January 2017

1. United Nation’s
Economic Commission
for Africa
The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not represent the views of the World Bank
Group and its affiliated organizations nor those of the Executive Directors of the World Bank or the governments they represent. It doesn’t also represent the
views of The United Nations Economic Commission for Africa and should only be attributed to Authors in their personal research capacities.
“Savings, Financial Development and Economic Growth in Egypt Revisited”
Khaled Hussein Mahmoud Mohieldin Ahmed Rostom
January, 5th 2017
Preliminary Draft for Discussion – Not be Quoted without Authors’ Permission
World Bank and
Cairo University
Faculty of Economics and Political Science
World Bank and
The George Washington University
Economics Department
1

2. Savings Behavior in Developing Economies (Literature Review)
Author Main Findings
Kwakwa
(2013)
Identified key determinants of national savings in Ghana. Concluded that in the long, income + ToT have
positive effects on savings whereas political instability and real interest rat have a negative effect
Oskoee et al.
(2012)
Introduced the savings investment gap and investigated whether it is a key determinant of income
inequality in 16 countries. Due to varying results, deemed country-specific research a necessity
Awan et al. (2010) Investigated association among several indicators by Pakistani emigrants and domestic savings behavior
in Pakistan. Results indicate that real interest rate, financial liberalization, and economic growth 
positive impact on savings behavior whereas ToT and real remittances  negative
Dhanasekaran
(2010)
Examined causality between GDP + savings in India; stable long-run relationship identified, concluded
that savings converge to its long-run equilibrium
Kim
(2010)
Studied internal and external determinants that affect personal savings in the US. Findings reveal that
personal income, tax, bank credit, and employment are highly dependent
2
Preliminary Draft for Discussion – Not be Quoted without
Authors’ Permission

3. Savings Behavior in Developing Economies (Literature Review)
Author Main Findings
Agrawal and Sahoo
(2009)
Estimated long-run total and private savings function in Bangladesh. Concluded that short-run =
determined by GDP growth rate, dependency ratio, interest rates, and bank density. Also identified
bidirectional causality between savings and growth
Slami and Sheikhy
(2008)
Examined several behavior of household savings model, determined that the permanent income model
most conducive to the case of Algeria
Nwachukwu and
Egwaukhide
(2007)
Examined determinants of private savings in Nigeria. Results reveal that short-run positively correlated to
the level of disposable income but negatively correlated with growth of disposable income
ElBassam
(2005)
Analyzed household savings in Saudi Arabia; estimated model indicated that income, wealth + financial
development variables are statistically significant whereas inflation, dollar interest rate, + financial
intermediation are statistically insignificant
Taher
(2001)
Studied the determinants of private savings in Saudi Arabia; concluded that government spending on
investment has a positive effect on private saving while budget surplus, excess of consumer loans +
outgoing remittances = negative
Burnside
(2000)
Analyzed the behavior of private savings in Mexico; determined private savings is highly correlated with
the level of disposable income than its GDP
3
Preliminary Draft for Discussion – Not be Quoted without
Authors’ Permission

4. Domestic Savings Rate in Selected Developing and Emerging Economies
4
0
10
20
30
40
50
60
Egypt, Arab Rep. Mexico South Africa Brazil Ghana India China Lower middle income Middle income
Source: World Development Indicators, 2016 Preliminary Draft for Discussion – Not be Quoted without
Authors’ Permission

5. Savings Behavior in Egypt (Literature Review)
Author Main Findings
Hevia and Loayza
(2012)
Examined the possibilities and limitations of a saving-based growth agenda; concluded that
productivity must increase to obtain constant economic growth given the current rates of national
saving
Giavazzi et al.
(2010)
Studied the behavior of household savings; found a negative correlation between savings and measures
of local financial development
Love
(2010)
Investigated corporate savings; concluded that larger firms invest more (physical saving) to maintain
competitiveness and growth whereas small firms invest less because of their lack of access to credit
Touny
(2008)
Sought to identify long-run determinants of domestic savings rate; concluded that growth of per capita
income, financial depth (proxied by M2:GDP) real interest rate, and inflation positively effected
domestic savings whereas the budget deficit ratio + current account deficit had a negative effect
Al-Mashat
(2002)
Assessed the effects of financial sector reforms on non-government savings; the study concluded that
only reserve money in percent of total deposits and credit to the private sector were statistically
significant
Hussein
(2002)
Studied the impact of financial liberalization on financial development; concluded that interest rates,
real per capita income, and expected inflation rate had a positive effect.
Elsayed
(1993)
Studied the determinants of savings that have contributed to raising saving rates; found that savings is
determined by income and negatively correlated to the unemployment rate + international trade rate.
Effect of inflation is undetermined 5

