Robust economic policies needed to maximise private savings and finance growth in Egypt: World Bank

Reem Hosam El-din
10 Min Read

Savings is alternatively defined as income minus consumption, the change in wealth, or the supply of capital. Given the comprehensive and consistent definitions of each of these terms, each definition of “savings” would represent the same concept and give rise to similar empirical measures. A research prepared by the World Bank Group—undertaken by Khaled Hussein, Mahmoud Mohieldin, and Ahmed Rostom—under the name “Savings, Financial Development, and Economic Growth in the Arab Republic of Egypt Revisited” discussed the nature of economic growth in Egypt and several areas it involves, relating them to the citizens’ behaviours in savings and trust in the financial development of the country.

The study illustrates the mechanisms linking national saving and economic growth, with the purpose of understanding the possibilities and limits of a saving-based growth agenda in the context of the Egyptian economy. This is done through a simple theoretical model, calibrated to fit the Egyptian economy and simulated to explore different potential scenarios.

Understanding savings behaviour is critical when designing economic policies that promote investment and growth, according to the research. Most of the empirical literature that analyses cross-country savings behaviour concentrates on aggregate savings for a multitude of reasons. The first reason is due in part to the lack of consistent information on household behaviour, as well as possible differences in the household savings in developing versus industrial countries.

A 4% growth rate of General Domestic Product (GDP) per capita requires a national savings rate of around 50% in the first decade and 80% in 25 years

A study by Hevia and Loayza illustrates the mechanisms that link national savings and economic growth in Egypt. The study uses a simple theoretical model calibrated to fit the Egyptian economy and simulated to explore different potential scenarios. Their main conclusion was that if the Egyptian economy did not experience progress in productivity, then a high rate of economic growth would not be feasible at current rates of national savings and would require a saving effort that is highly unrealistic. To obtain a constant 4% growth rate of GDP per capita with no total factor productivity (TFP), improvement would require a national savings rate of around 50% in the first decade and 80% in 25 years. However, if productivity starts to rise to at least moderate levels, sustaining and improving high rates of economic growth becomes viable. Realistically, to achieve the goal of high economic growth, the national savings effort must be alleviated by forcefully and purposefully improving productivity.

The research includes a mix of a “simple permanent income” hypothesis as well as “life cycle” hypothesis determinants, which are used to interpret real private savings behaviours in Egypt. The study was able to present new empirical evidence related to savings behaviour, financial development, and economic growth in Egypt.

By using high quality and high frequency quarterly data covering 1991-2010, the study employed a robust vector equilibrium correction modelling strategy. The key long-term determinants of private savings in Egypt are the real interest rate and level of financial development, as shown by the data. The data also showed higher persistence of real private savings in the short run.

The real interest rate varies negatively with real private savings in the long term for the period under consideration, 1991-2010. This translates to the fact that higher consumption is becoming more attainable at a lower cost. Hussein and Mohieldin reached the same conclusion on the relation between private savings and real interest rates during 1960-1990. However, they referred to the fact that the financial repression of the 1960s cannot be alleviated by an increase in the real interest rate, as it further deepens the problem of excess liquidity of the banking system, which is indicative to the liquidity crisis in the late 1990s.

In the short term, real private savings vary positively with real interest rates, whereas financial development positively reflects on higher private savings on both horizons. This is a literal translation of the McKinnon-Shaw hypothesis on financial development and growth, which strongly holds for the case of Egypt. The effect of higher inflation on real savings negates the presence of a precautionary motive for savings in Egypt. This can be attributed to seeking alternative non-formal inflation hedges, particularly in real estate and gold. This is common in less developed countries that suffer financial market imperfections. Unavailability of robust data on real estate holdings and gold prices in the domestic market limit the interpretation of this result and raise a feasible research question for future development of this model. Exchange rate movements reflect on higher private savings. It provides signals of macroeconomic uncertainty to economic agents and triggers precautionary motives for savings. In the absence of data on domestic and foreign currency denominated private savings, devaluation would reflect on raising the domestic currency equivalence of foreign currency savings, leading to a net positive effect of devaluation on private savings, according to the data of the research.

Individuals with trust in deposit safety and financial stability are likely to save funds

Relevant policy recommendations are imperative to the betterment of the Egyptian economic narrative. A multitude of sources indicate that trust is a significant determinant of savings; in other words, it has been observed that individuals who perceive that the economic situation within their country will improve are more likely to save. Moreover, regression analysis illustrates that trust in deposit safety and financial stability is highly correlated with trust in one’s government; therefore, an individual who trusts the institutions within their country is likely to save.

That said, it is imperative for Egypt to build creditability as well as maintain integrity in their financial institutions in pursuit of building trust to ultimately increase savings. In addition to trust, internet access is significant to savings behaviour, whereas physical access and distribution of banks do not have an effect on one’s probability of participating in bank savings and/or informal savings. In many underdeveloped countries, information barriers are generally associated with higher costs. With that being said, improvements in internet access lower transaction and information costs for stock market participation, thus increasing the likelihood of savings as well as helping a consumer make better financial decisions. However, one must be financially literate to reap the benefits cultivated from access to the internet. Increasing internet access within Egypt could be pivotal to savings behaviour; however, it should also be noted that it would only assist a specific cohort of individuals. Furthermore, the inception of funded private pension system schemes within Europe and Central Asia have been pivotal to savings behaviour. Essentially, a pension system encourages savings within the workplace to ensure adequate income for workers during retirement.

Regulatory requirements and misguided strategies have reduced the yield of such investments and impeded the overall objective of private pensions. Appropriately positioning a mandatory pension system within Egypt could dynamically alter savings behaviour; however, it is recommended that more research should be conducted in regards to regulatory requirements prior to implementing such a policy.

Overall, macroeconomic measures heavily influence resource mobilisation and particularly savings behaviour in Egypt during the period under consideration in this study (1991-2010). Robust economic policies, including macroeconomic and monetary measures, are prerequisites to maximising private savings and financing growth in Egypt.

Conclusion

If the Egyptian economy does not experience progress in productivity—supported by and stemming from technological innovation, improved public management, and reforms in the private sector—then a high rate of economic growth is not feasible at the current rates of national saving and would require a savings effort that is highly unrealistic. For instance, financing a constant 4% growth rate of GDP per capita with no improvement in total factor productivity would require a national savings rate of around 50% in the first decade and 80% in 25 years. However, if productivity rises, sustaining and improving high rates of economic growth becomes viable. Following the previous example, a 2% growth rate of total factor productivity would allow a 4% growth rate of GDP per capita with a national savings rate in the realistic range of 20-25% of GDP.

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