2016Cambridge Business & Economics ConferenceISBN : 9780974211428
A Sluggish Trend of National Savings and its
Causes:The Case of Pakistan
Rukhsana Kalim
Professor of Economics
Department of Economics
School of Business and Economics
University of Management and Technology
C-11, Johar Town Lahore Pakistan
Email:
Cell: 03054440614
and
Mohammad Shahid Hassan
Assistant Professor
Department of Economics
School of Business and Economics
University of Management and Technology
C-11, Johar Town Lahore Pakistan
Email:
Abstract
Savings play a pivotal role for the development of the economy. Higher rate of savings and their channelization to investment not only ensures the economic growth but also generates employment opportunities. Aggregate savings are necessary for the growth of capital stock. In order to achieve sustainable growth efficient utilization and the mobilization of domestic resources, a decent rate of national savings is imperative (Khan, 1993). The objectives of steady economic growth and development are knitted closely with the mobilization of domestic savings and investment.The objective of the present study is to investigate the internal and external factors determining national savings in Pakistan. After employing ARDL bounds testing cointegration approach on the data series from 1976 to 2014, this study confirms the presence of long run relationship between national savings and its determinants in Pakistan. The study finds that depreciation of domestic currency, increase in exports and remittances significantly elevate national savings in Pakistan whereas increase in interest payments against external debt and imports significantly discourage national savings in Pakistan. These results are robust to different controls and diagnostics. The study suggests that the government can play effective role in controlling the internal as well as external factors determining national savings in Pakistan.
Keywords:Pakistan, Sluggish National Savings, Internal Factors and External Factors
- Introduction
Saving has been always considered as one of the important determinants of growth. Developing countries can sustain the path of development on the basis of the higher rate of savings in their economies. Higher rate of savings and their channelization to investment not only boosts the income of the economy but also generates employment opportunities. Aggregate savings are necessary for the growth of capital stock. In order to achieve sustainable growth efficient utilization and the mobilization of domestic resources is much required (Khan, 1993). The objectives of steady economic growth and development are closely knitted with the mobilization of domestic savings and investment.
It is generally believed that national savings are a major source of investments in the economy and contribute to the future economic development. On the basis of the high rate of savings developed countries have achieved a decent economic growth. The high rate of domestic savings can lessen the State dependency on foreign investments. It can also bring better stability to the economy. The other socio economic problems like poverty and unemployment can also be curbed. Therefore for policy making the analysis of saving behavior and its determinants are essential (Nasir and Khalid 2004).
The growth models in the economic literature consider savings as an engine of growth. The earlier Harrod- Domar (1939) growth model emphasized on the savings and capital output ratio for the growth of the economy. Later Solow(1956) in his model highlighted that for steady state of equilibrium of the economy saving is a key determinant. The classical school of thought discussed the rate of interest as a major factor determining saving behavior. While the Keynesian school of thought emphasized on the role of income in determining saving behavior. Different models were developed to express the behavior of saving along the lines of various hypotheses. For example, Modigliani and Brumburg (1954) presume that by allocating lifetime discounted income to consumption in various periods of the life cycle individuals maximizes their lifetime utility and in each period equalize the discounted marginal utility of consumption in each period.The permanent income hypothesis by Friedman’s (1957) offers varieties of common features, underscoring additionally softening of utilization from "transitory disparity in realized income”.Browning and Annamaria (1996) portray both approaches inside of a typical conviction uniformity model, since they both are dependent on inter-temporally elemental utility function and capital market, from which expectations are inferred for short-run and long-run utilization smoothing conduct.
