PORTRAIT OF LOW SAVINGS IN AFRICA

 

By 

Magaji, S. (Ph.D) Department of Economics, University of Abuja,

NigeriaYahaya, H. (Ph.D) Department of

Statistics, University of Abuja, Nigeria.

INTRODUCTION Savings is the act of not consuming current income. In economic theory, saving is required for investment to take place, and

the investment is required to achieve economic growth Hence, high savings means high investment, which results to high

economic growth rate. This means that for a country or continent to achieve economic growth

and development savings must be reasonably high and sustainable An alternative to mobilisation of savings for investment and capital

formation is the use of foreign capital which is also associated with higher cost and grotesque conditions.

Africa is lagging behind in terms of economic growth and development Despite the fact that Africa is blessed with abundant human and natural

resources, its economies remained stagnant The fundamental question of interest to us is that isn’t African savings

reasonable to stimulate investment necessary for economic growth? Alternatively if African savings is low relative to the investment required for target growth how do we boost the savings?

OUTLINE

This paper discusses:Concepts and Theories of savings

Household source of income in Africa

Composition of households’ savings in Africa

Analysis of savings trends and determinants in Africa

The constraints to savings in Africa

And make recommendations

Concepts of savings

In economic theory, savings are dependent directly on the level of income

Thus saving function equation is normally expressed as S = a + sY where s is the marginal propensity to save and Y the level of income and ‘a’ autonomous savings

Hence savings are simply income not consumed It is only when income is realised that decision is taken

about what proportion of the income is to be spent and what is to be saved.

Savings are also viewed as deferred consumption. Households may allocate current period’s income to current or to future consumption.

THEORIES OF SAVINGS The Traditional Theories Traditional theories of savings are the lifecycle hypothesis

LCH and the permanent income hypothesis PIH. Both of these theories are concerned with analysing the household’s choice of consumption and savings over a long time horizon

Keynesian Theory Keynes argued that saving is not directly offset by

investment spending. Saving and investment are influenced by interest rate but other influences are also important and can keep the interest rate from serving its vital function of equating savings and investment spending. Keynes concluded that desired saving could exceed desired investment spending at the full employment level of output.

Theories of savings continues Modern Savings Theories Traditional theorists wrongly assumed that individuals exponentially

discount consumption to determine how much to save for future consumption versus current consumption

The Keynesian theory is designed for developed countries (DCs) and cannot therefore apply to Africa because households in Africa are larger than in DCs and are more likely to contain several generation

As a result of this there are fewer tendencies to save for retirement or for inter-generational transfer

In addition, income in Africa is uncertain and cyclical, making estimation of long-term income flows difficult. Furthermore, credit constrain can deter borrowing in early years. This means that households simply save small amounts at frequent intervals to smooth consumption, rather than accumulate or save for retirement.

Two modern theories attempt to remedy the shortcomings of Traditionalists and Keynesian. These theories are “hyperbolic discounting” and “mental accounting”, which model decision on how much to save for the future consumption and how much for the present

Modern theories emphasized commitment savings

* HOUSEHOLDS’ SOURCE OF INCOME IN AFRICA

* Generally poverty is a characteristic problem of African households

* Other characteristics are: diseases such as HIV/AIDS, malaria, typhoid and tetanus; unemployment, political troubles, and reliance on imports

* As a result of these, households are depressed of income which is the basis of savings

* The rural dwellers rely virtually on agriculture and informal source of savings

* Savings growth rate is expected to be stagnant because of low financialization of the African economy, high level of poverty, and massive importation of consumer non-durable goods

COMPOSITION OF HOUSEHOLDS’ SAVINGS IN AFRICA

Households’ savings in Africa is classified into formal and informal but more than 80% of the savings is not done in financial asset

Informal households’ savings in Africa are not normally incorporated in the formal financial system for good utilisation of the savings in modern investment to achieve economic growth

Both formal and informal savings made in Africa primarily are for short-term purposes

