Some reflections on World Savings Day

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.