Determinants of Private Savings Effect on Economic Growth in Ethiopia

Ch. Venkata Krishna Reddy

doi:10.7176/jpid/60-01

Abstract

Private saving is a very important factor in bringing economic development, its working or efficiency is determined by different socio economic and political factors. In Ethiopia, private saving does not have a deep-rooted history because of frequent policy changes following the changes of government. The objective of this paper is to analyse the determinants of private saving in Ethiopia and also to check the long run or short run impact of real per capita GDP, real deposit interest rate, age dependency ratio, inflation rate and number of bank branches on private savings using time series annual data from 1978 to 2018. The research methodology employed are tests such as testing for stationery (unit root test) and co-integration test, rank of co-integration determined by using ARDL (Autoregressive- Distributed Lag) to characterize long-run and the short-run relationship between private saving and independent variables. The model is estimated by using Ordinary Least Square (OLS) and/or E-Views 10 also offered a specialized estimator for handling ARDL model. The estimated results revealed that real per capita GDP, real deposit interest rate, age dependency ratio and number of bank branches have found to be statistically significant and positive effect (but real per capita GDP negative in the short run) on private savings while inflation rate is found non-significant and negative effect on private savings in Ethiopia both in the long and short run periods in the study period. Based on the result, the researcher concluded that level of real per capita GDP and number of bank branches is found to be important variable and have very significant impact on private savings. Finally, the study recommended that the national level policy makers or decision makers has to take measure to improve income levels of society and special attention to increases financial access throughout the country by further expanding bank branches or other financial institutions and their services to increase private savings. Keywords : Determinants of private savings, Economic growth, ARDL, co-integration, Ethiopia DOI: 10.7176/JPID/60-01 Publication date: July 31 st 2021

Highlights

National saving consists of two components which are public saving and private saving
Research objectives 1.1.1 General Objective The general objective of this study is to identify the major determinants of private savings on Economic growth in Ethiopia using time series annual data from 1978 to 2018 and to give necessary recommendations. 1.1.2 Specific objectives The study has the following specific objectives; 1
Secondary data was gathered from documentation mainly on annual reports of government institutions such as Central Statistics Agency (CSA), National Bank of Ethiopia (NBE), Commercial Banks, Ethiopian Investment offices (EIO), Ministry of Finance and Economic Cooperation (MoFEC), Ethiopian Economic Associations (EEA), and the like. 1.10.1

Summary

Introduction

National saving consists of two components which are public saving and private saving. National saving is always assumed to be equal with total investment of the country. This assumption has implied that the amount of a country gross investment was influenced a lot by the amount of savings available in the country. Promoting economic growth through saving and investment has received considerable attention in many countries around the world (Vema, 2002). This is because high investment and saving rates are crucial for growth as a result of their strong positive correlation with GDP growth rates enunciated by endogenous growth theory (Agrawal, 2000). The conventional perception through which investment, savings and economic growth are related is the savings contribute to higher investment and higher GDP growth in the short run (Mohan, 2006)

Objectives

Methods

Results