6. 6
Savings Behavior in Egypt (Indicators)
5
6
7
8
9
10
11
12
13
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1991Q1
1991Q4
1992Q3
1993Q2
1994Q1
1994Q4
1995Q3
1996Q2
1997Q1
1997Q4
1998Q3
1999Q2
2000Q1
2000Q4
2001Q3
2002Q2
2003Q1
2003Q4
2004Q3
2005Q2
2006Q1
2006Q4
2007Q3
2008Q2
2009Q1
2009Q4
2010Q3
Real Interest Rate and Real Gross Private Savings Per Capita 1991 - 2010
rgpspc RealInterest
Source: CAPMAS of Egypt and IMF (IFS), 2015
Hussein and Mohieldin (1997) Hussein, Mohieldin and Rostom (2016)
Preliminary Draft for Discussion – Not be Quoted without
Authors’ Permission

7. • Consider the interest bearing financial assets at the formal financial sector as a percent of GDP (FS/Y) as an independent
variable, whereas the rea interest rate (id-π) lagged savings rate, per capita income (y) in addition to the premium between
the domestic and foreign interest rates adjusted for expected devaluation (Z).
• Dummy variables for liberalization (covering 1974 – 1990), a dummy for 1987 tourism crises and another dummy for the
1973 war were included.
• The Long Run Equation:
L(FS/Y) = -0.03 (id-𝜋) -5.58 Z + 0.43 L(y)
• Tests for statistical significance indicate that the real interest rate doesn’t have any impact on financial savings in Egypt;
however, shows a negative relation between financial savings and real interest.
7
Financial Savings Behavior in Egypt: Summary of findings of Hussein and Mohieldin (1997)
Preliminary Draft for Discussion – Not be Quoted without
Authors’ Permission

8. Financial Savings Behavior in Egypt: Summary of findings of Hussein and Mohieldin (1997)
• Key findings and interpretation to the negative relation between financial savings and real interest:
• Money illusion: deposit holders suffer from money illusion, which in the words of Fisher the failure to perceive that the
dollar , or any other unit of money, expands or shrinks in value. Thus the rise in nominal interest rate according to this
argument may explain part of the increase in financial saving with the formal sector.
• Risk and Return: decision of selecting a particular asset is taken according to the relationship between its return and risk. It
seems that such a relationship in the formal sector satisfied a large number of depositors and hence they chose it. Since the
sequestration of deposits that accompanied the Egyptianisation and nationalization laws of the 1957 and 1961, the formal
financial sector was stable and did not suffer any major crises.
• Implicit deposit insurance: monetary authority was quick to rescue ailing units and managed to contain the possible damages
of failing banks, under a notion of collective responsibility amongst all of the operating banks. According to this implicit
insurance mechanism and government explicit support of the banking system, bank deposits were associated with low risk
which satisfied risk-averse savers.
• Tax free returns: interest on deposits with banks was tax-exempt which attracted more depositors
• Limited choices of financial instruments: the absence of an active capital market, bank deposits were the only available
saving instruments for large number of savers. Those who took the risk and saved with the Informal Investment Companies
during the 1980s as alternative(17), realized with the collapse in 1988, that they took the wrong decision
• Moderate inflation: can provide an explanation of depositors behavior. Even if the downward bias in official rates is taken
into account, inflation in Egypt which averaged 9.57% over the period 1960-90, is considered moderate compared to other
PCs. We argue that if the inflation rates were higher in Egypt, ceteris paribus, and real interest rates were as a result,
substantially negative, the behavior of savers regarding the selection of bank deposits would be much different.
• Widows and orphan behavior: Many of the formal sector depositors are without entrepreneurial skills or lack the ability to
invest or manage their savings, even with the existence of alternatives. Regular predetermined* returns that are offered by
banks may suit these depositors better than any form of saving which may suffer irregularity or high variability.
8

