Pakistan saving to GDP rate stands around 12 percent which is the lowest in the region and peer economies, according to a study by the State Bank of Pakistan (SBP).
The formal savings are substantially small on account of low levels of income, rate of return, and public investment amid high inflation.
The saving to GDP rate stands above 20 percent in low-income countries whereas it stands at nearly 30 percent in South Asian countries.
Low savings lead to lower investments that are affected by shallow financial markets, a large informal economy, and other institutional and administrative challenges, including structural weaknesses in revenue mobilization that contribute to low public savings.
Pension, insurance, and social security systems also remain weak in the country due to institutional and capacity-building challenges in the country’s insurance and pension landscape and the pension framework.
This presents a two-fold challenge: (a) it contributes to the problem of low levels of long-term savings needed to finance long-term projects, and (b) puts the post-retirement life of the working-age population at risk.
Although the level of financial inclusion in the country has improved over the years, Pakistan ranks low compared to peer economies, where gender disparity is rather large. Moreover, the overall credit to the private sector in the country also needs substantial improvement, as the credit largely flows to big corporates instead of individuals, and micro, small and medium enterprises (MSMEs).
Consequently, individuals and MSMEs excessively rely on their own savings (retained earnings or owners’ personal funds) and informal lending channels that are expensive and unreliable.
The combined impact of these trends challenges the increasing youth bulge as savings remain insufficient to meet the growing needs for public and private investments. However, recent initiatives taken by the State Bank of Pakistan to incentivize SME finance, housing, and Islamic banking are steps in the right direction.
Investment to GDP ratio
Furthermore, in terms of total investment to GDP, Pakistan stands lowest in the region with around 15 percent of GDP. In comparison, total investments in India and Sri Lanka are more than 30 percent of their respective GDP. This is primarily attributed to low domestic savings in the country amid a high degree of reliance on foreign direct investments, low business growth, macroeconomic instability, and policy uncertainty.
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