ISLAMABAD: Pakistan’s investment-to-GDP ratio fell to 15.2 percent from 15.5 percent of gross domestic product (GDP), although the savings-to-GDP ratio improved to 15 percent from 13.8 percent of GDP in the outgoing fiscal year 2020-2021.
According to the working paper approved by the National Accounts Committee, total gross fixed capital formation (GFCF) is projected at Rs 6,492 billion, but remains insufficient to meet the target.
Low investment and savings in terms of GDP have caused history to repeat the boom and bust cycles of the country’s economy. The GDP growth forecast of 3.94% for the outgoing fiscal year demonstrates that growth is fueled by higher consumption as both domestic and foreign investment have not achieved the expected results.
The annual plan for the outgoing fiscal year 2020-2021 called for the investment-to-GDP ratio to increase to 15.5% of GDP in order to achieve sustained and inclusive growth taking into account the Corona crisis. Fixed investment is expected to reach 13.9% of GDP in 2020-2021.
National savings are targeted at 13.8% of GDP. The goal is to replace consumption-driven growth with investment-driven growth. The new posture of monetary policy with the reduction of interest rates will encourage investors and consumer finance will stimulate economic activity. Many measures aimed at improving the ease of doing business (such as tax exemptions in special economic zones, removal of binding taxes on banking transactions) are expected to stimulate capital formation and attract investment. nationals and foreigners.
The phenomenon of low growth reappears after a few years, mainly due to the country’s inability to generate investments and savings as a percentage of GDP to fuel the desired GDP growth at a sustained level.
The inability to generate the desired level of investment and savings forced regimes to increase their dependence on financing from external channels, which ultimately plunged the country deeper into a double deficit crisis soon after reaching a deficit. growth slightly above 5-5.5% for two to three years. period. India’s GDP growth has averaged 6.5 percent over the past two decades, compared to Pakistan’s 4.4 percent. Vietnam’s growth has averaged over 6.7 percent and even Bangladesh’s has averaged 5.4 percent, surpassing Pakistan.
Pakistan needs investments for sustained growth. In the decade of the 1990s, Pakistan’s gross capital formation was at the same level (or better) than its peers. Since 1995, Pakistan’s GCF has declined, while that of peers has increased significantly.
The private sector has remained timid due to the high cost of doing business and energy and security constraints. Pakistan’s Public Sector Development Program (PSDP) expenditure fell sharply from an average of 10% of GDP in the 1980s to only 4.7% in FY18 and will now decline further in the next fiscal year. Ultimately, Pakistan needs 20% growth in investment to achieve 5% GDP growth rate. Second, Pakistan lags behind its peers, mainly due to its inability to increase savings, as the savings rate in Pakistan was pathetically low at around 16%, while in China it is 46%, India 31%, Bangladesh 33%, Sri Lanka 25% and in Vietnam it hovered around 24%.
The investment / GDP ratio was estimated at 16.7% of GDP when the PML (N) ruled the country in 2017-2018.
Now, the savings-to-GDP ratio has improved in the current fiscal year, as the current account deficit is projected to be less than 0.2 percent of GDP, as overall a government surplus is expected. current account of $ 400 million for the outgoing fiscal year.
The low level of investment and savings as a percentage of GDP remained the biggest challenge for the country’s economy, as such a low level cannot fuel a long and sustainable growth path.
Without stimulating investment and savings, Pakistan’s dream of achieving a long and sustainable growth path of around 7-8 percent for 10 years cannot be realized. When GDP growth picks up, it results in growing imbalances in the external accounts because weak investment could not fuel GDP growth.