BY WOSSENSEGED ASSEFA
Days ago, the Ethiopian Prime Minister Abiy Ahmed (PhD) was making a speech and answering to the questions raised by the members of the FDRE parliament. Among the major areas the parliament has been discussing, saving and its effect on the economy was given a due attention. One major success in relation to saving is the increase in the number of bankable people by more than 30 million. This success is of course mainly attributed to the demonetization of currencies and the related directives put forward by the National Bank of Ethiopia.
National saving rates are among the major determinants of economic growth of a nation. 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 percent of its GDP.
While measuring GDP using 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 a survival of an individual, in the same way savings and investments are also necessary for a healthy functioning of an economy. Planting trees saves 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 the 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 USD. 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. Bransonon his book, Macro economic 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 business borrows these savings, new business and services are created, plants and equipment’s 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 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 increase in output of leads increase in income, thus raising the level of saving in the economy. Others argue that saving has a bi-directional causality in a way that it 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 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 complementarily with capital accumulation will exist as long as the real interest rate does not exceed the real rate of return on investment. So from producer perspective there exist 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 a 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.
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 for investment.
The rural community being the major source of finance and foreign exchange earnings, the financial system and institutions we have built denies them the benefits they deserve. A farmer producing coffee for instance doesn’t enjoy the luxuries of technological products such as smartphones, modern suits, vehicles et al, while a person living in a city who contributes none for the generation of foreign earning enjoy these technological products. Well, this has to be reversed and there must be a way in which the main agents that directly contribute for the foreign exchange earnings should be rewarded for their labor.
Furthermore, the bureaucratic red tape of securing loans in urban areas and 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 a long-term economic growth and improve living standards and per capita income. The main source of the funds for the 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. Expansion of micro finances also helps to address a number of start-up entrepreneurs who strive to start small.
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Editor’s Note: The views entertained in this article do not necessarily reflect the stance of The Ethiopian Herald
The Ethiopian Herald July 14/2021
