The Effect of Financial Sector Liberalization on Private Financial Savings in Uganda (1980-2007)

Abstract

It is a stylized fact that financial sector liberalization would result into higher interest rates, which would attract savings desirable for increased investments through enhanced efficiency in financial resource allocation. This paper examines this posture in the Uganda’s case using the Granger and Engle framework and structural change analysis. The results indicate that, liberalization of the financial sector results into higher financial savings which operate through the rate of return on savings, financial deepening and foreign exchange rate channels. This provides some support for first part of the crux of McKinnon and Shaw financial liberalization thesis, confirming the potential for payoffs relating to ongoing financial deepening and a shift to an out-ward oriented growth strategies. Consistent with the predictions made in the Life cycle model, the results indicate that higher growth in income stimulates private savings which reinforces the fact that the ability of the country to mobilize financial savings.