There are many arguments which emphasize on the positive role of the savings in the economic prosperity of the economy. It is imperative to identify the pressing factors affecting the saving rate in the economy.As far as Pakistan’s economy is concerned the saving rate has been showing a sluggish trend for many years. The growth rate of saving was 13.23 as a percentage of GDP in 1997 which declined to 7.51 in 2004 (Table-1).After reaching at peak in 2004 (17.6%), the saving rate started declining. (See Table 1 and Figure 1):
Table – 1: Trends of Gross Saving Rate as Percentage of GDP
Year / Saving Rate as % of GDP1997 / 13.23
1998 / 16.67
1999 / 13.95
2000 / 15.98
2001 / 15.94
2002 / 16.49
2003 / 17.35
2004 / 17.61
2005 / 15.21
2006 / 11.92
2007 / 12.23
2008 / 8.38
2009 / 10.27
2010 / 9.97
2011 / 9.11
2012 / 7.06
2013 / 7.86
2014 / 7.51
Source: Pakistan Economic Survey 2014-15
Figure – 1: Gross Saving Rate as Percentage of GDP
If we compare the saving rate of Pakistan with other South Asian countries it is evident that Pakistan has been experiencing the lowest gross saving as a percentage of GDP (Table -2).
Table – 2: Comparison of Gross Domestic Savings(% of GDP)
Year / Sri Lanka / Bangladesh / India / Pakistan1997 / 17.32 / 14.70 / 23.30 / 13.23
1998 / 19.13 / 16.68 / 21.88 / 16.67
1999 / 19.51 / 16.73 / 24.95 / 13.95
2000 / 17.43 / 17.78 / 23.22 / 15.98
2001 / 15.77 / 16.97 / 24.71 / 15.94
2002 / 16.01 / 18.38 / 24.01 / 16.49
2003 / 15.99 / 17.58 / 25.45 / 17.35
2004 / 15.91 / 18.67 / 30.70 / 17.61
2005 / 17.90 / 18.06 / 31.53 / 15.21
2006 / 16.98 / 20.74 / 32.71 / 11.92
2007 / 16.93 / 20.23 / 34.02 / 12.23
2008 / 13.41 / 18.90 / 30.46 / 8.38
2009 / 17.80 / 19.99 / 30.92 / 10.27
2010 / 18.94 / 20.49 / 32.16 / 9.97
2011 / 14.83 / 19.84 / 30.04 / 9.11
2012 / 16.63 / 20.47 / 27.96 / 7.06
2013 / 19.98 / 21.17 / 27.83 / 7.86
2014 / 20.8 / 22 / 29.3 / 7.51
Source World Development Report (2014)
On the basis of the analysis of the low growth rate of saving in Pakistan, it is imperative to explore the factors determining the rate of saving in the economy.There is no single factor identified in economic literature as mainly responsible for determining domestic savings. Numerous factors have been figured out affecting the rate of domestic savings in different countries.The present study aims to examine the determinants of national savings in Pakistan. For this purpose the study categorizes the determinants of savings in to two; internal factors and external factors. An attempt is made to examine the impact of these factors empirically on the rate of savings in Pakistan. The study employs ARDL bound testing cointegration approach on the data series from 1976 to 2014.
The rest of the paper is organized into different sections. Section 2 is a compendium of different studies on the relationship of savings with other factors. Section 3 is devoted to the methodology and models utilized for the analysis. Section 4 consists of results. Lastly section 5 concludes the major findings of the study along with some policy implications.
- Literature Review
Economic literature is full of empirical findings on the behavior of savings. Based on the Keynesian model, GDP has been considered one of the important factors behind savings and a positive relationship is expected to exist between these two. Many empirical studies suggest a strong relationship between savings and growth especially in the case of developing countries (See for example, Agarwal 2001; Jilani et al. 2013). As far as causality is concerned there is mixed evidence. In some studies causal relationship goes from growth to savings (Agarwal 2001) and in some studies this is other way round (Caroll and David,1994).
