Investment-to-GDP ratio eased to 15.2 percent in FY2021

ISLAMABAD: Pakistan’s investment to GDP ratio declined to 15.2 percent from 15.5 percent of Gross Domestic Product (GDP) though savings to GDP ratio improved to 15 percent from 13.8 percent of GDP during the outgoing fiscal year of 2020-21.

According to approved working paper of National Accounts Committee, the total Gross Fixed Capital Formation (GFCF) is projected at Rs6,492 billion but remained short to achieve the fixed target.

The low investment and savings in terms of GDP resulted in repetition of history of the boom, bust cycles for the country’s economy. The outgoing fiscal year GDP growth forecast of 3.94 percent demonstrates that the growth is fueled by higher consumption as an investment both at domestic and foreign levels failed to get the desired results.

The annual plan for outgoing fiscal year 2020-21 had envisaged that investment to GDP ratio would increase to 15.5 percent of GDP in order to achieve sustained and inclusive growth keeping in view post Corona crisis. Fixed Investment was projected to grow to 13.9 percent of GDP in 2020-21.

National Savings is targeted at 13.8 percent of GDP. The focus is to replace consumption-led growth with investment-led growth. New Monetary policy posture with the reduction in interest rate will encourage investors and consumer financing will boost economic activity. Numerous measures to improve ease of doing business (such as tax holiday to special economic zones, withdrawal on constricting taxes on banking transactions) are expected to boost capital formation and attract both domestic and foreign investment.

The low growth phenomenon re-emerges after every few years mainly because of the country’s inability to generate investment and savings in the percentage of the GDP to fuel desired GDP growth at a sustained level.

The incapability of generating the desired level of investment and savings forced the regimes to increase reliance on financing from external avenues, which ultimately shoved the country deeper into twin deficit crisis soon after achieving growth of slightly over 5 to 5.5 percent for two to three years’ period. India’s GDP growth has averaged 6.5 percent over past two decades, compared to 4.4 percent for Pakistan. Vietnam’s growth has averaged over 6.7 percent and even Bangladesh’s has averaged 5.4 percent, outperforming Pakistan.

Pakistan requires investment for sustained growth. In the decade of 90s, Pakistan’s Gross Capital Formation was at par (or better) than its peers. Since 1995, Pakistan’s GCF has gone down, while that of peers has increased substantially.

Private sector has remained shy due to high cost of doing business and energy & security constraints. Pakistan’s Public Sector Development Program (PSDP) spending has declined sharply from average of 10 percent of GDP in 1980s to just 4.7 percent in FY18 and now it is going to fall further in the next fiscal year. Bottom line, Pakistan needs 20 percent growth in investment to get a GDP growth rate of 5 percent. Secondly, Pakistan lags behind its peers mainly because of its failure to jack up savings as savings ratio in Pakistan was pathetically low around 16 percent, while in China it is 46 percent, India 31 percent, Bangladesh 33 percent, Sri Lanka 25 percent, and in Vietnam it hovered around 24 percent.

The investment to GDP ratio was estimated at 16.7 percent of GDP when the PML (N) was ruling over the country in 2017-18.

Now savings to GDP ratio improved in the current fiscal year because the current account deficit is projected at negative 0.2 percent of GDP as overall there is projection of current account surplus of $400 million for the outgoing fiscal year.

The low investment and savings in percentage of GDP continued to remain the largest challenges for the country’s economy because such low level cannot fuel long and sustainable growth trajectory.

Without boosting investment and savings, Pakistan’s dream of achieving long and sustainable growth trajectory in the range of 7 to 8 percent for 10 years cannot be materialized. When GDP growth picks up, it results in increasing imbalances on external accounts because the low investment could not fuel the GDP growth.