Savings and Investment in Pakistan: Economics Report

 

Savings is the core for the development of a country. Especially for a developing country like Pakistan savings are important because the infrastructure for the growth of the country is needed. And a solid infrastructure can only be provided to a country if the country saves enough to support the formation of the infrastructure. The relationship between saving is investment is of extreme importance as it signifies the saving converted into effective product producing assets. The higher the co-relation between the savings and investment, the higher the savings converted into valuable asset producing asset. In Pakistan the correlation between the savings and investment is 0.76 based on the following data.

 

 

Savings182004246205296872249842268555401386
Investment277744305477346508403417418549476424

 

The coefficient of correlation (r) between the two variables come to about 0.76.

 

This means that the investment is highly related to the savings done by the people in the society. The coefficient signifies that as the savings increase then the investment increases and the relationship of the corresponding increase is signified by the number of 0.76. The relationship between the saving and investment is more or less linear, meaning that more or less the for a given amount of saving there is a corresponding high amount of investment which shows a high correlation.

 

Savings182004246205296872249842268555401386
Investment277744305477346508403417418549476424

 

 

* Figures in millions for year 92-93 to 97-98

 

The savings and investment each in the period has been rising at more or less steady rate and the relationship between them is nearly linear in nature. The savings are channeled to the investment, which is the one of the prime objectives of the monetary policy of the government.

 

The savings have been encouraged by the government through its policies of price stability and a low and constant rate of inflation over the time period. The stable inflation rate has raised expectations in the public for a period of stability, so there is an increase in the savings by the public as they anticipate a good return on their savings.

 

Interest and Inflation Rate

 

The interest rate is a determining factor that controls the total credit available to the industry. An interest rate that creates a healthy demand for credit can spur the industrial activity in the country.

However, the nominal interest rate is directly dependent upon the inflation rate in the economy. This dependence of interest rate on the inflation has an important significance for the investment avenues. As the interest rates rise and fall with the inflation rate in the economy, therefore the fluctuation in the inflation rates causes some projects to remain profitable while renders others unprofitable.

 

In a country like Pakistan where there is huge government deficit, the demand for more debt puts pressure on the inflation rate pushing it up, while simultaneously putting the pressure on the interest rates. This added pressure on the interest rate causes the inflation and interest rates to increase, thus putting constraint on the money available to the business for investment purposes.

 

Inflation Rate12.914.29.611.4
PLS Interest9.199.079.69.9

 

The coefficient of correlation (r) between the two variables comes to -0.75.

 

* From 93-94 to 96-97

 

The relationship between the PLS profit rates and the inflation rate is not much linear in nature. This is because of the fact that the PLS Accounts are not dependent upon the inflation rate in the economy as much as the other interest based Accounts which mainly give a specified amount of return to the Account holders.

 

 

Inflation Rate12.914.29.611.4
Interest on Interest based Accounts5.936.9166.1

 

* From 93-94 to 96-97

 

The coefficient of correlation (r) comes to about 0.68 between the two variables.

The coefficient represents a high degree of relationship between the inflation rate and the interest rate on the interest based Accounts. As the inflation rate in the economy rises then there is also a rise in the interest rate, which is not linearly related to the inflation rate, but still there is considerable relationship between the two variables.

 

Deposit And Interest Rates

 

The deposits in the banks are a reflection of the satisfaction of the depositors from the interest rate in the economy. The higher the interest rate in the economy, more deposits would deposit in the banks. The interest rate should give enough return to the depositors so that they should consider putting their money in the banks. If the rate of return on the deposits were not able to give sufficient return over and above inflation rate then the deposits would not be enough to support the development of the infrastructure in the economy.

 

PLS Interest9.199.079.69.9
Investment92074108797117686121900

*From 93-94 to 96-97

 

The corelation coefficient comes to around 0.77 between the two variables.

 

There is a strong relation between the returns offered by the PLS Accounts and the deposits in the banks. As the PLS Accounts are giving a high return therefore the deposits are highly correlated with the profit given by the PLS Account.

 

Interest on Interest based deposits5.936.9166.1
Investment92074108797117686121900

*From 93-94 to 96-97

 

The coefficient of corelation (r) between the two variables comes to around 0.068.

