Abstract
In Uganda’s development aspiration “VISION 2040”, Uganda aspires to transform its society from a peasant to a modern and prosperous middle-income country by 2040, with per capita income of USD 9, 567. To attain the vision, savings as a percentage of GDP should be over 35%. Notwithstanding such a high commitment, GDS as a percentage of GDP has remained below the desired target, standing at 16.5% in 2017. This paper investigated the determinants of Gross Domestic Savings (GDS) in Uganda for the period 1980–2017. The theoretical framework is based on the life-cycle/permanent-income hypothesis. Augmented Dickey Fuller and Phillips–Perron tests were utilized to test for the stationarity of the time series variables in the model. To test for both the short-run and long-run relationships among GDS and the independent variables, the ARDL bounds testing approach was adopted. The observational results indicate that in the long run, Gross Domestic Product growth rate (GDPg), Foreign Domestic Investments (FDI) and Broad money (M2) have positive and statistically significant effects on GDS, while Current Account Balance (CAB) and Gross National Expenditure (GNE) have negative impacts on savings. Deposit Interest Rate (DIR) was observed to be a statistically unimportant determinant of GDS in Uganda. In the short run, CAB has a positive and statistically significant impact on GDS while GDPg and DIR have a negative and statistically significant impact on GDS. The paper recommends increasing net exports through implementation of the industrial and export strategy espoused in the national development plan 2. In addition, the government should ensure a predictable economic environment to act as an assurance to the foreign investors that their investments will yield profits.
Highlights
Achieving sustainable economic growth is one of the fundamental targets of most economies
In other words ceteris peribus, a percentage change in Gross domestic product (GDP) growth rate prompts 0.69 percentage change in Gross Domestic Savings (GDS) in a similar direction. This result is in line with the theories of consumption and savings theories such as the life-cycle hypothesis which assumes a positive relationship between income and savings and with the Random walk hypothesis predicts that higher GDP growth rate countries are envisaged to have savings higher than that of low-GDP growth rate countries
Gross Domestic Product growth rate (GDPg) and Broad money (M2) were found to be significant explanatory variables at 5% significance level while Foreign Domestic Investments (FDI) was found to be significant at 10% significance level
Summary
Achieving sustainable economic growth is one of the fundamental targets of most economies. A nation’s domestic savings play a very imperative role in attaining rapid and sustainable economic growth, that is higher savings provide funds. Nagawa et al Economic Structures (2020) 9:39 needed for investment thereby prompting an expansion in production and employment eventually leading to economic growth and development. The Harrod Domar model (1939) indicates that the growth rate of an economy has a positive relationship with that economy’s savings ratio and a contrary relationship with its capital output ratio. This suggests that for an economy to grow, it ought to save a proportion of its Gross National Product (GNP) to boost capital formation. A standard neo-classical model of economic growth developed by Robert Solow in 1956 proposes that higher savings antecede economic growth, that is, a savings rate increase prompts an increment in investment and subsequently higher economic growth
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