MWANGI: Low saving rates a factor in Kenya’s economic slowdown
Published on: August 27, 2019 08:05 (EAT)
By Kevin Mwangi Things are looking bleak for the Kenyan economy and it is expected to continue facing challenges of increased debt servicing burden, reduced export earnings, reduced employment growth and deflating asset prices. One of the key issues at the heart of these problems is that the economy is not generating enough to pay for debt service and wages and hence it’s forced to borrow heavily in order to meet development spending as well. This translates to a fiscal risk management that is wanting. Another major problem is that we have not delved deeper into the issue of powering up our economy by boosting domestic savings. Kenya has previously emerged as one of the countries with the lowest saving rate in the region. In just under a decade, Kenya’s Gross Savings Rate has slumped from 11.7 % in Dec 2007 to 6.1 % in Dec 2018, according to a report by Census and Economic Information Center (CEIC). World Bank also estimates, the gross domestic savings as a percentage of GDP is 5.3%. Complicating matters further, the government has turned to a debt fueled spending spree through issuing bonds worth billions in overseas capital markets to finance a budget that channels 64% to recurrent expenditure. Only 36% of the Ksh.3 trillion for the 2019/20 financial year is meant for developmental projects including repayment of debt. This does not leave any room for private sector borrowing, which explains the low investment rates. This also means that the government is dis-saving as it spends on recurrent expenses and other necessary infrastructure developments. Every high-income nation was once poor. For instance, most Asian countries like Japan, South Korea and Singapore are popularly known as ‘economic miracles’ for their ability to maintain savings rates above 20 percent even when faced with tough economic times. Unlike Kenya, whose debt to GDP ratio is 55.5%, Japanese government’s debt to GDP ratio stands at 239%. The story of how Japan’s government manages its national debt serves as a model for the developing economies in the world. While as at June 2019, Kenya’s external debt stood at Ksh.3 trillion, equivalent to 52% of total debt, Japan boasts that close to 90% of its debt is held domestically due to robust domestic savings which have made it possible for domestic investors to absorb most of the government debt. South Korea’s national savings rate is about 36%. In 1997 South Korea was faced with the severest economic crisis. However, with the backing of a strong financial sector and efficient allocation of resources, the country has shown remarkable progress recording a GDP of $1.6 trillion. This, according to International Monetary Fund IMF, personified South Korea as the world’s fifteenth largest economy in 2016. Singapore’s national savings rate is about 50%. This places it at the high-income level among world economies. Only half a century ago, the country was just an island without any natural resources to call its own but it has since made dramatic transformations due to generation of capital enough to sustain the country through economic turbulence. An economy like Kenya where savings are extremely low indicates that the economy is choosing short-term consumption over long-term investment which can lead to future bottlenecks and shortages. The credit-fueled economy has a youthful population that likes to spend and has included wastage into a way of life. For Kenya to develop into a globally competitive and prosperous country as envisioned by Vision 2030, we need a savings and investment rate of about 30 percent. The magic wand for transformation from band spenders to effective savers and wise investors starts with each individual taking the first step by saving a minimum of 20% of their income every month and turning it into a way of life. To achieve this, Kenyans require stronger and sober backing from the government and corporate sector. It goes without saying that in order to begin saving, individuals require a source of income. However, we need to save something regularly or when we can no matter the level of income. Developing a savings culture should be a key concern to all of us. It also requires a combined effort between the government, citizens and all institutions. In addition, for this to succeed, national policymakers should ensure that the increased savings are directed to accelerating the country’s economic growth. Kevin Mwangi is an Investments Analyst at Amana Capital.