Saving less, growing less

The unseen threat to economic stability

Pakistan is experiencing a domestic savings crisis that could jeopardize its economic future. The country just does not save enough. The gross domestic savings are approximately 7.4 percent of the GDP, which is less than the regional counterparts, and the country is forced to rely on uncertain foreign inflows.

A decade ago, Pakistan’s saving rate was nearly twice as high as it is now. East Asian economies save over 30 percent of their output as do China and Vietnam, whereas Bangladesh and India save in the high teens. These savings are invested in export growth, infrastructure and industry. Remittances and foreign borrowing are the major contributors to fill the investment gap in Pakistan. Can an economy be sustained on outside lifelines only? Obviously not.

Savings are not just a macroeconomic statistic. Savings constitute the amount of income that is not used today so it can be invested in the future. Increased savings enables the banks to avail loans to businesses, fund employment and new projects. Low savings leads to slower growth and low investment. Repeated balance-of-payments crises have been linked with this structural deficiency of domestic capital over the last decade. How can it financially sustain its own development, unless it does it internally? It cannot. Without domestic savings, long-term growth is weak and is dependent on debt.

The causes of the downfall are primarily macroeconomic. Inflation has been one of the most disruptive forces of saving behaviour. Inflation was close to 35-38 percent in 2023, lowering purchasing power and eroding public trust. By the end of 2025, inflation had dropped to approximately 5-7 percent, yet the households do not forget the shock. Moreover, food, fuel and electricity prices remain volatile and instability is still expected. 

In cases where there is an unexpected inflation, the real value of bank deposits goes down. In response, households often resort to save in gold, real estate or foreign exchange. Although they may protect individual wealth, these resources do not promote profitable investment. Thus, inflation diverts savings out of the formal financial system and escalates prices. 

After all, the crisis of saving in Pakistan is not the failure of the people. It is a manifestation of macroeconomic instability. The saving is pegged on trust, trust that the price will not go down, trust that the returns will be sensible. Pakistan will continue to react rationally to uncertainty by keeping the savings low until Pakistan is able to instill a culture of rewarding patience over punishing it.

Similarly, an additional layer of the problem is created by interest rate dynamics. In an attempt to curb inflation, the SBP raised its policy rate to an all-time high of 22 percent in 2024. The rate had gradually declined to about 10.5 percent at the end of 2025 as inflation slowed down. Even though these reduced rates encourage borrowing, it also reduces deposit returns. Should households be supposed to save, in case there is minimal or no gain in postponing the consumption? Of course, most will be reluctant. When real returns are low, this makes formal saving unattractive.

Moreover, fiscal policy has added to these strains. Pakistan's fiscal deficit remained close to 5.4 percent of GDP during 2024-2025. When the government’s expenditures exceed their revenues, it results in negative public savings. Such constant shortages lead to intensive borrowing, often by local banks. Such borrowing has the potential to crowd-out private businesses that require credit to grow and invest. The frequent deficits also undermine long-term economic management.

Combined, these macroeconomic factors put together justify the drastic drop in the savings rate in Pakistan. It is not a cultural issue but it is structural. Instead, human beings react to rewards. In the context of volatile inflation, uncertain returns and persistent fiscal deficit makes savings less appealing and consumption seems safer.

The after effects are severe. Reduced domestic savings limit investment, resulting in slow growth, reduced employment and greater dependency on external financing. In Pakistan, further reliance on foreign borrowing will help to alleviate the short-term burden but the country cannot substitute domestic capital formation locally and exposes the economy to geopolitical shocks and differences to global interest rates.

So, what is the solution? Moral appeals or awareness campaigns are not the solution. When the economy favours individuals and rewards them, then they save.  The inflation remains steady and predictable, returns on deposits need to be positive and decrease in fiscal deficit is needed to curb the effect of crowding out and revive public saving.

After all, the crisis of saving in Pakistan is not the failure of the people. It is a manifestation of macroeconomic instability. The saving is pegged on trust, trust that the price will not go down, trust that the returns will be sensible. Pakistan will continue to react rationally to uncertainty by keeping the savings low until Pakistan is able to instill a culture of rewarding patience over punishing it.