Let us start with statistics: Pakistan had the highest percentage of GDP spent on private consumption, from a sample of 40 large developing countries? It was followed by Egypt, Nigeria and Kenya. In terms of absolute amount spent on consumption, then an average Pakistani spent $4,100 out of a per-capita of $5,000. This was the 3rdhighest amongst our sample countries with less than $7,000 per-capita. Vietnam and Nigeria consumed a similar amount, but had a higher per-capita. IMF data has its own shortcomings, but these countries also had the lowest average savings rate for the five years till 2017. The consequence was they also saw the lowest average gross investment rates for the five years till 2017. Sustained investment in the initial years is widely acknowledged as a key driver for future growth, if one looks at experience of China and the Southeast Asian countries.
But why are citizens saving less? Behaviours and attitudes partly explain the demand pull for current consumption. The compulsive habit to spend for immediate gratification is common everywhere. Most consumer brands are aspirations. This is also a reason large foreign investors look at markets like ours. It is no wonder the profit pool of the Top 200 listed companies in USA, UK, Canada or Germany is dominated by consumer sector companies. Even China now exhibits this trend. But we need them too. They create a lot of local jobs, especially in the services sector. With services comprising only 56% of Pakistan’s GDP vs. the average 60%+ in large emerging markets, it needs this more. It would also disincentivize foreign investors who often package investment projects with the opening of local sectors.
So how does one balance all sides, while ensuring people are incentivized to save more and postpone consumption? Energizing the supply in the savings space may work best. A perennial problem in developing countries is the dearth of institutionalized financial products across asset classes that earn proper inflation-adjusted returns. The absence of this disincentivizes the desire to save for future consumption. It is also one of the reasons for most personal wealth to be parked abroad, rather than in the country. So while Pakistan has only a moderate level of income concentration as per gini-coefficient, it has a much higher level of wealth concentration. It is this wealth, rather than income, that helps us continue our consumption in the long-term. Southeast Asia offers an example of correcting this. In 1997, countries like Indonesia, Malaysia and Thailand saw a financial crisis partly due to the combination of low savings, high investments and dependence on external debt. In subsequent years, they all made their domestic financial sectors more dynamic with new products, alternates and regulations. Their people got a wider and better bouquet of products that earned inflation-adjusted returns. This supply-push incentivized the desire to save and postpone consumption, and created the demand-pull for people to save more. Today, those countries have a high savings rate in line with China, Korea and India. This domestic capital also reduced their dependence on external debt for funding investment, which still continues at a healthy pace.Such a supply-side boost to the product bouquet which can incentivize saving is a precedent for furthering the demand habit.
To leverage on the demand-led consumption habit, it might tax discretionary consumer products higher. Textbook says they have higher price elasticity, but behaviour says the compulsive desire often makes people buy it irrespective of a price-rise. For example, do you reduce buying cigarettes, smartphones or fast-food? But a tax has socio-political implications, and can only fuel inflation further. The government just hiked petrol prices. So while such a cess would have given it resources for investments, the political cost may be dire. So one comes back to the savings market!
Pakistan’s foreign reserve to GDP ratio is 7%. It is 14% and 17% in Bangladesh and India, and even higher in China. Moreover, a lot of imports in machinery occur during phases of investment, which puts further pressure on reserves. So depending only on external borrowing to make up for the saving shortage would increase the twin-pressures on the forex position. So again, we come back to the imperative of further incentivising the habit of domestic saving!
At the end,the shortage in domestic capital can be a constraint for a high-growth economy like Pakistan. A growth story cannot run on current consumption alone. Future consumption by the current working-population is critical for making foreign investors think of the long-term. It implies a wider addressable market for them, and also bodes well for sustained job-creation. All in all, it would make people more financially-secure during exigencies.