Historical Trends of Savings and Investment in Pak-pep

8/11/2019 Historical Trends of Savings and Investment in Pak-pep

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SAMAN CHISHTIE (9287)NIGHAT MANNAN (8792)

SIDRA NAEEM (9823)

HISTORICAL TRENDS OF

INVESTMENT AND SAVINGS IN

PAKISTAN


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INTRODUCTION

O Saving and investment are two key macro

variables which can play a significant role in

economic growth, inflation stability, selfreliance and promotion of employment

O Investment, which is the part of countrys

wealth used for the production of more wealth,

is financed by savings


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SAVINGS

Savings

Government

(public sector)Private sector

Corporate

Household

Foreign savings


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NATIONAL SAVINGSNational savings comprise of :

1.Public sector savings

2.Private sector savings

3. Foreign savings

Public sector savings include

O government savings and

O savings produced by public sector enterprises in

the form of internal resourcesThe position of public sector savings has not beenvery impressive over the years (0.9% in FY2010).


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O In Private sector:

O The household sector, which constitutes the largest

portion in national savings (10.4% FY10), has seen a

varying trend over the years

O Decline in household savings is due to the rising cost of

living and a consumption driven growth in the economy

in the last few years

O On the other hand, savings trend in the corporate sector

has been largely stagnant over the years (2% FY10)

O The low savings of the corporate sector, despite rising

profitability in recent years, is generally attributed to

increased dividend payouts


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O Foreign savings

Also known as external liabilities, it includes

borrowings and investments etc. from abroadForeign savings are equal to current account

deficit of countrysbalance of payment


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O National Savings is 13.8 percent of GDP in 2010-11, anincrease of 0.6 % compared to the preceding year

O This rise entirely came from improvement in private

household savings, as public savings declined andprivate corporate savings remained unchanged during

the year. Although savings rate has improved but the

level of saving rate in Pakistan especially with respect

to investment, remains low.


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PAKISTANS LACKLUSTER

SAVINGS PERFORMANCEVarious reasons have been advanced to explain Pakistans

lackluster savings performance. These include :

1. The existence of a large unorganized black economywhose savings are not captured by official statistics.

2. Reliance on informal sources of savings such as the

committee/bisi system

3. A development strategy which has emphasized theproduction of consumer goods

4. High consumption and showy living by the elite- pro

consumption society


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5. Rates of inflation higher than the rates of return

on financial savings, thereby reducing the valueof savings-disincentive to save in financialassets

6. Lack of adequate attention to the efficiencydimension of investment

7. A high population growth rate with a highdependency ratio and low level of per capitaincome

8. Other factors like high poverty and inequality inthe country.

A consistent increase in disposable income is a

necessary condition to accelerate the rate ofhousehold savings.


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INVESTMENT

O Investment is related to saving or deferring consumption.

O Investment is involved in many areas of the economy, suchas business management and finance whether forhouseholds, firms, or governments.

O In economic theory or in macroeconomics , investment isthe amount purchased per unit time of goods which are not

consumed but are to be used for future production.Examples include railroad or factory construction.


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O Investment is often modeled as a function of Income and

Interest rates, given by the relation I= f(Y, r)where Yis income

and rinterest

O An increase in income encourages higher investment

O a higher interest rate may discourage investment as it

becomes more costly to borrow money.


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INVESTMENT TRENDS IN

PAKISTANO The total investment has declined from 22.5

percent of GDP in 2006-07 to 13.4 percent of GDPin 2010-11.

O Fixed investment has decreased to 18.1percent ofGDP from 20.4 percent last year.

O Gross fixed capital formation in real terms hascontracted for third year in a row by 0.4 percentcompared to a contraction of 57 percent last year.

O Even in nominal terms gross fixed capital

formation increased by only 4.4 percent againstdecrease of 3.4 percent last year.


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O Private sector investment on average

contracted by 6 percent per annum in real

terms and recorded third contraction in a row.It contracted by 3.1 percent in nominal terms

during 2010-11 as against contraction of 6.1

percent last year.

O Public sector investment decelerated from 5.6

percent of GDP in 2006-07 to just 3.3 percent

in 2010-11


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FACTORS INFLUENCING

INVESTMENT IN PAKISTANO Major factors constraining investment growth;

O reluctance of foreign investors to invest in Pakistandue to negative country image.

O domestic banks invested more in governmentpapers.

O intense competition in cellular business thatlimited investments in this sector.

O uncertainties regarding strength of globalrecovery, and

O skepticism in the initial months of FY10 regardingrecovery in domestic demand.


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INVESTMENT TO VALUE-ADDITION RATIO


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DOMESTIC INVESTMENT AND FDI


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O the negative country image contributed most to theinvestment decline in the country.

O the entire decline in investment was in foreign direct

investment .

O increase in FDI across Asian region , but foreign

investors shied away from investing in Pakistan.

O reluctance stemmed mainly from uncertainties

surrounding domestic political and economic outlook.


