The Determinants of Savings in Uganda 1987-2018

Abstract

This study examined the major determinants of savings in Uganda using secondary annual time series data for the period 1987-2018. The macroeconomic variables used include GDP, deposit interest rate, M2, Inflation, gross fixed capital formation, merchandise trade, final consumption expenditure, and tax on income profits and capital gains. The model was estimated using co-integration and error correction model to analyze the short and long run equilibrium among the variables. The ADF test shows that savings, deposit interest rates, gross fixed capital formation, merchandise trade and tax on income profit and capital gains contained unit root at levels. However, all variables were stationary after first difference. Results of the study showed that most variables except Gross Domestic Product, tax on income profits and capital gains, and broad money supply play a significant role in determining the savings rate in Uganda. The coefficient analysis also shows that GDP, broad money supply and inflation have a positive impact while the deposit interest rates, consumption expenditure, gross fixed capital formation, merchandise trade and tax on income, profits and capital gains revealed negative impact on the savings rate in Uganda. The study also concludes that the speed of adjustment is 48.4% which means that the model will correct short run disequilibrium position at the rate of 48.4% annually. The paper concludes that there is a potential for increased domestic savings and this calls for policy changes and political will among policy makers who should put more emphasis on consumption expenditure, deposit interest rates, taxes on incomes profits and capital gains and merchandise trade that influences saving.