National saving rates are among the major determinants of economic growth of a nation. The national saving rate, in macroeconomic theory, is the combination of public and private savings. It is a source of capital stock that leads to increased investment and then level of output and employment. In order for a particular economy to achieve sustainable growth, inter alia maintenance of adequate capital stock accumulation is of paramount importance. Though many economists regard it as a rule of thumb, not as such scientific, the national saving rate of a healthier economy needs to be at least 20% of its GDP.
While measuring GDP using the expenditure approach (GDP= C + I + G + Nx), investment is one of the addends. The level of investment on the other hand depends on the level of saving. Investment is a function of saving. The link between the saving rate and the economy is , therefore, crystal clear. The higher the saving rate the higher the level of investment which in turn leads to an increase in the GDP (i.e. economy).
It is very general apologue that as the circulation of blood is necessary for the survival of an individual, in the same way, savings and investments are also necessary for a healthy functioning of an economy. Planting trees save the environment so does saving for the economy. Domestic saving is a source of domestic investment. In developing nations such as Ethiopia, the low level of national saving has however been challenging. Investors face a lack of credit facilities as much amount they need. Even those who get access to finance have to go through a tedious bureaucratic red tape to secure bank loans. When businesses go bankrupt, the creditors act fiercely to bid collaterals. Our culture in this aspect is punitive. The relationship businesses have with financial institutions is insulated with trust.
Moreover, the private sector competes with public borrowing to secure loans from banks. The Ethiopian government covers its budget deficit by borrowing from commercial banks. Such borrowings of the government deplete the investment capital in the banks and leave less for the investors. Economists call this situation a ‘Crowding Out Effect’. In 2019, the domestic debt of the government was $25.4 Billion. This is a huge amount of public debt and it disrupts the money market and then private investment.
The saving culture we have as a nation is also poor. The economics concept of saving is oftentimes confused with hoarding. Saving is a deposit in financial institutions whereas hoarding is keeping the money outside the banking system. The higher illiteracy rate coupled with lack of financial institutions in rural areas of our country and many other factors
have made the agricultural society hoard its money than save it.
As the economist William H.Branson in his book, Macroeconomic theory, and policy (2003), put it succinctly, an economic system must be able to produce capital if it is to satisfy the want and needs of its people. To produce capital people must be willing and able to save, which release produce for use elsewhere. When people save, they make funds available to others. When a business borrows these savings, new business and services are created, plants and equipment are produced and new jobs become available.
Several researches have indicated that there are so many factors for the lower level of saving rate in Ethiopia. Those who incline to build their theoretical framework using Keynes’s theory argue that the major cause for the lower saving rate is the lower level of disposable income of the household. The supporters of this theory argue that an increase in output leads to increases in income, thus raising the level of saving in the economy. Others argue that saving has a bi-directional causality in a way that increases when income increases on one hand and it also leads to an increase in output and income on the other. Output growth and saving are of course closely related in a vicious circle of “Saving-Investment-Growth-Saving”.
The other major determining factor of saving rate that most people are not aware of is the rate of inflation. The relationship between saving rate and inflation rate also hosts competing arguments. Higher inflation rate leaves fixed income earners staggering since as a final consumer they bear the burden of an increase in prices unlike producers/suppliers who just postpone each and every increase in input prices. As saving is what is left from consumption, consumers don’t tend to save more since their consumption spending increases due to the rise in prices (inflation). When prices are high, producers/suppliers and sellers earn more profit by charging higher prices and ultimately the phenomenon influences the national savings positively regardless of the negative real interest rate there might be. Positive (and high) real interest rates are of course preferable and necessary to encourage agents to accumulate money balances, and complementarity with capital accumulation will exist as long as the real interest rate does not exceed the real rate of return on investment. So from a producer perspective there exist a positive and significant relationship between national savings and inflation rate, as some researches indicate.
Political instability also determines the saving rate in an economy. Political and economic uncertainties lead to an increase in precautionary saving. But occurrences of such uncertainties make people especially in developing countries where the financial sector is poorly established keep their hard
earned money at their sight not in financial institutions. A few weeks ago the National Bank of Ethiopia (NBE) put a directive regarding the daily and monthly withdrawal limits of deposits, ETB 200,000 for personal savings, and ETB 300,000 for businesses per day. Announcing such directives in the middle of the COVID-19 pandemic among other things signals the high withdrawal rates of accounts. This limit on withdrawals has made some interest groups complain and have called for a revision of the directives for especial cases and business lines. There is a suspicion within the finance industry that businessmen are and will continue to hoard their money in a safe-deposit box at their homes. Such mistrust and unstable conditions have a negative effect on saving rates.
The number of commercial bank branches available in Ethiopia, a nation with a population of 110 million, is only 5,564, a branch for a populace about 20,000. Besides, a significant portion of these branches is located in and around major cities. This has deprived most of the rural population access to a bank and has left aside a substantial amount of savings that can be mobilized and used or investment. Furthermore, the bureaucratic red tape of securing loans in urban areas and the absence of commercial banks in rural areas has made the people consider the practice of usury. This usury in turn affects the healthiness of the finance sector and deprives interest incomes that it should have earned and also the people borrowing from usurers.
Capital investment in infrastructure, education, technology, industrial parks, business expansion, etc. is required to achieve long-term economic growth and improve living standards and per capita income. The main source of the funds for capital investments is of course household savings. It is a long established fact in economics that saving – investment and economic growth are positively related.
To enhance and keep the Ethiopian financial sector safe, sound, well capitalized and profitable, saving mobilization across the country is among the major tasks we need to carry out. The finance industry needs to set a room for agricultural finance and increase the engagement of farmers and pastoralists. The National Bank should encourage and even set as a criterion for commercial banks to open branches in rural areas at least as corporate social responsibility. Besides, raising the minimum interest rate that financial institutions pay on saving and time deposits as it did back in 2017 should be considered by the NBE and commercial banks too. The expansion of microfinance also helps to address a number of start-up entrepreneurs who strive to start small.
Stay Home! Stay Safe!
The Ethiopian Herald Jun 18, 2020
BY WOSSENSEGED ASSEFFA
