Saving for the rainy day

By Zubeida Mustafa
Source: Dawn

PAKISTAN is a bundle of contradictions and it is difficult to make out what the finance managers want from the people. On the one hand, they are constantly complaining that Pakistanis are not in the habit of saving and the country’s saving rate is deplorably low.

The website of the Pakistan Savings Organisation carries a saying of the Quaid-i-Azam exhorting the people to save and invest in saving certificates. “Thrift as a national asset is going to play an important part in the building up of the state,” the father of the nation had said, we are told.

On the other hand, we have our policymakers attempting to pay homage to the market economy. To sustain it they feel the urgent need to give a fillip to consumerism. The attractive credit schemes — they are not necessarily attractive but are made to look so — only encourage profligacy with the state’s blessings. After having bought a car with a loan from a leasing company or a house with a bank loan which he can hardly afford and trapped in the debt cycle, can you expect the poor man to follow the Quaid’s dictum to buy certificates? The numerous shopping plazas coming up also confirm that the government’s strategy of encouraging the consumerist craze and giving a boost to the economy with demand driven growth is succeeding.

Then why expect the average Pakistani to save? The fact is that frugality has never been the cultural forte of our people. The poor can be forgiven for not saving because they live from hand to mouth and have nothing left at the end of the month to set aside for the proverbial rainy day. Most of them live on overdraft from their employers or credit from their mohalla shopkeepers, the unscrupulous among whom exploit the indebted. Hence evils like bonded labour. Even the rich who are in a position to save invest only a small proportion of their income in saving schemes or long term deposits in banks because they have their ostentatious lifestyles to pay for. It would be instructive if a study were to be undertaken on how much Pakistanis spend on weddings, dowries, jewellery and other items of conspicuous consumption.

Hence should we be surprised when the State Bank governor complains of the saving rate being barely 16 per cent of the GDP? According to the director Central Directorate of National Savings (CDNS) in 2006 his directorate had one trillion rupees in gross receipts. It was Rs939 billion in 2005 after having fallen to Rs761 billion in 2001.

If the government really wants to give the saving rate a boost it will have to pay serious attention to the saving schemes. In 2004 it was announced, under IMF pressure it is believed, that the CDNS would be converted into an autonomous corporation called National Savings. This has not been done so far. With an autonomous status, the performance of the saving centres would improve. They could then undertake mobilisation campaigns and devise schemes to mop up small savings, especially from housewives, students and youth. A system of paying commission to those saving centres staff who mobilise savings, as the insurance companies and banks do, should also be explored.

Karachi generates 15 per cent of the national savings. In 2006 the seven schemes in vogue at present and the seven defunct schemes (that still have some funds) had gross receipts of Rs145.5 billion. A break-up of the area-wise collection shows that most of the savings came from the affluent residential localities such as Defence Society and Clifton or business centres such as Habib Square, Savings House and Saddar. That indicates that there is much scope to access the small and medium savers.

The State Bank Report 2005-06 presents innovative suggestions which can generate savings if implemented. It talks of the need to expand the network of banks, microfinance institutions and postal savings to far-flung areas. It also calls for a friendly atmosphere for the small depositors who can be over-awed by an institution that is not user friendly. This would require the centres to be equipped with basic facilities such as a comfortable waiting area and the provision for expediting transactions that is possible only with an efficient and sufficient manpower to attend to the clients. There is also the need to launch a drive to explain to the public the value of saving money — a realisation that is woefully missing.

With the CDNS controlled by the federal ministry of finance, these improvements will take long in coming, that is if they ever come. If the central directorate were to be converted into an autonomous corporation, the prospects of a transformation would visibly improve.

In the final analysis, however, the incentive to save is determined by the rate of return the saving schemes offer. Over the years the government has reduced the profits on all schemes which were pretty lucrative at one time — 15 per cent per annum — and brought them close to the bank rates. Unsurprisingly, the quantum of savings fell. With the profits below the inflation rate the saver was left in the unhappy situation of the purchasing power of his savings actually being eroded with the passage of time.

The situation has somewhat improved with the upward revision of rates in the last two or so years. Yet they are not attractive enough. With inflation officially at 8.8 per cent (higher unofficially) the average returns of 9.24 per cent (which are lower after tax and zakat have been deducted) on most certificates are not good enough. Only Defence Saving Certificates and Bahbood Saving Certificates offer higher profits of 10 per cent or more but they are long term investments and the latter is restricted to senior citizens and has a ceiling of three million rupees.

Apparently, the government has exercised caution because it does not want to be caught on the wrong foot again. Higher profits might once again open the floodgates of malpractice by those with black money. But this can be controlled if the government institutes checks and screening to ensure that unauthorised funds do not find their way into the saving schemes.

This is possible only if the data is computerised on a nation-wide basis as has been done by Nadra. This should pre-empt cheating while it will encourage those with incomes from legally declared sources to invest in the saving schemes.

This once again highlights the need for expediting the establishment of National Savings — the autonomous corproration that was promised over two years ago.