Depreciation of the domestic currency may also impact the savings.Depreciation is considered a cure to trade deficit through the boost of exports.The effectiveness of depreciation on correcting the balance of payments of a country however depends on the elasticity of exports of the country.Generally speaking, if there is an improvement in exports, depreciation can have positive impact on savings through the channel of income.Montiel and Luis (2008) in their report, based on analytical models established a positive link between the depreciation of the real exchange rate and savings. Recently attention has been paid to the positive contribution of remittances on savings and investment ofthe economy.Mishra (2005) in his study found that 1 % increase in remittances will mount investment by 0.6% of Gross Domestic Product in thirteen Caribbean countries.Balde (2010) investigated the macroeconomic impact of remittances on savings and investment in Sub-Saharan Africa during the period 1980 – 2004 and found the strong impact of remittances on savings.Another point of view discussed in literature was the crowding out impact of remittances on domestic savings.A study by Hossain (2011) examined the role of foreign capital inflows and remittances in the domestic savings of developing countries by taking the 63 developing countries in the panel for a period of 1971 – 2010.The findings suggest that remittances flows have significant but negative impact on domestic savings because the remittances displace the domestic savings.
The impact of real interest on savings is theoretically ambiguous because of the fact that real interest rate is conflicting associated with substitution and income effects. An increase in real interest rates cutthe currentpriceof futurefinancial gainflowsand thusencompasses anegative impact on savings (income effect).However, atconstanttime itwill increasenetcome backon savings and makes savingsadditionalenticingthese daysandends up in a delay of consumption andincludes apositive impact on savings (substitution effect).The study by Nasir and Khalid (2004) found that fiscal deficitnegatively influence savings whereasrealinterest rateand remittances positively influence savings in Pakistan. Matur et al. (2012) found the income influence strong in case of Turkey and there was negative relationship between real interest rate and savings there. Agarwal (2001) dissected the saving prototype of seven Asian nations and recommends that there is variety in relationship between loan fee and reserve funds from nation to nation. In the event of Malaysia, Taiwan and India a positive but statistically insignificant relationship exists between interest rate and saving.Aleemi et al. (2015) made an effort to examine the relationship between national saving and important determinants in case of Pakistan. They applied dynamic regression with ARMA specification for the period of 1980 – 2010 and found that inflation, interest rate and government expenditures were negatively affecting the national saving rates. Samantaraya and Patra (2014) by applying ARDL approach investigated the association among domestic savings and its determinants in case of India. The findings of the study reveal that GDP, dependency ratio, interest rate and inflation exert statistically significant impact on household savings both in long run and short run. A study by Blanc et al. (2015) analyzed the role of household behavior within the perceived liquidity constraints in 15 Euro countries.The findings of the study show that the household characteristics and institutional macroeconomic variables are important determinants of household saving preferences and credit constraints. Chaudhry et al. (2014) investigated the fiscal and monetary determinants of national savings in Pakistan for the period of 1972-2010. The results of ARDL approach reveal that deposit rate and government expenditure are positively affecting national savings of Pakistan.M2 is highly significant and has negative impact on national saving. Inflation rate is positively associated with national saving in the short run.
Kwakwa (2013) examined the association between national savings and its related factors in case of Ghana by employing Johanson cointegration technique and error correction model for the period of 1975-2008. His empirical results showed that over the long period savings are positively and significantly related with income and terms of trade while savings are negatively related with dependency ratio, political instability and real interest rate. However, in short run solely terms of trade affect savings positively.Loayza and Serven(2000) find in their study that in comparison to domestic saving private savings are more positively sensitive to interest rate.
The study of Jilani et al. (2013) is based on examining national savings and various factors that impact national savings in Pakistan. By taking the data from 1973-2011, the study used co integration and ECM for short run and long run analysis. Their results show that the role of Gross Domestic Product, fiscal deficit and inflation is very vital in determining national savings of Pakistan.Globalization is also discussed as an important factor determining saving behavior of the economy.It is generally believed that globalization through increase in the volume of trade influences the saving of a country as well.An investigation by Faridi and Asma (2012) has been made to find out the impact of globalization along with other variables on private, public and national saving of Pakistan for the period 1972-2010. The findings of the study reveal that globalization, real interest rate, consumer price index and worker’s remittances have significant and positive impact on national savings.Other variables like government deficit and FDI also play a significant role on savings of Pakistan.