Features of commercial bank deposits is high proportion of demand deposits relative to time deposits

In fact, savings in Africa whether formal or informal is done in liquid form to guarantee short-term usage

Savings in Africa is more informal than formal and most of it is not captured by the monetary authority for documentation

In addition, most of the savings in Africa is in terms of assets rather than cash, which means that to save for another to invest, is insignificant

Furthermore, savings in the formal sector is mainly done for short term purposes attracting insignificant interest while that of informal sector is primarily made to smooth consumption

Hence, there is only one option of analysing the trend of savings in Africa – Analysing the GDS trend based on the documented figures of the monetary authorities.

As proposed by Aryeetey and Udry (2000) there are no standard rules on the determination of how well national and domestic savings should perform in any given year

Hence in discussing how well savings are doing in any economy, the standard used is to compare the economy to other economies of similar characteristics, or to compare the same countries’ saving performance over time, or to compare the actual performance versus the planned performance

Savings Trends in Africa

FIG 5.1 : GDS IN AFRICA

Savings Trends in Africa continues

Aggregate savings rate remained strikingly low for a number of countries

To compare the actual performance versus the planned performance, most countries lagged behind the targeted savings rate

In fact, the low savings rate made most of these countries to abandon their series of development plans

FIG. 5.2: COMPARISON OF AFRICA AND ASIA’S SAVINGS AS % OF GDP

Comparing Africa and LDCs of Asia

Africa annual savings as a percentage of GDS lags behind that of developing economies of Asia.

In addition, the volatility of savings growth rate in Africa is far higher than that of developing countries of Asia.

DETERMINANTS OF SAVINGS IN AFRICA

• population share of children, per capita income (PCI) and growth of PCI are all significant• Accessibility to credit markets• The institutional factor• Reliability of financial institutions

Savings Gap in Africa Versus Economic Growth

very few countries have ever achieved their savings targets in Africa

Basic gap models assert that the rate of economic growth is constrained by inadequate levels of savings and therefore foreign capital is required to fill these gaps in order to achieve a target rate of growth

Africa has a very wide savings gap and so far the methodology of bridging this gap through the use of foreign capital is faulty thereby leaving the continent with stagnated growth rate

In order to bridge the savings gap, internal mechanisms must be designed to boost GDS, curtail loss of foreign exchange and capital flight.

CONSTRAINTS TO SAVINGS IN AFRICA

Low Presence of Formal Institutions Fragmented Financial Markets and Low Patronage Patronage to Holding Physical Goods than Cash Informal Savings More Acceptable Than Formal

Ones Financial Reforms Inflation and Currency Devaluation Risk of Institutional Failure or Bankruptcy High Transaction Cost and Low or no Return on

Small Savings External Debt Services

RECOMMENDATIONS

To boost savings in Africa, we recommend as follows:• Amalgamation of African Financial Markets• Promotion of Export Earnings• Fight Poverty and Diseases• Use Foreign Capital with Caution• Promote MFIs• Promote Commitment Savings (CSs)

African savings are primarily low because of low income Institutional or corporate and government savings are what the monetary

authorities have control over Household economy is detached from the formal economy in a number of ways:

low usage of banks, savings in terms of assets rather than banks, and portfolio arrangement based on physical assets rather than financial assets

Africa’s GDS is seen to be very low, highly fluctuating and relatively far below the average of less-developed countries of Asia. These are primarily as a result of high influence of some key negative determinants of savings in the continent.

Hence Africa experienced a very wide savings gap which is a constraint to economic growth and the methodology to bridge the savings gap through the use of foreign capital is faulty

Foreign capital rather leads to high external debt-servicing which consumes reasonable portion of Africa’s GDP.

For Africa to be free from low savings there is a need to amalgamate African financial markets, promote export earnings, fight poverty and diseases, use foreign debt with caution, promote MFIs, and promote CSs.

CONCLUSION

THANK YOU!!!

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