What Drives Private Saving in Botswana?

Naledi C Modisaatsone

doi:10.22610/jebs.v5i9.434

Abstract

This study examines the determinants of private saving in Botswana for the period covering 19942009. We use quarterly time series data to evaluate the magnitude and direction of the effects of key policy and non-policy variables on private saving. The variables examined are inflation, real interest rates, real gross national disposable income, degree of financial depth and dependency ratio. The dependency ratio is included in order to capture the effect of demographic influence on private savings. The stated determinants of savings are articulated in the context of the life cycle hypothesis. We investigate the short and long run behavior of the variables using an ARDL-ECM. The results suggest that there is a positive relationship between household income and their savings. The dependency ratio exerts a negative impact on private savings which supports the Lifecycle Hypothesis. The results also suggest that financial sector development has induced a positive impact on private savings in Botswana. Interest rates have a positive relationship with private savings; and, lastly, inflation has a negative relationship with private savings. Financial depth and real interest rates are the core policy instruments that the government can use to encourage savings in Botswana.

Highlights

While a poor country at independence in 1966, the discovery of diamonds, as well as fiscal discipline and sound economic management have enabled Botswana to maintain one of the world's highest economic growth rates leading the country into a middle income status
The results show that the log of real gross national disposable income (LnRGNDI) is an important determinant of private savings in Botswana
Savings is an issue of fundamental importance in the economy and of interest for both academics and policy makers

Summary

Introduction

While a poor country at independence in 1966, the discovery of diamonds, as well as fiscal discipline and sound economic management have enabled Botswana to maintain one of the world's highest economic growth rates leading the country into a middle income status. Other formal financial institutions operating in the country at the time included the Botswana Savings Bank, the Botswana Building Society, the National Development Bank, the Botswana Cooperative Bank and the Botswana Development Corporation. The latter listed institutions 3were all owned by the government and were established to fill in the gaps in the financial sector with respect to small savings, housing finance and long term agricultural and industrial funding. Despite the global financial crisis, the domestic banking sector performed well during 2008, with total assets and liabilities of commercial banks increasing by 21.4 percent to P43 billion (Bank of Botswana Annual Report, 2009)

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