Policy Dialogue on Boosting Domestic Savings in Rwanda

04th October 2019, @Marriot Hotel
Organized by EPRN in collaboration with UNDP

1. Background

African countries’ ability to finance a greater share of their development needs from domestic sources “would give them much-needed flexibility in the formulation and implementation of policies” to address development challenges, direct resources into high-priority areas and “strengthen state capacity,” finds a 2007 UNCTAD report, Economic Development in Africa : Reclaiming Policy Space, Domestic Resource Mobilization.

The Report also indicates that there are many reasons for Africa’s low savings rates, including inadequate financial services, physical distance from banking institutions and high minimum deposit and balance requirements mean that the majority of the population does not get access to banking services.

The growth of any economy depends on capital accumulation, which in turn depends on investment and an equivalent amount of savings to match it. Two of the most important issues in development economics and for developing countries are how to stimulate investment and increase the level of saving to fund increased investment. Understanding the determinants of the aggregate savings rate is a crucial prerequisite in designing a number of policy interventions ; from the design of the tax and social security system to the layout of financial markets regulations. It is therefore not surprising that the analysis of saving behaviour has become one of the central issues in empirical macroeconomics.

Domestic savings are generally classified in three types, such as, voluntary savings, involuntary savings & forced savings. Voluntary saving relates to voluntary abstinence from consumption by private individuals out of personal disposable income and by companies out of profits. Involuntary savings is brought through involuntary reductions in consumptions. Forced Saving comes as a result of rising prices and the reduction in real consumption. Depending on time frame also, the savings can be categorised as short, medium and long-term savings. Savings can also be from foreign and domestic sources, from the private public sources and at the individual and institutional level.

The macroeconomic framework for NST1 requires an average GdP growth of 9.1% over the NST1 period for the country to remain on its path of economic transformation. This will require considerable efforts in boosting private and public investment financed by domestic savings and capital inflows…(National Strategy for Transformation 1)

The NST 1 stipulates that through financial sector development, including the introduction of innovative savings mobilization schemes, the private domestic savings rate is projected to increase from 12.1% in 2017 to 23.9% in 2024. This will provide domestic resources to help finance the expansion of investment, while also encouraging a gradual increase in the share of private domestic savings in private investment financing. Furthermore, these domestic savings will reduce Rwanda’s reliance on foreign financing and keep indebtedness sustainable. Despite these large increases in savings, consumers will still be projected to experience real private consumption growth averaging 7.6% per year from 2017 to 2024.

To create a shared understanding on the factors affecting domestic saving in Rwanda as well as defining key recommendations to boost domestic finding, the Economic Policy Research Network (EPRN) in collaboration with the United Nations Development Programme (UNDP), is organizing a policy dialogue/debate about Domestic Savings.
This is in line with implementing the existing Memorandum of Understanding signed in March 2019 between the two organizations.

2. Objective

The Dialogue was jointly organised by EPRN and UNDP to discussed the finding of the recent study “Developing effective solutions to boost domestic savings in Rwanda” authored by Professor John Sérieux from the University of Manitoba. The author illustrated the study and its findings and guide the audience through the proposed policy solutions to boost domestic savings in the country. After a Q&A session in which the author responded to questions coming from the audience, the policy solutions as illustrated during the presentation was discussed by the panel members. They will contribute to the inform the current debate on how to improve Rwanda’s capacity of financing its own development as well as on how to increase financial inclusion and participation.

3. Participants

More than 100 participants attended this policy dialogue including officials from public institutions, the private sector, academicians, NGOs/CSOs, Development Partners, Embassies, EPRN Members/Researchers and Media Houses.

4. Key recommendations from the dialogue

  • Incentivize banks to sell long-term time deposits in order to encourage longer-term lending – Current initiatives work to encourage customers to hold long-term time deposits but offer no incentive to banks to, more aggressively, offer such deposits. Banks might have such an incentive if such deposits were treated differently (in terms of lending options) by the regulatory authority (the National Bank of Rwanda).
  • Provide incentives for large firms to offer trade/supplier credit to client firms – Allow firms to include the implicit cost of offering trade/supplier credit (to their customers) in their operating costs for tax purposes (thus making such credit cheaper without changing its na¬ture or making it more difficult to extend).