Modeling the Contribution of Domestic Savings to Economic Growth: Empirical Evidence from Somalia

Executive Summary

Introduction

Countries have had a wide range of economic growth patterns during the last two centuries. Some countries have maintained a consistent increase in per capita income while others have continued to suffer from poverty during the same time period. This significant disparity in economic performance is not coincidental; substantial engines of growth were put in motion in certain countries that were absent in others. Economic growth is an important variable for countries to achieve high and sustainable economic development by encouraging their people to save in order to accumulate huge sums of funds for investments.

Somalia has undergone considerable volatility and civil violence over the last three decades, affecting both the population and the economy. Despite the fact that Somalis are naturally entrepreneurial and have setup successful businesses inside and outside the country, inadequate savings; due to lack of tax revenue collection system and poor institutions, have left the Somali economy exposed to shocks with income uncertainty and unexpected increase in prices.

Purpose, Methodology and Data

The purpose of this study is to investigate the role of saving in economic growth in Somalia during the period of 1989 -2019. Using annual time-series data spanning from 1989 to 2019, the study’s methodology is based on the econometrics analytical approach to estimate the parameters’ value and the trends of the economic relations between the study variables by using OLS estimation technique with linear regression model.

Empirical Findings and Policy Implications

The results found in this study reveal that saving is one of the key determinants of economic growth in Somalia and it is shown that saving positively and significantly contributes to the gross domestic product of a country. Interpretively, the study reveals that 1% increase in saving leads the economic growth in Somalia to increase by 3.94% which is laterally substantial in effect.

The study concludes that government and policy makers in Somalia should ensure adequate macroeconomic policies in order to encourage private saving as it is the only feasible mean for providing investment funds to stimulate the future economic growth in the country.

Following the empirical findings of this study, these recommendations are made for the purpose of effective policy formulations in the area of Domestic Savings and Economic Growth in Somalia.

        i.           The Somali government should set a sound and favorable environment that allows mobilizing domestic savings from the small depositors that will help to increase the level of economic growth in Somalia.

      ii.             The government should also transform the financial sector of the country and it is required to ensure its transparency and publicity in order to build a trust of the depositors in the sector.

    iii.      The central bank of Somalia is required to make sure the proper functioning of other banks by overseeing their activities and creating laws that guide the regulation of the financial sector in order to enhance its stability which is significant and key to the promotion of economic growth in Somalia.

    iv.            The private banks are also required to initiate profitable investment projects that may encourage households to deposit their funds in order to benefit such productive investments.