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Savings versus debt: Ruto's paradigm shift

 Kenyans have been saving through Saccos, merry-go-rounds and individually. [Istockphoto]

The new paradigm in Rutonomics is savings. In his speech to parliament, President William Ruto even gave an incentive to savers that the government would match every two shillings with one.

He should have gone a step further and explained if this savings will earn interest, and if one can withdraw it at will or after a given period. Shall we save through banks, M-Pesa or a special purpose vehicle?

This is a shift from debt that defined Uhuru’s regime. But wait a minute...the saved money will most likely be borrowed to fund public and private projects.

The thinking is that if we saved more there will be more to borrow and banks and other institutions could entice us to borrow by lowering interest rates. If there is competition, we might add.

The high interest rates in Kenya stifle economic growth by denying us access to credit. It’s amazing when you hear that a rate of five per cent is high in the West.

One possible reason for the high rates is that the demand for credit is higher than the supply (savings).

Rutonomics seems to suggest, correctly, that if you increase the supply of credit through savings, hoping the demand does not go up, the price (interest rate) will fall.

The mismatch in the market is already being noticed when the government does not meet its target in Treasury bill auctions. The buyers want higher rates.

The way bonds by private firms are snapped up leaves no doubt that Kenyans could save more if given good incentives. That is for sophisticated investors. For hustlers?

Is there empirical evidence that savings can spark economic growth?

Abrams Tagem and Kunal Sen (2021) for United Nations University note that “investment is a key determinant of economic growth. Investment rates are determined by national and household savings rates. Countries that have high savings rates tend to grow faster on average”.

They further add: “A high savings rate in line with a country’s investment rate reduces vulnerability to sudden shifts in international capital flows.” 

Reducing vulnerability is great, we stop living under the mercy of global forces.

The policy shift to savings is supported by empirical evidence. It’s worth trying. But wait another minute...

Daniel Thornton, writing for the Federal Reserve Bank of St. Louis, said “that personal saving and growth are likely to be positively related in the long run does not preclude the possibility that a higher saving rate can slow economic growth in the short run.” 

The dividends of savings will come in the long run after investing in projects that improve the productivity of the economy.

That rhymes with government thinking. Most of us want instant returns. That’s why bonds are popular, you get some money (coupon) every six months.

Why would savings slow down economic growth in the short run? It’s simple; if we save we do not consume, which could slow down demand for goods and services.

When you spend money it’s not wasted, you drive the economy. Think of the US where consumption makes 70 per cent of the gross domestic product. In Kenya, it’s about 75 per cent. We saw the effect of a fall in consumption during the Covid-19 pandemic.

Why is our savings rate that low? It’s simple. We don’t have money to save!

We save what we don’t consume. If we want to save we must get surplus. That calls for improvement on our income.

That, in turn, calls for increased productivity; to get more money without causing inflation. That would require a shift to technology and value addition in all sectors including the government. Huduma Centres was a good starting point.

In improving our productivity, we should start with low-lying fruits such as agriculture. And give credit to Uhuru Kenyatta and Mwai Kibaki for improving infrastructure. Add Daniel arap Moi for education.

We can’t save when we live from hand to mouth. Kenyans have been saving through Saccos, merry-go-rounds and individually. They could save more if they had more money.

Who would hate to save and enjoy the security that goes with such a buffer?

I asked a group of students why we do not save. This is what they said: “Kenyans have developed a spending culture as opposed to a saving culture. They lack an objective that compels one to save, like owning a home or educating children.“

“Mashida ni mingi. There is no savings culture in Kenya.” “We save through other means such as crypto wallets.” “It’s better to borrow and then pay the loan instead of saving.”  

They also cited trust issues with financial institutions, past experiences with savings schemes that later turn out to be con-games. Another quipped, “We drink a lot”.

Let’s give this savings scheme a trial, against the reality on the ground.