Determinants of Private Savings Effect on Economic Growth in Ethiopia

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.