Determinants of Gross Domestic Savings in Uganda

Vivian Nagawa

Working Papers from African Economic Research Consortium

Abstract: In Uganda’s development aspiration, VISION 2040, the country aims to transform its society from a peasant economy to a modern and prosperous middle-income nation by 2040, with a per capita income of USD 9,567. Achieving this vision requires savings as a percentage of GDP to exceed 35 percent. However, despite this high target, Gross Domestic Savings (GDS) as a percentage of GDP remained below the desired level, standing at 16.5 percent in 2017. The objective of this study was to empirically identify the determinants of GDS in Uganda. The study was based on the lifecycle/permanent income hypothesis theoretical framework and used time-series annual data from the World Development Indicators for the period 1980-2017. Augmented Dickey-Fuller and Phillips-Perron tests were employed to assess the time-series properties of the variables. The unit root tests revealed that the variables were integrated of order zero and one. To analyze both the long-run relationship and short-run dynamics of the model, the ARDL bounds test was applied. The empirical results suggested that in the long run, GDP growth rate (GDPg), broad money (M2), and foreign direct investments (FDI) have a positive impact on savings, while the current account balance (CAB) and gross national expenditure (GNE) have a negative effect. Additionally, the study found that deposit interest rates were not a statistically significant determinant of GDS in the long run. In the short run, the results indicated that all variables, except for CAB and GDPg, had a positive and statistically significant impact on GDS. The key policy recommendations are twofold: first, there is a need for export promotion and import substitution strategies to improve the current account balance and, consequently, savings through their effect on GDP; second, it is essential to ensure a stable economic environment to attract more foreign direct investments.

Date: 2018-12-01
Note: African Economic Research Consortium
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