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Money Matters

Dismal savings

By Muhammad Mubasal & Shahid Sattar
13 May, 2024

Pakistan has the one of the lowest savings rates in the world. During the past decade, Pakistan’s savings rate has averaged around 13 percent 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 percent and 37 percent of GDP.

Dismal savings

Pakistan has the one of the lowest savings rates in the world. During the past decade, Pakistan’s savings rate has averaged around 13 percent 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 percent and 37 percent of GDP.

The low savings rate has been the main obstacle in 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 percent meanwhile India and Bangladesh were 30 percent and 34 percent respectively (Figure 1). The world and South Asian average for the savings rate is 28 percent and 26.3 percent 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 percent of Pakistan’s population lives in poverty, having the lowest per capita income in South Asia. Approximately 60 percent 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 percent, stands as the highest in the region, in stark contrast to India’s 3 percent and Bangladesh’s 4.2 percent. 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 percent, 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 percent whereas in Pakistan corporate tax rate is 29 percent, in addition, super tax up to 10 percent for tax year 2023 and onwards has also been imposed in 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 percent of tax payable for listed companies. Additionally, the dismal situation is further highlighted from the fact that in 2023, only one Initial Public Offering (IPO) took place on the PSX. For comparison, India saw 57 IPOs in 2023.

Furthermore, listed companies face double taxation, first at the corporate tax rate of 29 percent and then on dividend distribution at 15 percent, alongside the super tax of 10 percent. In contrast, unincorporated businesses face varying tax rates from 0 percent to 35 percent 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 percent, while India and Bangladesh followed with rates of 48 percent and 41 percent, respectively. Meanwhile, Pakistan’s trade openness stood at 37 percent, 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, 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.


The writers are APTMA officials