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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



(public sector)
Private sector
Foreign 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.

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
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
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.


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.
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
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
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.

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.
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

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
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.

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.
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
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.