Determinants of domestic saving in Ethiopia

Abstract

The objective of this paper is to investigate the determinants of domestic saving in Ethiopia using time series annual data form 1969/70-2010/11. In this study, both qualitative explanations and econometric analysis are used. The qualitative (descriptive) part of the analysis shows that average domestic saving in Ethiopia was low and continuously falling. In the econometric analysis, effort has been made to identify the long run and short run determinants of domestic saving in Ethiopia using Johnson Maximum Likelihood co-integration test and Vector error correction mechanism (VECM).Estimated results reveal that growth rate of GDP, government consumption and foreign aid are statistically significant long run determinants of domestic saving in Ethiopia. On the other hand, deposit interest rate, dependency ratio, and financial depth are found to be insignificant determinants. However, in the short run, all the explanatory variables included in this study do not have statistically significant meaning in explaining domestic saving in Ethiopia. The speed of adjustment has value 0.585743 with negative sign, which shows the convergence of saving model towards long run equilibrium. By considering the significant as well as insignificant but very important variables to enhance domestic saving: Sustainable economic growth, increasing private sector participation as well as selective privatization of government owned institutions, expansion of financial intermediaries and creating competitive environment in the financial sector are suggested to improve domestic saving in Ethiopia.