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FACTORS IMPEDING

INVESTMENT IN PAKISTANO Law and Order

O Political Stability

O

Economic StrengthO Government Bureaucracy

O Local Business Environment

O Transparency of Regulatory System

O Protection of Property Rights


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O Infrastructure

O High Business Cost

O Labor ForceO Quality of Life

O Judicial System

O Welcoming Attitude

O Child Labor

O Tax Structure


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SAVING-INVESTMENT GAPO The main imbalance between savings and investment in

Pakistan arises in the public sector. Budget deficit i.e. the

gap between consolidation revenues and expenditures has

been one of the most serious problems facing the economy

and is an important cause of the low level of domesticsavings

O The State Bank of Pakistan has quite appropriately pointed

out that a large savings-investment gap is not desirable for

the country in the long run because of its negative impact

on macro-economic stability. It results in accumulation of

external debt and puts additional burden on the countrys

balance of payments in terms of mounting debt servicing.


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POLICY RECOMMENDATIONS

O Labor Laws: Overprotective labor laws do not encourage

productivity and frighten away much needed productive

investment. There is a need to rationalize the labor laws and

multiple levies on employment that inhibitbusinessexpansion andjob creation.

O Infrastructure: In most infrastructure services, Pakistan is

highly deficient as compared with many developing countries that

have attracted higher levels of foreign investment. If Pakistan

wants to catch up gradually with the development of the economies

of East and Southeast Asia, it will have to investment more in the

areas of education and physical infrastructure.


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O Confidence-building Measure: The closerelationship between private and public sector

is essential to build confidence. It is suggestedthat a forum may be established where the

private and public sectors could sit together to

discuss business promotion-related issues.

This kind of partnership between the

government and private sector will help

restore investorsconfidence.


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O Macroeconomic Stability: Pakistans fiscal and balance of

payment situations and foreign exchange reserves position is underconsiderable strain for some time making the macroeconomicenvironment less conducive for foreign investors. Some drastic andfar reaching measures are needed to reduce the fiscal deficit on theone hand and to raise trade surplus and foreign exchange reserveson the other.

O Removal of Bureaucratic Hurdles: Although theinvestment approval requirement has been removed, numerouspermits and clearances from different government agencies atnational, regional, and local levels are still applied to investors,causing delays to complete the process. The authorities shouldstreamline administrative procedures regarding approval andofficial clearances. The laws and regulations should be simplified,updated, modernized, and transparent, and their discretionaryapplication must be discouraged.


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O Fiscal Incentives: Fiscal incentives should be given liberallyby the government to investors. Import of plant and machinery

for new industries may be allowed duty free in case suchmachinery is not manufactured in Pakistan. Tax relief in the formof accelerated depreciation allowance may also be available to

priority industries, besides the availability of similar relief toexisting industries undertaking balancing, modernization andexpansion in production facilities.

O Identification of Potential Investors and Sectors: Topromote investment government should identify potentialcountries. Government should move from traditional investors(USA, UK, Japan, Saudi Arabia, UAE, Libya, Lebanon) to newdirections (China, Malaysia, Korea). Government should also

identify new sectors for investment (mining and quarrying,tourism, construction, etc.) rather than focusing on traditionalsectors (financial business, textiles, oil and gas, etc.)


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O Improvement in Tax Structure: There is an urgent need to

reduce the number of taxes and contributions, to streamline taxregulations and administrative procedures, and most importantly

to reduce the contact of firms with a large number of tax and

contributions collecting agencies. There is also a need to

examine tariffs of plant and machinery with a view to

substantially reducing them.


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ConclusionO Budget Deficit and Government Investment are notsignificant in determining the savings in Pakistan, i.e.

there is no Ricardian Equivalence and the saving rate is

not related to the return on Government Investment as

well.

O By the increase in the GovernmentsCurrent expenditures

more resources are transferred towards the people in the

form of increased wages, and clearing of more liability on

the part of Government and other related heads thusincreasing their savings as well.


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High income leads to high saving, thereby confirming

Mckinnon effect. Suggesting that if there is an arbitrarybig push in GDP growth for some period it would lead to

higher savings, which would positively effect

investments, and increase in investments, would increase

GDP, which would again increase Savings. Thus byinitiating that push a cycle of development can be started.


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O Saving behavior is insensitive to the interest rate. Most people

save to cover the future expenditures, i.e. Education, Marriagesetc. So there is a need of restructuring of the financial market to

lure more saving.

O Remittances effect the saving positive and significantly. More

effective policies for transfers of Remittances and further jobcreation in the abroad should be explored.


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O Improvement in Tax Structure: There is an urgent need to

reduce the number of taxes and contributions, to streamline taxregulations and administrative procedures, and most importantly

to reduce the contact of firms with a large number of tax and

contributions collecting agencies. There is also a need to examine

tariffs of plant and machinery with a view to substantially

reducing them.

Historical Trends of Savings and Investment in Pak-pep

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