Determinants of Domestic Savings in Pakistan: An Economic Analysis

Abstract

This study examines the impact of key economic factors—interest rate, unemployment rate, inflation rate, and worker remittances—on domestic savings in Pakistan. To assess the stationarity of these variables, the Augmented Dickey-Fuller unit root test is applied. Lag selection criteria are utilized to determine the optimal lag length, with a maximum of two lags chosen. To analyze the cointegration among the variables, the Autoregressive Distributed Lag (ARDL) model is employed. Cointegration analysis is essential for understanding long-term equilibrium relationships and assessing whether the variables move together over time. Through this model, the study evaluates whether changes in interest rates, inflation, unemployment, and remittances exert a significant and lasting impact on domestic savings. The estimated results confirm that all four factors substantially influence domestic savings in Pakistan, highlighting their critical role in shaping savings behavior. These findings underscore the necessity of economic policies that effectively address these determinants to enhance savings mobilization. Despite government efforts to increase savings rates, challenges such as low income levels, high unemployment, and ineffective policy implementation continue to hinder progress. This study contributes to existing literature by offering a comprehensive analysis of domestic savings determinants, providing valuable insights for policymakers and stakeholders. Addressing income inequality, unemployment, and policy gaps is imperative for fostering an environment conducive to higher savings rates. Continued research in this area will be instrumental in refining policy approaches and overcoming economic challenges to promote sustainable growth and financial stability in Pakistan.