Basic economic principles suggest that a country with a savings rate lower than its investment rate will struggle to sustain long-term growth. Additionally, nations with low financial literacy, high inflation, and a large amount of unbanked cash circulation typically experience very low national savings rates.
Pakistan is a prime example of this issue. Firstly, the country’s official savings rate—defined as savings in banks as a percentage of GDP—stands at just 14%. While inflation has moderated recently, the returns offered by banks on savings products still fall below inflation, resulting in negative real returns. Secondly, Pakistan remains a largely cash-driven economy, with Rs9.1 trillion in circulation as of March 14, 2023, money that is not held in bank accounts.
This combination of factors makes it difficult to raise the national savings rate. To address this challenge, regulators and financial service providers need to adopt a customer-focused approach to change saving behaviors. Solutions must ensure a positive real return without excessive risk, offer safety (no Ponzi schemes), be easily accessible (without lengthy documentation), have affordable entry points, and offer liquidity.
Research shows that Pakistanis save in a variety of asset classes including cash, cryptocurrency, dollars, gold, real estate, stocks, and even livestock (mostly in rural areas). To channel more of these savings into the formal financial system, it is essential to make these assets more accessible and understandable to the public.
An Opportunity to Channel Trillions of Rupees into the System
There is a significant opportunity to bring the trillions of rupees circulating outside the formal economy into various investment assets, provided access and knowledge are simplified. This shift will not only help formalize the economy and increase the official savings rate, but it could also enable banks to lend more. Let’s explore what a Rs10,000 investment made five years ago in each asset class would be worth today.
As the data shows, investments in cryptocurrency, gold, and company shares have provided positive returns after adjusting for inflation. However, the largest pool of savings remains in Pakistani rupees. While Rs34 trillion is within the system (in banks and national savings schemes), an additional Rs9.1 trillion is in circulation, likely in private safes, office vaults, and under mattresses. If Rs10,000 had been invested in a savings account five years ago, it would have experienced a negative return after factoring in the inflation rate.
To encourage more people to save in rupees, four steps need to be taken. First, educate savers on rupee-denominated instruments, such as 90-day Treasury bills, which offer returns above inflation. Second, the process of opening an Investor Portfolio Securities account—which is necessary for investing in capital market instruments—must be as simple as opening a digital wallet. Third, investments should be available in smaller denominations (e.g., the Rs5,000 denomination of the T-bill, which is currently underutilized). Finally, these investments must be liquid, allowing easy access to funds when needed.
Cryptocurrency’s Popularity and the Need for Regulation
Cryptocurrency, particularly Bitcoin and Ethereum, has gained massive popularity in Pakistan. Although exact figures are hard to verify, analysts estimate that Pakistanis hold between $10 billion and $30 billion in crypto assets, with over 10 million individuals owning crypto wallets across various exchanges.
Despite its popularity, cryptocurrency trading in Pakistan is unregulated and often conducted through informal hawala systems. While cryptocurrencies have potential for use in money laundering and are a drain on foreign currency reserves, they are here to stay. A practical solution would be to create a regulated synthetic contract that mimics popular cryptocurrencies, allowing Pakistani investors to participate while adhering to “Know Your Customer” (KYC) and anti-money laundering regulations.
Gold and Its Investment Potential
Gold remains one of the most popular asset classes in Pakistan, primarily in the form of gold ornaments rather than financial instruments or gold bars. It is estimated that over $10 billion worth of gold ornaments are held across the country. To make gold investment as easy as purchasing a soft drink, the gold market needs to be fractionalized and tokenized.
Imagine an app that allows individuals to buy gold for as little as Rs100, using their digital wallets or credit cards. The app would offer real-time buy/sell options with an established bid-ask spread, and users could even redeem physical gold once they accumulate a certain weight. Such a service, provided by a regulated entity with physical gold reserves backing the tokenized gold, could be a game changer and help bring the money in circulation into the formal financial system.
Equity Investments and the Need for Financial Literacy
While the Pakistan Stock Exchange has provided impressive returns in recent years, many Pakistanis avoid investing in equities due to three main reasons: a lack of awareness about the potential returns and associated risks, low financial literacy, and the cumbersome process of opening a brokerage account. To expand participation in the stock market, financial literacy programs must improve public understanding of the risks and rewards of investing in stocks, and the process of opening a brokerage account must be simplified.
Conclusion: A Major Opportunity to Formalize Savings
There is a vast opportunity to bring the trillions of rupees circulating outside the formal economy into one or more of the asset classes discussed. This move would not only help formalize the economy and improve the savings rate but also provide greater liquidity for the banking system. Achieving this goal will require collaboration among regulators, financial institutions, and innovative start-ups to make these savings options more accessible and attractive to the public.