The objective of the study by Akpan et al. (2011) was to identify factors determining household saving of rural agro-based labors in the south-south region of Nigeria. For the analysis they used two-stage least squares method of concurrent equation model in the analysis. Cross-sectional information was gathered from 250 haphazardly chosen laborers of five agro-based firms in the study regions.The aftereffects of the investigation demonstrated that saving attitude of the labors are being swayed by the size of the family, experience of the job, tax, income and lastly the membership of a social group. The factors like CPI, remittance, rate of interest, public loans, and government consumptions have been taken in the study by Imran et al. (2010) to investigate their relationship with savings in Pakistan. They found a long run relationship of these variables with national savings of Pakistan.
Faridi et al. (2010) assessed the origin of the savings of the families dwell in Multan region of Pakistan. In aggregate 293 respondents were selected for primary information. Field survey was the source of data collection from 2009-10. Their results show that there is a significant positive relationship between Participation of spouse, rate of total dependency, overall income of the household and range of landholdings with household saving. Whereas other way around significant negative relationship was observed with family size, education family unit head, responsibility to be paid, marital status,expenditures on children’s education and house’s value.The study upheld presence of Life cycle hypothesis.
Chaudhry et al. (2010) tried to investigate short run and long run determinants of national saving in Pakistan. Time series data was applied from 1972 to 2008. To examine long run relationship Johansson Co- integration approach was utilized and to observe short run directions between variables VECM was used. The results reveal thatin long run national saving of Pakistan is positively impacted by Consumer Price Index, remittance of workers, interest rate, exports and consumption by the government whereas public loans have negative impact in the long run. In short run Remittance taken as % of Gross Domestic Product and rate of interest were optimistically swaying National Saving.Horioka (2009) examined the pattern of saving of the aged in Japan and China through the survey method by analyzing data from the year 1990 to 2008 at micro level. Thus, the income of the family and spending Survey were going to gather data on saving rates by taking into account age gathering of the families head. The author also concluded that dis-saving also occurs at three different ages, resigned age, functioning age and prior ages as well. The study observed that dis-saving had been made at three different ages, resigned ages, working ages and at early ages as well. The study suggested that the life cycle model as exceedingly pertinent if there should arise an occurrence of Japan. Chaudhry et al. (2009) probed that how savings and investment efforts were influenced by overseas debt and foreign debt servicing in Pakistan by using annual time series data from 1973 to 2006. The study accomplished that savings have a very harmful relationship with interest rate and real Gross Domestic Product. The regression coefficients were in line with the theory.
Some of the empirical studies have been also done to find out development of economic rural households due to rural saving mobilization. For example, Fasoranti (2007) on the basis of primary data from 5 villages of Nigeria found that there is a positive relationship between income, Human Capital, Investments and assets with savings. The author also put forward that household in rural areas should join co-operative societies to mobilize their saving. Agarwal (2001) estimated co-integration on state saving rate with its preferred determinants incorporating per capita income, real interest rate and foreign saving funds for three nations; Indonesia, Thailand and Singapore and reasoned that the elected variables are co-integrated.
Hasnain et al. (2006) evaluated household’s saving in the progression of economics advancement in Pakistan from the time 1972-2003.The finding reveal that per capita income, rate of growth of per capita income, and interest rates exert positive impact on public savings while both in short and long run inflation, ratio of young dependency, ratio of old dependency are negatively swaying public saving. Demographic factors along the lines of life cycle hypothesis have been also taken in some empirical studies of saving. Schultz (2005) suggested that there was rise and fall between short run associations of saving with five year age degree of population along with advancing ages as projected in the LC model.While determining the household savings Callan and Christian (1997) took the data of 21 OECD countries for 1975-1995. Structure of tax system, financing and kindness of the social security and welfare system were found vital determinants of household savings.The private savings and its determinants have been investigated by Athukorala and Kunal (2001) in case of India for the period covering 1954-1998.The study found a positive and significant relationship between the level and growth of disposable income. The real interest rate also depicted the positive relationship with the private savings.
The literature review suggests that a number of factors influence the saving rate in different countries. Contrary to the earlier studies, the present study categorizes the determinants of savings into two; internal and external within the context of Pakistan and investigates their impact on the saving rate in Pakistan.The study will be helpful in finding out the importance of these factors on the basis of their category.