Economists say low national savings level in a country indicates the issues related to balance of payments. As per the economic equation, the current account balance is the difference between the total savings and total investments in an economy. Pakistani nation invests or spends more than it saves, which results into trade deficit.
Last year our gross savings to gross domestic product (GDP) and Gross investment to GDP ratios were at a much lower levels, with an investment gap of ~4.1% of GDP. This gap between imports and exports is covered usually through foreign investments and loans. Since the foreign direct investment (FDIs) remained low in the past years. The difference was financed through foreign loans from other countries.
In an economy ‘Savings’ are an important source of investment; low savings levels usually result in suppressed exports, economic growth and employment generation. Mainly there are two types of savings a) Government savings b) Household savings. Since our government spending remained very high, government savings remained very low. Therefore, a large chunk of savings was generated by private or household sources. One of the major factor determining the savings volume is interest rate. The higher the interest rate, the more will be the savings.
Previously the interest rates were reduced by the government, in order to boost development in real estate, speculative investment and consumer financing in the country. However, the results generated were not as per the expectations. Due to reduction in interest rate by GoP, financial institutions also started offering lower saving rates to the clients. This not only discouraged ‘household savings’ but also encouraged spending especially on buying more consumer goods.
For keeping an equilibrium between savings and spending, suitable/moderate policy rate is required to be kept by the regulator and government.