It is an almost neglected issue in all governmental discussions, especially among economic policymakers, despite its paramount importance. This we have clarified in several previous articles. It is well known that Egypt’s economic problem can be solved to a large extent mainly via an increase of the investment rate in the range of 25 and 30 percent. What is achieved now doesn’t exceed 15 percent.
The reason for this can be referred to the decrease in domestic saving, which is one of the most important sources of financing investment. Even in the light of foreign capital flow, it is still the basic source of it.
If achieving a high economic growth rate requires regular increases in capital, and also in using it effectively, continuing the increase in the volume of investment can’t be done unless it is achieved in line with a sound economic situation and a suitable investment environment. This also necessitates in equal measure paying attention to packaging domestic savings.
Hence, attracting external savings entails first increasing domestic savings and packaging them in rational and productive investments. Consequently, increasing growth rates requires first increasing savings to stimulate capital formation. The higher the rate of saving is, the more this will positively affect the growth rate. For increasing savings leads to an increase in growth while growth increase leads to raising saving rates.
Here we notice that the domestic savings rate is in steady decline and has fallen to a very low rate that doesn’t in any way fit with the investment rates needed to raise the growth rate, in order to achieve the country’s developmental objectives.
It reached 3.1 percent in the year 2016/2017, which was an extremely low rate, and as a result the domestic resource gap reached 12 percent. This gap is financed either through foreign investment or external borrowing and both paths have their problems, issues and also their limits, especially that external debt has increased to a large extent during the current period and its composition has become different.
External debt has become largely short-term debt, constituting a considerable sum of the total. All these matters point to the difficulty of continuing external borrowing and therefore increasing domestic savings should be strongly promoted.
Here we should differentiate between compulsory savings, which are cut from salaries according to the law, such as social insurance, and voluntary savings that are made willingly by individuals, such as bank deposits, mail saving funds, investment certificates and business insurance.
We should also differentiate between the household savings sector and the savings of the state’s other sectors, such as the government, business sector and private sector.
We fully acknowledge that the domestic savings decline is largely due to the state’s general budget deficit. The final statistics of the savings and investments matrix show that the household savings sector was able to accumulate good savings during the recent period, but most of it was used in lending to the government and financing the budget deficit.
Here the financing investment matrix of the year 2016/2017 shows that society was able to accumulate savings amounting to EGP 514.4 billion (most of which is coming from the household savings accounting for EGP 376.8 billion). Out of this sum, EGP 236 billion (51.3 percent) was used to finance the budget deficit and EGP 250.7 billion used in financing investment.
To say it in other words, the continuing increase in the state’s general budget deficit is considered a key element in domestic savings weakness.
From this point, the follower of household savings will notice that its rates are diminishing continuously, whether within the banking system, mail savings funds, or investment certificates as well as the increase in hoarding rates and continuing to prefer to deal in cash rather than with banks. In order to generalise financial inclusion, the Central Bank and other banks exert incessant attempts aiming at facilitating the accessibility and usage of official financial products and services to different segments in society at reasonable prices, along with fairness and transparency to combat resort to unofficial channels.
Their efforts also include widening the scale of the banking system to include all categories of the population, such as rural inhabitants, the poor, small and micro enterprises, and merging the informal sector with the official economy, which would positively affect savings rates.
In spite of all the aforementioned, efforts still lacks several mechanisms that would help in achieving the desired objectives. Here statistical indicators point to several negative phenomena, the most important of which is the increase in circulated money outside the banking system within the domestic liquidity structure. For it increased from 14.2 percent in 2009 to 16.6 percent in 2011 and to 17.9 percent in 2014, before falling to 16.5 percent then to 14.4 during the years 2015/2016 and 2016/2017 respectively in parallel with the decrease in the share of bank deposits. We should bear in mind that the decline is due to the increase in foreign currency deposits as a result of the change in the rate of exchange of the Egyptian pound since November 2016, which in its turn affected the relative distribution of domestic liquidity components.
In addition, circulation of the 20 pound note and lesser notes decreased in comparison with the increase in big banknotes (EGP 100 and EGP 200) where the latter increased from 24.2 percent in 2009 to 52.2 percent in 2016 to 55.1 percent in 2017 and to 56.7 percent by the end of November 2017.
It is noteworthy to mention that most countries that adopted financial inclusion strategies withdrew big banknotes from circulation. India withdrew the 500 and 100 Rupees banknotes and the European Central Bank intends to stop printing the 500 Euro banknote in 2018 after studies proved that big banknotes play an important role in spreading corruption and illegal incomes, not to mention the increase in hoarding rates within society.
This was obvious in the monies directed to pyramid schemes in the 1980s until nowadays, as well as the money invested in Suez Canal certificates and other activities.
Strangely, some currently raise the possibility of a further decrease in interest rates, in spite of high inflation rates. This may drive some people, especially small savers, to withdraw part of their bank deposits with the aim of hoarding it, or using it in consumption. Both cases will result in a decline in the volume of domestic savings, rather than encouraging them as is the goal. Indeed, domestic savings should be encouraged at all costs.