. In the same period, Bangladesh averaged 21 percent, India by over 28 percent, and Vietnam by almost 30 percent.

The gap cannot be explained by income level alone; these countries managed to create an environment where savings were safe and well-rewarded. Those savings ultimately translated into jobs and growth.

Conversely, the savings base eroded in Pakistan. Because savings don’t make sense for the average Pakistani. Around 94 percent of all income generated in the economy is consumed on necessities, such as food, rent, power, commuting, healthcare, and education.

Whatever little money is left over gets eaten up by rising inflation, which in recent years has always risen faster than the interest offered by banks.

When returns on deposits or savings products do not compensate for rising prices, households see little reason to keep money in formal financial instruments.

This creates an inflation/consumption trap. Households spend the lion’s share on necessities, and what little is left ends up stashed in cash, committees, and jewellery in the cupboard. These may provide security at the household level, but they do not create an efficient pool of resources for productive investment.

The situation is further worsened by the lack of financial literacy and sludge. Millions of Pakistanis, particularly women and rural inhabitants, are unable to access financial instruments due to long distances, extensive documentation, lack of trust, and existing products that are not compatible with their needs and beliefs.

Then comes the role of the state, persistent fiscal deficits reduced national savings. Over the years, the country has been spending more than it generates and relies heavily on borrowing, including from domestic banks, leaving almost nothing for the private sector.

Banks prefer such lending due to associated lower risks and higher profits, which triggers the crowding out of private investors from the economy.

However, all is not lost, and this issue is still resolvable. The upcoming Finance Bill is the natural place to begin with, through the provision of incentives to motivate citizens and nudging them to save.

Building on the Policy Viewpoint, “Mobilizing Domestic Savings: A Finance Bill and Institutional Reform Agenda for Pakistan,” by Dr. S. M. Naeem Nawaz (Professor of Economics) and Wajid Islam (Research Economist) at PIDE, the policy response should begin with a targeted National Savings Mobilization Package through the FY2026–27 Finance Bill.

The principle should be simple. Ensure that systematic saving is more rewarding and secure than stashing away one’s wealth in the form of cash or gold. Specifically, it requires the revival of a targeted tax relief scheme for approved long-term investment instruments.

Previously, such instruments were offered under Section 62 of the Income Tax Ordinance until withdrawn in 2022. It implies the promotion of pension schemes, especially those aimed at younger individuals, women, and self-employed citizens, to encourage saving from an early age.

It is pertinent to note that the incentives have to be tailored to serve as a reward for authentic, small, and long-term savers. Caps on the amount of the incentive, minimum investment duration, and clawback provisions for early withdrawals can help keep the fiscal burden at bay.

A savings-friendly budget needs to refrain from punishing citizens whenever their money flows into the formal economy. The transaction taxes on bank-based financial transactions have done significant harm by pushing citizens away from banks.

Along with incentives, a conducive environment is a prerequisite to enable easy access to financial markets. The country doesn’t need to work from scratch as several options are already available, such as national savings institutions, a broad network of banking outlets, digital payment mechanisms, and Islamic finance institutions.

What is needed is a channel that links them in a manner that allows citizens to gain access to these services through digital accounts, easy verifications, and diversity of Shariah-compliant instruments.

However, nothing will stick unless the government balances out its books as well. Restraining wasteful expenditure, reducing losses in state-owned enterprises, and using borrowed funds for investments instead of expenditures must become integral parts of any policy for savings.

Pakistan has spent too long trying to finance growth without building the savings base needed to sustain it. The choice is not between austerity and growth. The real choice is whether Pakistan will continue relying on foreign savings or begin rebuilding the domestic pool on which durable growth depends.

The Finance Bill FY2026-27 should be the starting point. Reward formal long-term saving, protect small savers, reduce public-sector dissaving, and ensure that domestic resources finance productive investment.

Copyright Business Recorder, 2026