9. • Building on Hussein and Mohieldin (1997), our new research focus on the period of 1991 – 2010 using quarterly frequency.
• This papers inspects the stochastic properties of the variables and analyze the relation between the variables. This
procedure involves visual inspection of the given variables to check whether the series are trending smoothly.
• We quantitatively test for the presence of unit roots following the implementation of the Augmented Dickey Fuller
procedures (ADF) (see Dickey and Fuller 1979, Campbell and Perron 1991 and Enders 1995) to determines the strategy
and the methodology for modeling.
9
Private Savings Behavior in Egypt Revisited: Hussein, Mohieldin and Rostom (2016)
Preliminary Draft for Discussion – Not be Quoted without
Authors’ Permission

10. • We follow Modigliani & Brumbreg (1954) LCH motivation as adopted by Loayza, Schmidt-Hebbel, and Servén (2000)
specification to empirically model aggregate savings behavior in Egypt.
• The following null hypothesis (𝐻0) are tested :
• aggregate private savings in Egypt vary positively with real per capita income, interest rate,
• aggregate private savings varies negatively with inflation, and the level of financial development (M2 to GDP).
• The regression equation is represented as follows with expected signs shown between brackets based on theory:
• 𝑅𝑒𝑎𝑙 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑖𝑣𝑎𝑡𝑒 𝑆𝑎𝑣𝑖𝑛𝑔𝑠𝑡 =
𝑓 (𝐺𝑟𝑜𝑤𝑡ℎ 𝑖𝑛 𝑟𝑒𝑎𝑙 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 𝑖𝑛𝑐𝑜𝑚𝑒𝑡, 𝑀2 𝑡𝑜 𝐺𝐷𝑃𝑡, , 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑡 , 𝑅𝑒𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒𝑡 )
(+/-) (-) (-) (+)
10
Private Savings Behavior in Egypt Revisited: Hussein, Mohieldin and Rostom (2016)
Preliminary Draft for Discussion – Not be Quoted without
Authors’ Permission

11. 11
Private Savings Behavior in Egypt Revisited: Hussein, Mohieldin and Rostom (2016)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Institutional
Banking
Structure of Aggregate Private Savings in Egypt
Source: CAPMAS of Egypt 2015

12. • The data was tested based on the ADF procedure for integration and a conclusion was reached that levels of real gross
private savings per capita, real interest rate and m2togdp. possess unit roots and exhibit integration of the first order [I(1)],
yet, first differences were [I(0)].
• We investigate the presence of a long run equilibrium relation between real gross private savings per capita, real interest
rate and m2togdp.
• A VAR-model in levels is considered between these three series that were proven to be integrated of order one [I(1)].
• We normalize on real gross savings per capita and identify the cointegrating relation in the long run.
• The Long Run Equation is:
rgpspc = 1.1317 - 0.045087 * RealInterest + 0.40821* m2gdpratio
12
Private Savings Behavior in Egypt Revisited: Hussein, Mohieldin and Rostom (2016)
Preliminary Draft for Discussion – Not be Quoted without
Authors’ Permission

