It will come as no surprise that the Governor of the State Bank of Pakistan knows his economic theory. When Jameel Ahmad told a seminar in Karachi on Monday that the key structural challenge to the economy was the low savings rate, he was merely expressing an economic orthodoxy. He was coy, however, about his own role in this. As SBP Governor, he has an extremely crucial role to play in this. The theory behind his remark is this: consumption plus savings are equal to income (or GDP). Savings depend on the quality of money. It is an economic truism that inflation disincentivizes saving, for if the value of money is going down, the economic actor who has the money, has no real reason to keep the money and defer consumption. Money, according to the textbooks, is only money if it acts as a store of value and thus allows for delayed consumption. However, inflation means that money buys less as time goes on, and proves not to store value. Inflation is supposed to be controlled by the SBP, mainly through controlling the money supply.
Of course, there is also the danger of sending the economy into recession if inflation stays too low for too long. Mr Ahmad has a delicate balancing act to perform. However, it is a relief to see him identifying the one single most important factor in the economic picture. He noted that there had been an improvement in almost all other indicators, but that the one which stubbornly seemed fixed was the savings rate. He spoke about the need to mobilize these resources, about the need to provide more means of investing, but he should have mentioned the steps taken by the SBP to make money itself a store of value.
The need to keep money cheap, so that it can be used for growth, must be balanced against the need to make savings attractive. For this, more attention should be paid to the real rate of return than seems to be the case. It should be remembered that while there is a cultural tradition of extravagance, our eastern neighbour has overcome it enough to bring its savings rate in line with that seen in economies which have grown in recent years. It should not be forgotten that growth is needed to keep a young workforce employed, and that growth can only come from a high savings rate.
