Low savings rate:
While foreign savings are important in financing the saving-investment gap, the most reliable source of funds for investment in a country is its own saving –Pakistan’s record in this aspect is also not encouraging. National savings as percent of GDP were around 10 percent during 1960s, which increased to above 15 percent in 2000s, but declined afterward (Figure 7). Pakistan’s saving rate also compares unfavorably with that in neighboring countries: last five years average saving rate in India was 31.9 percent, Bangladesh 29.7 percent, and Sri Lanka 24.5 percent. Similarly, domestic savings (measured as national savings lessnet factor income from abroad) also declined from about 15 percent of GDP in 2000s, to less than 9 percent in recent years (see Box 1for methodology of measuring savings). Domestic savings are imperative for sustainable growth, becauseinflow of income from abroad (remittances and other factor income) is uncertain due to cyclical movements in world economies, exchange rates, and external shocks.
Domestic Savings are then bifurcated into public and private savings. While public savings are estimated from fiscal data; private savings are taken as residual. Within private savings, an amount equalto 2 percent of GDP is assumed as corporate savings and the rest is household savings.
Fundamentally speaking, Pakistan seems to be stuck in a low-saving low-investment trap, which has seriously hampered its growth potential: a low savings rate reduces the volume of investible funds; low investments make growth spurts unsustainable; and low growth generates fewer domestic savings. It is not surprising therefore, that nearly all of Pakistan’s high growth periods have coincided with abundant inflows of foreign savings(in the form of external loans, grants and remittances).2Accordingly, whenever such inflows dried up, economic growth slid back, as domestic saving and investment were never sufficient to keep up the growth momentum Source