13. • The interpretation of the Long Run Equation:
• Real Interest Rate negatively influence private savings in the long run in the case of Egypt. The statistical results
shown in the long run equation provides evidence that income effect dominates the substitution effect in the case of
Egypt. This is consistent with earlier findings of Hussien and Mohieldin (1997) and also consistent with relevant
LDC’s results by Loayza, Schmidt-Hebbel, and Servén (2000).
• The income effect is further interpreted by the fact that higher interest rates imply that fewer current dollars are
needed to fund a given amount of future consumption. Planned future consumption is thus less expensive,
making people better off in a lifetime sense, and leading them to consume more today and save less.
• The substitution effect makes today's consumption more costly relative to future consumption accordingly and
based on the interpretation of this effect - the interest rate increase encourages people to consume less today and
save more.
• Financial Development positively influences private savings in the long term in Egypt. The positive implication of
liberalizing domestic financial markets in Egypt—through recapitalizing domestic banks—fostering the efficiency of
financial intermediation in addition to liberalizing interest rates has contributed to higher growth. Higher levels of
financial development depicted by a 1% increase in m2 to GDP increases private saving rates by 0.4% in the long run
in Egypt if all other variables remain unchanged.
13
Private Savings Behavior in Egypt Revisited: Hussein, Mohieldin and Rostom (2016)
Preliminary Draft for Discussion – Not be Quoted without
Authors’ Permission

14. 14
Private Savings Behavior in Egypt Revisited: Hussein, Mohieldin and Rostom (2016)
Dm2gdpratio = + 0.418*Drgpspc_1 + 0.114*CIa_1 - 0.135*CSeasonal
(SE) (0.165) (0.0345) (0.00431)
- 0.00788*CSeasonal_2 - 0.0665*dumm2002q3 + 0.0575*dumm1999q1
(0.00397) (0.0143) (0.0134)
+ 0.053*dumm2002q4 + 0.0758*dumm2002q1 + 0.0711*dumm2003q1
(0.0144) (0.0136) (0.0151)
- 0.0722*dumm2007q1 + 0.046*dumm2007q2 - 0.47*DUnemployment_1
(0.0144) (0.0138) (0.255)
Drgpspc = + 0.338*Drgpspc_1 + 0.0297*Dm2gdpratio_2 - 0.0325*CIa_1
(SE) (0.0682) (0.0109) (0.0138)
- 0.00608*CSeasonal - 0.017*DDrealPercapitaGDP - 0.224*DInflation
(0.00169) (0.0101) (0.0379)
+ 0.00591*DRealInterest + 0.00713*DDExchangeRate_1
(0.00274) (0.00353)
- 0.0028*DUSTBills_1 + 0.023*dumm2003q1 - 0.0215*dumm2002q3
(0.00147) (0.0064) (0.00642)
+ 0.0407*dumm2002q4 + 0.0346*dumm2004q1 + 0.0183*dumm2007q2
(0.00579) (0.00535) (0.00568)
- 0.0368*dumm2008q2
(0.00572)
• The Short Run Parsimonious System:
Preliminary Draft for Discussion – Not be Quoted without
Authors’ Permission

15. • A mix of the simple permanent income hypothesis as well as the life cycle hypothesis arguments help interpret real
private savings behavior in Egypt.
• The key long-term determinants of private savings in Egypt are real interest rate and level of financial
development. Data also shows higher persistence of real private savings in the short run.
• Real interest rate varies negatively with real private savings in the long term for the period under consideration
(1991 – 2010). This translates to the fact higher consumption is becoming more attainable at lower cost. Hussein
and Mohieldin (1997) reached the same conclusion on the relation between private savings and real interest rates
during (1960 – 1990).
• In the short term, real private savings vary positively with real interest rates, whereas financial development
positively reflect on higher private savings on both horizons. This is a literal translation of the McKinnon -Shaw
hypothesis on financial development and growth that strongly holds for the case of Egypt.
• The effect of higher inflation on real savings contradicts theory and negates presence of a precautionary motive to
savings in Egypt. This can be attributed to seeking alternative non formal inflation hedges particularly in real estate
and gold. This is common in LDCs that suffer financial market imperfections.
• Robust economic policies including macroeconomic and monetary measures - are pre-requisites to maximize
private savings and financing growth in Egypt. 15
Private Savings Behavior in Egypt Revisited: Hussein, Mohieldin and Rostom (2016)
• Summary of key findings and conclusion:

16. Thank you
16
Comments are welcomed; corresponding author: arostom@worldbank.org
Preliminary Draft for Discussion – Not be Quoted without
Authors’ Permission