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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Saving: Private sector gets worse while govt. improves

Saving: Private sector gets worse while govt. improves

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K.Haputantri

K.Haputantri
Co-Admin
Saving: Private sector gets worse while govt. improves
* Savings-investment gap widens
The Island - August 5, 2012, 7:29 pm

Over the years the state has been guilty of heaping up dis-savings while the private sector drove economic growth through its savings, which generated into investments. Last year however, the government was able to reduce its dis-savings while private sector savings declined, resulting in the savings-investment gap widening from 2.2 percent of GDP in 2010 to 7.8 percent in 2011.

"In 2011, the domestic savings to GDP ratio contracted by 3.9 percentage points to 15.4 percent (Rs. 1,007 billion) from 19.3 percent (Rs. 1,080 billion) in 2010. The decline was entirely due to the drop in savings by the private sector to 16.5 percent of GDP from 21.4 percent in 2010 as the government was able to reduce its dis-savings to 1.1 percent of GDP from 2.1 percent in the previous year," the Ministry of Finance and Planning said.

"This trend is consistent with the significant increase in private sector consumption as opposed to the decline in government consumption during the year. Reflecting this, the national savings, which is the sum of domestic savings, net foreign private transfers and net factor income from abroad, also declined to 22.1 percent of GDP in 2011 from 25.4 percent in 2010," the Treasury said.

"The increase in net foreign private transfers to 7.8 percent of GDP from 7.4 percent in 2010 helped achieve this national savings ratio as the net factor income from abroad reflected a marginal decline. Foreign private transfers mainly included the private remittances which continuously showed an encouraging trend increased by 25 percent in 2011 as well. Benefiting from the new developments in this area, private remittances are expected to increase in the future. However, the decline in national savings in 2011 emphasizes the necessity of curtailing particularly the consumption expenditure of the country while creating an environment to make more savings.

Savings-Investment gap widens

"With the drop in domestic savings to GDP ratio and the increase in investments to GDP ratio, the savings –investment gap also widened to 7.8 percent of GDP in 2011 from 2.2 percent in 2010, which was reflected in a higher deficit in the external current account. The transformation of budgetary operations to generate a revenue surplus and restructuring of state owned business enterprises to reduce their losses in the medium term is conducive to generate more domestic savings," the Treasury said.

"Total gross investment of the country increased to 29.9 percent of GDP in 2011 from 27.6 percent in 2010. The private sector investment, which recovered strongly in 2010 from the weak performance experienced in 2009 amidst the recessionary conditions, continued to expand to 23.7 percent in 2011 from 21.4 percent in 2010. Public investment also increased to 6.3 percent of GDP from 6.2 percent recorded in the previous year.

The private investment was mainly encouraged by the low interest rates prevailed in the country in the backdrop of relaxed monetary policy stance as the cost of funds was relatively low for the investments in real assets. Hence, there was a shift of the available resources from low yielding savings to real investment. The improvement in the private sector investments was reflected in the significant growth in the credit to the private sector and the expansion in the importation of investment goods in 2011. Hotels and tourism, manufacturing, trading, construction, and infrastructure, including telecommunication and petroleum, were among the key areas that attracted private sector investments during the year.

"Within the private investment, the Foreign Direct Investment (FDI) inflows increased by 107 percent to US$ 1,066 million in 2011 from US$ 516 million in 2010 due to the enhanced investments by the foreign investors to establish their presence in an economy with diverse opportunities," the Treasury said.

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