Savings have been shown to have a positive impact on economic growth at the macroeconomic level. But, the micro-level analysis of households’ savings behavior is limited, especially in Sub-Saharan African economies.
Why do Sub-Saharan African countries have the lowest savings rate in the world? This fundamental question is yet to be thoroughly investigated because many of the studies on savings in developing countries have focused on Asia and Latin America. Also, the few studies on African economies have tended to be at the macroeconomic level, which makes it difficult to learn about the actual savings behavior of economic units (households) at the micro-level.
The saving culture of the society in general is poor despite the performance improvement of saving rate in the past years. In Ethiopia, majority of the population is living in rural sector where there is limited access to financial institutions. The financial sector was found to be not effective to reach the rural societies at the same time with lower transaction cost.
Besides to this, even though there are improvements in saving mobilization of households from time to time, one observes inadequate and fragmented savings in the rural areas of the country as studies based on some regions indicate.
A national study focused on saving and investment in Ethiopia started in 2016/17 was finalized recently. Saving amount in 2013/14, as indicated in the study, was 205 billion Birr. Increasing three fold, the saving amount has reached 638 billion Birr in 2018.
It is crystal clear that accumulating finance for investment is among the main objectives of saving. Regardless of the aforementioned saving growth, data indicate that it is retarding with regard to the need of the investment.
Comparing relationship between saving and investment of the first growth and transformation plan, the saving amount of 2013/14 was 22.5 percent whereas the investment appetite during the same period was 40.3 percent of the Gross Domestic Product (GDP). As per this, the gap between saving and investment was 18 percent.
The study predominantly indicated ways to better mobilize saving which results in narrowing the gap. While approached by Addis Zemen Daily, Mehammed Beshir, researcher of macro economy explained about ways of augmenting saving options and narrowing the gap with investment.
According to Mehammed, people start saving for various reasons like in fear of danger might happen and to minimize the risk, hoping for the better future and aiming to begin new business.
The difference in number between those who are saving and do not is very slight in Ethiopia. Studies conducted in this area indicate that 56 percent of the nation’s population is saving their money whereas 44 percent are not. This indicates that there is huge potential in advancing saving culture if the way in which it can be mobilized and expanded is strengthened.
Reasons people abstain from saving are low interest and hand to mouth income among others. Though there is accessibility of banking, mainly people put their money in banks not to earn interest rather to keep in a safe place. Low interest discourages people’s saving.
Among the major reasons impose negative impact on saving is also low income. Individuals do not have surplus money to save since there is imbalance between their income and expenditure.
Ignorance of the benefit of saving also contributes its part among the people not to save. This basically reflects situations in rural areas. Lack of interest in saving methods, especially when financial institutions fail in providing all-encompassing saving methods, create barrier to the growth of saving, he noted.
As grown saving and investment are highly interrelated, narrowing the gap between them is essential. In this regard, government plays the lion’s share in stabilizing the macro economy or reducing the cost of inflation.
Income, predominantly, is the decisive factor for saving so that raising citizens’ income through creating job for those who are in need is a must.
Protecting purchasing capacity of money is necessary as value of currency has direct relation with saving. On the other hand, government has to transfer basic financial knowledge to the society. This enables the society benefit from knowledge based engagement of saving method they prefer.
He further explained that introducing a variety of saving programs also plays pivotal role in advancing saving. For instance, savings of housing and renaissance dam bond purchase previously started by government have advanced saving culture. Introduction of such kind programs for the future, if possible, will highly boost saving.
Banks are also expected to increase their saving methods and options. Islamic banks recently launched by government will add to the growth of all-encompassing saving options.
All in all, the investigation into the saving behavior of households is critical because savings mobilization and the resulting capital accumulation start from individual members of society. The understanding of the saving behavior of individuals in an economy could help economic policy decision-makers of African countries; in particular, to design effective policies to increase saving rates, it is stressed.
The Ethiopian Herald December3, 2019
BY BACHA ZEWDIE
