Dependency Ratio, Foreign Capital Inflows and the Rate of Savings in Pakistan

Abstract

National savings are critically important to help maintain a higher level of investment which is a key determinant of economic growth. Although savings rates have fallen in many developing countries during the last two decades, Pakistan presents a unique picture of experiencing high rates of economic growth along with very low savings rates. In fact, the national savings rate of Pakistan is not only low compared to that in many countries with per capita income about the same as Pakistan's but it is even lower to that in some South Asian countries with lower per capita income. Pakistan's economic performance during the last three decades has been impressive. Real gross national product (GNP) has grown at an average rate of 6.0 percent per annum since 1960. The national savings rate, on the other hand, has fluctuated around an almost horizontal trend (15 percent) during the same period. Thus, Pakistan's saving performance and its overall economic performance appear to be incongruous. Although the low savings rates have become a major source of concern in recent years, not much attention has been devoted to highlight the key determinants of saving in Pakistan. In recent years, few studies have been done on this issue using both the time-series and cross-section data. Qureshi (1981); Abbot and DeRosa (1984) and Khan (1988) using time-series data have examined various determinants of household/national savings. Qureshi (1981) concentrated on economic determinants and found income and its rate of growth, the rate of return on financial assets and rate of inflation as key factors influencing household savings in Pakistan.