Financial liberalisation and its Impact on savings mobilisation and Investment: A case of Zambia
Date
2011-04-08
Authors
Kumwenda, Judith C. Makulu
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Abstract
This study considers the impact of financial liberalisation policy on savings and investment in Zambia for the period 1964 to 1996. It examines the relationship between
positive real domestic interest rates and savings and investment. Real domestic interest rates are a proxy for financial liberalisation. Other variables of interest were included. These were world real rate of interest, credit availability, real exchange rate, domestic credit to the government, terms of trade, foreign debt growth rates and foreign direct
investment. The study uses econometric time series analysis, consisting of cointegration analysis and error correction models on annual data.
The main findings are that positive real interest rates have no long run relationship with savings and do not affect savings in the short run. The variables that have an impact on savings in the long run are foreign debt and the world real interest rate. In the short run the growth rate of income and world real rate of interest and foreign direct investment affect savings. The study has therefore, not found any support for the McKinnon-Shaw
financial repression hypothesis for the savings model. In terms of investment, for the long run, credit availability has been found to exert a strong influence, as well as, foreign debt, terms of trade and the world real rate of
interest. In the short run the real exchange rate and real domestic interest rate are the only two variables to exert any significant impact. The two dummies for change of policy and openness of trade have not had any impact on savings or investment. The study concludes that for investment, the McKinnon-Shaw hypothesis has found empirical support. Results have validated the theory that it is via the availability of credit, rather than through positive real interest rates per se, that investment is increased. It is recommended that macroeconomic stability should be a precondition for successful financial liberalisation. Exchange control regulation needs to be put in place to prevent or at least limit capital flight. There is need to reduce reserve requirements to free up loanable funds so as to increase credit that can go to finance productive investment. To promote investment especially in non-traditional exports there is need to make the prices of domestic exports attractive to the world market
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Keywords
Investments -- Zambia , Savings and investment -- Zambia