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........