In the year 1924, a
group of banks held a jamboree in the Italian city of Milan and resolved
to observe World Savings Day on October 31 of every year.
They
intended to promote personal saving as a pillar for economic
advancement. Many professionals attending this conference were European
and their concern was borne out of the extreme conditions that people
faced after World War I and the poor economic performance that followed.
For the next half-century, this date was aggressively promoted by banks and savings societies in Europe and North America.
Needless
to say, the idea of saving, by both households and government, should
be given greater prominence in Kenya. Kenyans and their government need
to save more, for a number of reasons.
Savings
are indispensable for growth because they allow for investments to be
made. Thus there is a connection between the savings level in a country
and its growth level, because greater savings facilitate more investment
and faster growth.
The
active promotion of savings at household level should be a more
prominent part of Kenya’s economic growth policy, yet the share of
national income that is saved in Kenya has been below 20 per cent for
the last ten years.
While
it is true that the financial sector in Kenya has converged with
technology resulting in expanded financial inclusion, there is no
evidence that this expanded financial inclusion has promoted overall
savings.
Promotion of financial inclusion, then, is good but should not be an end in itself.
Because
access to financial products has been expanded by the efficiency of the
mobile telephone and its connection to banking infrastructure, the cost
of maintaining a bank account has also been lowered.
What remains is to use the availability of this mass of people to create consistent growth in overall national savings.
While
banks and other financial institutions may develop savings products and
make investments that reduce cost, public policy is the major
determinant of overall savings. This is because the government’s
decisions on taxation have a direct effect on how much taxpayers can set
aside as savings.
Enlightened
public policy that seeks to increase savings should start from the fact
that most Kenyans have low incomes, which means their ability to save
is constrained by the reality of survival.
Government must understand, given the reality above, that a policy which encourages savings must do more than just provide a direct incentive to send money to a bank account.
In
essence, savings correlate highly with the cost of living. Spending
patterns show that Kenyans spent 47 per cent of their incomes to buy
food in 2013, confirming that basic needs still command a large share of
individual incomes.
It
is a matter of common sense, therefore, that public policy should aim
to increase savings indirectly, through ensuring that basic food and
commodities are more affordable to a majority of the population.
Looking
at the cost of cereals and sugar in Kenya, it is clear that protecting
these industries comes at great cost to the affordability of adequate
food in addition to household savings.
A policy that actively pursues reductions in the cost of living would also be an indirect driver of saving.
What
this shows is that a sensible agriculture policy supports growth
through the channel of saving. Yes, importing cheaper cereal and sugar
into the country may be unpopular policy but it would enhance savings by
reducing the cost of food for households.
Government
spending also affects savings because every working Kenyan faces a top
tax rate of 30 per cent, which means that income tax obligations consume
the largest share of that income, and borrowing by government simply
means that there will be more taxes to pay in the future, therefore
reducing overall incomes and saving.
The
M-Akiba government bond is a policy innovation initiated by government
to enable small savers to participate in lending money to government.
This
excellent innovation is useful since it ensures a return to the
participants, but it does not raise national saving because it helps
government to lower its costs of raising money without affecting total
spending.
Kenyans
do not have to dedicate a day to celebrate national savings, but must
look on enviously when the date passes this year, not only because the
level of national savings is low to begin with, but also because
domestic funding investments will call for increased spending by working
people.
Improving
savings cannot be done by artificially suppressing consumption as much
as by promoting policy ideas that make it worthwhile to save, and an
environment of high inflation against low return on bank deposits is not
it.
Kwame Owino is the
chief executive officer of the Institute of Economic Affairs
(IEA-Kenya), a public policy think tank based in Nairobi, Kenya.
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