SIDRA NAEEM (9823) HISTORICAL TRENDS OF INVESTMENT AND SAVINGS IN PAKISTAN INTRODUCTION O Saving and investment are two key macro variables which can play a significant role in economic growth, inflation stability, self reliance and promotion of employment O Investment, which is the part of countrys wealth used for the production of more wealth, is financed by savings
SAVINGS
Savings
Government (public sector) Private sector Corporate Household Foreign savings NATIONAL SAVINGS National 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 resources The position of public sector savings has not been very impressive over the years (0.9% in FY2010). 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 O Foreign savings Also known as external liabilities, it includes borrowings and investments etc. from abroad Foreign savings are equal to current account deficit of countrys balance of payment O National Savings is 13.8 percent of GDP in 2010-11, an increase of 0.6 % compared to the preceding year
O This rise entirely came from improvement in private household savings, as public savings declined and private 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.
PAKISTANS LACKLUSTER SAVINGS PERFORMANCE Various reasons have been advanced to explain Pakistans lackluster savings performance. These include : 1. The existence of a large unorganized black economy whose 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 the production of consumer goods 4. High consumption and showy living by the elite- pro consumption society
5. Rates of inflation higher than the rates of return on financial savings, thereby reducing the value of savings-disincentive to save in financial assets 6. Lack of adequate attention to the efficiency dimension of investment 7. A high population growth rate with a high dependency ratio and low level of per capita income 8. Other factors like high poverty and inequality in the country. A consistent increase in disposable income is a necessary condition to accelerate the rate of household savings.
INVESTMENT
O Investment is related to saving or deferring consumption.
O Investment is involved in many areas of the economy, such as business management and finance whether for households, firms, or governments.
O In economic theory or in macroeconomics , investment is the 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.
In measures of national income and output, "gross investment" (represented by the variable I ) is also a component of Gross domestic product (GDP). Given in the formula GDP = C + I + G + NX, O where C is consumption, O G is government spending, O and NX is net exports. Thus investment is everything that remains of total expenditure after consumption, government spending, and net exports are subtracted (i.e. I = GDP - C - G - NX). O Investment is often modeled as a function of Income and Interest rates, given by the relation I = f(Y, r) where Y is income and r interest
O An increase in income encourages higher investment
O a higher interest rate may discourage investment as it becomes more costly to borrow money. INVESTMENT TRENDS IN PAKISTAN O The total investment has declined from 22.5 percent of GDP in 2006-07 to 13.4 percent of GDP in 2010-11. O Fixed investment has decreased to 18.1percent of GDP from 20.4 percent last year. O Gross fixed capital formation in real terms has contracted for third year in a row by 0.4 percent compared to a contraction of 57 percent last year. O Even in nominal terms gross fixed capital formation increased by only 4.4 percent against decrease of 3.4 percent last year.
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 FACTORS INFLUENCING INVESTMENT IN PAKISTAN O Major factors constraining investment growth; O reluctance of foreign investors to invest in Pakistan due to negative country image. O domestic banks invested more in government papers. O intense competition in cellular business that limited investments in this sector. O uncertainties regarding strength of global recovery, and O skepticism in the initial months of FY10 regarding recovery in domestic demand. INVESTMENT TO VALUE-ADDITION RATIO
DOMESTIC INVESTMENT AND FDI O the negative country image contributed most to the investment 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. FACTORS IMPEDING INVESTMENT IN PAKISTAN O Law and Order O Political Stability O Economic Strength O Government Bureaucracy O Local Business Environment O Transparency of Regulatory System O Protection of Property Rights
O Infrastructure O High Business Cost O Labor Force O Quality of Life O Judicial System O Welcoming Attitude O Child Labor O Tax Structure
SAVING-INVESTMENT GAP O 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 domestic savings 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.
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 inhibit business expansion and job 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. O Confidence-building Measure: The close relationship between private and public sector is essential to build confidence. It is suggested that 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 investors confidence.
O Macroeconomic Stability: Pakistans fiscal and balance of payment situations and foreign exchange reserves position is under considerable strain for some time making the macroeconomic environment less conducive for foreign investors. Some drastic and far reaching measures are needed to reduce the fiscal deficit on the one hand and to raise trade surplus and foreign exchange reserves on the other. O Removal of Bureaucratic Hurdles: Although the investment approval requirement has been removed, numerous permits and clearances from different government agencies at national, regional, and local levels are still applied to investors, causing delays to complete the process. The authorities should streamline administrative procedures regarding approval and official clearances. The laws and regulations should be simplified, updated, modernized, and transparent, and their discretionary application must be discouraged. O Fiscal Incentives: Fiscal incentives should be given liberally by the government to investors. Import of plant and machinery for new industries may be allowed duty free in case such machinery is not manufactured in Pakistan. Tax relief in the form of accelerated depreciation allowance may also be available to priority industries, besides the availability of similar relief to existing industries undertaking balancing, modernization and expansion in production facilities. O Identification of Potential Investors and Sectors: To promote investment government should identify potential countries. Government should move from traditional investors (USA, UK, Japan, Saudi Arabia, UAE, Libya, Lebanon) to new directions (China, Malaysia, Korea). Government should also identify new sectors for investment (mining and quarrying, tourism, construction, etc.) rather than focusing on traditional sectors (financial business, textiles, oil and gas, etc.) O Improvement in Tax Structure: There is an urgent need to reduce the number of taxes and contributions, to streamline tax regulations 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. Conclusion O Budget Deficit and Government Investment are not significant 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 Governments Current 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 thus increasing their savings as well.
High income leads to high saving, thereby confirming Mckinnon effect. Suggesting that if there is an arbitrary big 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 by initiating that push a cycle of development can be started.
O Saving behavior is insensitive to the interest rate. Most people save to cover the future expenditures, i.e. Education, Marriages etc. 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 job creation in the abroad should be explored. O Improvement in Tax Structure: There is an urgent need to reduce the number of taxes and contributions, to streamline tax regulations 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.