Discussion Paper No. 206 of 2019 on Responsiveness of Gross National Savings Rate to Change in Fiscal and Monetary Policy in Kenya

Abstract

National savings rate is an important indicator of economic health. It indicates the country’s ability to finance a greater share of its development needs using domestic sources. As such, boosting national savings is an important ingredient for growth. National savings rate has been fairly lower in Kenya compared to its peers in the East African Community and the greater Sub-Saharan Africa. This study examines the impact of monetary policy and fiscal policy on explaining the national savings behaviour in Kenya by estimating the Kenyan savings function with GDP growth, government budget deficit, inflation, tax revenue, money supply and interest rate on bank deposits as its determinants. The analysis covers the period 1980-2018 using dynamic Autoregressive Distributed Lag (ARDL) approach. The study finds that GDP growth, growth in Government tax revenue and real interest rate on deposits positively and significantly affect national savings rate both in the short and long-run. Fiscal deficit and broad money supply (M2) negatively and significantly affect national savings rate in long-run whereas inflation exerts a positive effect suggesting increasing precautionary motive to hold money during periods of inflationary pressures. In the short-run, however, it is established that broad money supply positively affects national savings rate while inflation slows savings rate. The study recommends increased efficiency and effectiveness in tax administration and tax policy, increased investment in activities that increase productivity and economic growth to improve incomes and peoples’ savings ability.