The correlation between the deposits and the interest on the interest-based deposits is very weak partly because of the return of these deposits. The other reason is that the major amount of the deposits are attracted by the PLS Account.

 

DEPOSITS AND INVESTMENT

 

The deposits are the most directly related economic variable to the investment in the economy. The higher the amount of deposits in the banks, the higher would be the investment in the infrastructure and valuable assets. The deposits are dependent upon the interest rates so the investment is indirectly related to the interest rates in the economy. So the investment in the economy is an indirect function of the interest in the economy.

 

Deposits7954492074108797117685121900109400
Investment277744305477346508403417418549476424

 

 

 

*From 92-93 to 97-98

The corelation co-efficient between the two variables comes to about 0.79.

 

The strong correlation between the deposits and the investment shows that the as the deposits increase then there is an increase in the investment in the economy. The relationship between the investment and deposits is more or less linear in nature. This is one of the desired results of the monetary policy of the government.  The deposits in the banks are converted into capital goods and this is an indication of the growth of the GDP of the company.
The near linear relationship between the two variables is a strong and do the depositors in the bank to the industry put an indicator of the channeling of the resources. This correlation is infact an indicator of the increase in the GDP of the country through the mobilization of the deposits.

 

 

Savings & GDP

The relationship between saving and GDP is an important indicator of the deposit creation efforts on the parts of the banking sector. As the size of the GDP increases there should be an increase in the value of the savings so as to support the growth of the growing economy. The consumption oriented Pakistani society has an inclination to spend more as they have more money, rather to save the money and invest it. The exact relationship in the Pakistan between the saving and GDP is given by the coefficient of co-relation, which comes to around

 

The coefficient corelation comes to 0.832 between the two variables under observation.

 

 

Savings182004246205296872249842268555401386
GDP134162915730971882071216559824046332759525

 

*From 92-93 to 97-98

 

The strong correlation between the saving and GDP indicates that the saving has a direct and profound impact on the gross domestic product of the country. As the savings increase then there is a corresponding increase in the GDP of the country. This means that the savings are infact being deposited into the banks, Which inturn are giving the loans. These loans are being invested in the economy and as a result of which there is increase in the gross domestic product of the company.

 

 

Pakistani banks are offering the depositors an interest rate ranging from 14- 16 percent in the current scenario. The current interest rate is definitely 1.5-2 percent lower then what Pakistani banks were giving nearly a year before. The current interest rate is because of the policy stated by the stated bank of Pakistan and is a part of long term strategy being implemented by the government to stabilize the economy and provide the needed thrust to put the economy again on the track.

 

The coefficient of correlation between the inflation and the interest rate is 0.68, Which is not high enough. This means that the interest rates have been especially kept at a level, which hasn’t high correlation with the inflation rate. The inflation rate has also been kept at a tight level to increase the perception of price stability in the market and to create confidence in the public to save, as there is price stability in the market. This will lead the public according to the expectation hypothesis to consider the inflation level to remain at the same level for quite sometime. The inflation rate has been going down in the economy consistently over the years. The inflation rate was 9.6percent in 1995-96, While in 1996-97 it came to about 11.4 percent. However, this year the inflation came down further at 8.9 percent. This gradual decrease in the inflation rate over the years has restored the confidence in the depositors to save and deposit the money in the banks.

 

This decrease in the interest rate despite a decrease in the return on the deposits offered by the banks has resulted in increase in the savings by the

Depositors.  Despite of the decrease in the interest rate the coefficient of correlation between the interest rates and the deposits is 0.77, Which shows a high degree of relation between the interest rate offered to the depositors and amount deposited in the banks.

 

The policy adopted by the banks seems to be working, as the coefficient of correlation between investment and deposits is 0.79.  This high correlation means that the intentions of the government are being fulfilled. A high investment rate is what the government desires for the revival of the economy. The present strategy of low and stable inflation rate and low return on the deposits seems to be working well for both depositors and the borrowers.

 

The present scenario represents a cohesive strategy being used by the banking sector to increase the deposits and to start vigorous activity in the economy.

 

 

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