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Private savings, govt dissaving: debt

Savings by an individual/householder or a government have different objectives and constraints and while a healthy savings account maybe a desired goal for a householder yet it is not always a preferred option for a government trying to grapple with severe resource constraints on the one hand and rising investment demands to upgrade a degraded and/or inadequate physical and social infrastructure or cope with the upswings and downswings of business cycles.

National savings form an identity with investment and a shortfall implies a commensurate increase in borrowing to meet the country’s investment needs (public sector development programmes) – either from the domestic market or from foreign savers (loans) which come at a high price.

World saving rate was calculated at 21 percent of Gross Domestic Product as per the World Bank in 2022. The Stand By Arrangement (SBA) documents uploaded on the International Monetary Fund (IMF) website dated July 2023 project Pakistan’s gross savings at 12.8 percent of GDP in the current year against 12.4 percent in 2022-23.

A breakdown of gross savings reveals that private sector savings (including public sector enterprises which require about a trillion rupees per annum from the treasury each year to keep afloat) are projected at 18.2 percent for the current year (comparable to 18.1 percent in 2020-21) against 17.9 percent in 2021-22. The government’s dissaving rate is projected at negative 5.4 percent in the current year, believed to reflect optimism rather than realism; and was negative 3.9 percent in 2020-21, the lowest government dis-saving rate in our recent history, due to: (i) deferred private consumption as an outcome of Covid19 lockdown; (ii) the 1.6 billion dollars disbursed under the IMF’s rapid financing instrument; and (iii) deferment of repayments under the G7 initiative to assist developing countries tackle the Covid19 fallout. This created fiscal space that allowed the then administration to increase disbursements under the Benazir Income Support Programme amid the temporary cessation of the then ongoing contractionary fiscal and monetary policies, conditions of the then ongoing Extended Fund Facility (EFF) programme.

A householder will save if his income is in excess of his budget (those with higher incomes engage in higher conspicuous consumption), however one common objective of most income groups is to save for the future. When inflation is high the capacity of a low to medium income earning householder to save is obviously more compromised than the rich. Pakistan’s consumer price index for August 2023 was at a high of 27.4 percent which, in turn, led to: (i) a decline in the capacity of the private sector to save reflected by the decline in the government’s unfunded debt, largely sourced to National Savings Centre’s products, appropriated entirely by the government to meet its budgeted allocations; (ii) rise in borrowing from commercial banks that crowded out private sector borrowing with a commensurate negative impact on unemployment and GDP; and (iii) printing money. In other words, the government implemented highly inflationary policies to counteract the decline in private savings that were due to inflation; a more appropriate policy decision would have been to slash its own expenditure.

No effort has ever been made by any Pakistani administration to curtail current expenditure which, given the current state of the economy, necessitates sacrifices on the part of the powerful elite for at least a couple of years as well as generate revenue from those with ability to pay rather than relying on indirect taxes (which at present account for over 80 percent of total tax collections) whose incidence on the poor is greater than on the rich.

The Pakistani elite include: (i) those paid salaries from the exchequer (raised massively – by 30 to 35 percent – in the current year’s budget in marked contrast to their unfortunate compatriots operating in a visibly shrinking private sector market) and their massive annual procurement bill; (ii) government pensioners budgeted a whopping 761 billion rupees this year funded entirely at the taxpayers’ expense instead of reforming the system and, like in other countries, initiating employee contributions; (iii) powerful trade organization members (including politicians) who operate mainly in sectors where the number of sellers and buyers is large enough not to warrant interference by the government. Sugar Mills Association, an example amongst many, allow for collusion not only to set domestic price but has been instrumental in getting billions of rupees of export subsidies from the exchequer; (iv) big landlords represented in large numbers in the country’s national and provincial assemblies who not only ensure continued fiscal incentives by opposing the levy of income tax on farm income commensurate to that payable by the much lower paid salaried class but in Balochistan have successfully resisted the levy of charges on agri-tube wells; and (v) the traders, wholesalers and aarthis who remain outside the tax net.

To fund the elite capture in terms of resource allocation and revenue generation the reliance on domestic debt rose dramatically last year – from 31.456 trillion rupees in September 2022 to 38.8 trillion rupees by June 2023 – a 23 percent rise in just nine months that broke all previous records. This led to a rise in mark-up on domestic debt (a component of current expenditure) by 39 percent – from 3.439 trillion rupees budgeted last year to 4.795 trillion rupees in the revised estimates.

Another reason for the rise in domestic debt was the cessation of external multilateral and bilateral inflows due to failure to reach a Staff Level Agreement on the ninth review with a subsequent downgrade in Pakistan’s rating by all international rating agencies, thereby severely compromising the country’s capacity to issue sukuk/Eurobonds or borrow from the commercial banking sector abroad. Disturbingly, the budget for the current year projects a rise in mark-up on domestic debt by a massive 34 percent due no doubt to the envisaged 26 percent budgeted raise in current expenditure.

To conclude, all our finance ministers have focused on raising the level of government dissaving (by increasing expenditure and not implementing tax reforms that would raise the tax to GDP ratio), with little attention to containing budget deficits – an inflationary policy that compromises the capacity of a householder to save and instead relied on borrowing domestically and from abroad to sustain elite capture and to meet their own profligacy. Overtime the situation of the poor and vulnerable has deteriorated markedly and until steps are taken to alter this paradigm immediately public unrest may become increasingly violent placing the country’s fragile infrastructure and industry in further peril.

Anjum Ibrahim, "Private savings, govt dissaving: debt," Business recorder. 2023-09-18.
Keywords: Economics , Investment demands , Social Infrastructure , Domestic market , Monetary policies , National savings , Pakistan , GDP

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