Personal Finance

Introduction to Savings

5 Mins read

Savings is an important tool for the growth of any country’s economy. Savings ratio means the percentage of disposable personal income that people save (rather than spend on consumption), to set aside as a nest egg for retirement or for emergencies.

The Importance of Saving Money

The overall level of savings in a country has a substantial impact on the economic activity. Higher levels of savings help the banks to lend more money to companies, thus financing higher levels of investments, which boosts a country’s productivity over the longer term. On the other hand, where savings ratios of a country are low, it means that the economy has chosen short term consumption over long term investments. Lack of savings will starve the economy of investments and will lead to future bottlenecks and stifle a country’s growth prospects.

What is National Savings

National savings are the total aggregate sum of public sector and private sector savings represented as a percentage of the GDP of a country. This component represents the total loanable funds provided by the domestic economy. The level of national savings indicates a country’s ability to embark on investments and is a major factor that drives economic growth.

Countries having high national savings ratios witnessed higher Gross Domestic Production (GDP) growth than countries with lower saving bases. As per the World Bank Report of 2019 China recorded the highest GDP growth of 6.1 pct in the Asian region and also recorded a higher saving ratio of 44pct of their GDP.  India, Pakistan and Sri Lanka recorded GDP growth rate of 4.2pct, 1.9pct and 2. 3pct.respectively. The national savings ratio of India was 29 pct, Pakistan 12pct and Sri Lanka 25 pct of their GDPs in the same year.

Public Savings

Public sector savings comes from the government sector. Public savings are positive when government runs fiscal surpluses with tax collections exceeding expenditure. On the other hand, when government runs a fiscal deficit with expenditure exceeding tax income, the public sector will experience dissaving.

Private Savings

Private sector savings comprise of both business entities and individual savers and represents the amount of savings left from their annual income, after paying for taxes and consumption.

Savings in Sri Lanka

Sri Lanka’s average national savings ratio on a quarterly basis for the last ten years, 2010 March 2010 to September 2020, recorded 23.3 pct of GDP. With disruption of economic activities due to the spread of the COVID 19 pandemic, the national savings ratio for the quarter ended September 2020 dropped to 14.8 pct compared to 23.4pct in the previous quarter. The main reasons for the decline in national savings are poor corporate performance, job losses, pay cuts and a widening government budget deficit.

The Sri Lankan economy faces many post COVID challenges in its drive to spur the country’s GDP. The country’s rating downgrade from B- to CCC+, the lack of investor confidence, low foreign reserves, higher foreign currency debt payment obligations and a widening budget deficit are the major hindrances for post pandemic growth.

In this background, it is vital to increase the national savings ratio in Sri Lanka in order to achieve a higher (positive) post pandemic GDP growth, from the negative GDP growth recorded in the first two quarters in the year 2020. Public savings continue to be negative as the budget deficit remains high. Post COVID corporate performance and individual savings are therefore key to increase national savings in the country. If Sri Lanka does not have adequate savings on its own to plough back to revive the economy, the country would have no other option but to depend on foreign investments. Foreign investors are purely attracted by avenues to enhance their returns. Furthermore, they have many choices and will base their investments decisions on the size of the domestic markets, legal framework, Labour laws, tax and other incentives that are key to attract foreign investors.

How to increase Savings

As citizens of a country, we all have a role to play in developing our economy. Our main responsibility towards ourselves as well as our country is to increase our savings base. Savings means not only saving cash, but also eradicating waste. Even though peoples’ income has been affected by the pandemic, many measures could be adopted to save cash. Saving, by reducing electricity, water, food and fuel costs etc. and differentiating between your “needs” and “wants”, will not only add to your personal savings and secure your future, but will also help to increase the national savings base in our country.

At a time the country is grappling with many COVID pandemic related challenges, specially the foreign debt payment obligations and the efforts to stimulate GDP growth, it is the duty of all citizens to respond to the Nation’s clarion call and cut waste from all corners, reduce consumption based spending, save more and add every penny to increase national savings for a better tomorrow.

Traditional Savings Methods 

The earliest forms of savings used by our forefathers have been those such as piggy banks, saving money in a safe at home etc. However, these measures did not yield an interest.

Traditionally, we now use and trust the banking and non-banking financial institutions for our financial transactions and to save money and earn an interest. Banks and non-banking Financial Institutions are authorized by the Central Bank of Sri Lanka (CBSL), as the Regulator, to accept and lend money to entities and individuals.

Commercial Banks offer different types of savings mechanisms;

  • Current accounts (no interest is paid on the monies, but monies can be withdrawn anytime),
  • Savings accounts (a lower interest rate, that is subject to change at the Bank’s discretion, is paid to the saver and money can be withdrawn anytime)
  • Minor savings accounts (an interest rate, that is subject to change at the Bank’s discretion, is paid to the saver and money can only be withdrawn upon the minor reaching majority or for specific purposes such as to meet expenses related education or critical illnesses)
  • Teenage Savings, Ladies Savings, accounts (offered by some banks only)
  • Fixed (Term) deposit accounts. (a fixed interest rate higher than the savings rate is paid, but the money is placed for a fixed term)

Banks introduce different types of savings products from time to time such as High Yield Savings accounts, linked to a minimum deposit threshold.

Fixed deposit accounts in particular, that earn interest, is typically used to save money for future needs, i.e. an emergency fund, to make a capital purchase (car, house, repairs etc.) or to secure one own future or a child’s future etc.

Senior Citizens are offered an interest rate above that of regular savings rates or fixed deposit interest rates.

Foreign currency deposit accounts could also be maintained with the Banks.

Non-banking Financial institutions are permitted to offer only savings and fixed deposits for their customers.

In addition, CBSL has permitted regulated Microfinance companies, that provide financial services to low-income people, who are too poor to be served by regular banks, (mainly because they lack sufficient collateral), to accept deposits.

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About author
Mr. Mangala Boyagoda has many years of experience in the fields of Banking and Treasury Management having worked at DFCC Bank, Standard Chartered Bank, Union Bank and Bank of Ceylon.
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