Abstract
Selected Issues
Private Savings in Mauritius1
The private saving rate in Mauritius has declined over the years and is lower than in other countries with similar characteristics. This decline has contributed to a lower national saving rate and a sizable current account deficit. Using data over the last four decades, this paper empirically examines the factors associated with the private saving rate in Mauritius and compares them with those for other emerging market and developing countries. The analysis indicates that while private savings respond to both economic and demographic factors in other countries, the deposit rate and economic growth are the key drivers of private savings in Mauritius. Given its macroeconomic and demographic characteristics. Mauritius’ private saving rate is about 3 percent of GDP lower than potential.
A. Background
1. The current account balance of Mauritius has been in a persistent deficit since the mid-2000s, peaking at about 10 percent of GDP in 2010 (Figure 1). While the current account deficit averaged about 5 percent of GDP in the runup to the global financial crisis, it has averaged 7.5 percent of GDP since 2008, primarily because of the deterioration in the goods trade balance.
Mauritius: Current Account Balance and National Savings
Citation: IMF Staff Country Reports 2019, 109; 10.5089/9781498311991.002.A003
Mauritius: Current Account Balance and National Savings
Citation: IMF Staff Country Reports 2019, 109; 10.5089/9781498311991.002.A003
Mauritius: Current Account Balance and National Savings
Citation: IMF Staff Country Reports 2019, 109; 10.5089/9781498311991.002.A003
2. From a savings and investment perspective, Mauritius’ current account deficit can be largely attributed to a decline in national savings, as investment has remained tepid. National savings fell sharply during the global financial crisis in 2008–09, but recovered somewhat in 2011, and have averaged about 17 percent of GDP since then. This ratio is one of the lowest among middle-income sub-Saharan African (SSA) countries—most of which have also been running current account deficits in recent years, though generally of a smaller magnitude than Mauritius (Figure 1).
3. The main contributor to national saving is private saving, which has averaged about 18 percent of GDP in recent years. As in other countries in SSA, national savings in Mauritius are mainly driven by private savings, which have fallen from a peak of 32 percent of GDP in the early 2000s to about 18 percent of GDP over the last decade (Figure 2). This rate is lower than the average private saving rate for other emerging market and developing countries (EMDEs), as well as the average for Mauritius’ middle-income peers in the region (Figure 3).
Mauritius: Public and Private Saving
Citation: IMF Staff Country Reports 2019, 109; 10.5089/9781498311991.002.A003
Mauritius: Public and Private Saving
Citation: IMF Staff Country Reports 2019, 109; 10.5089/9781498311991.002.A003
Mauritius: Public and Private Saving
Citation: IMF Staff Country Reports 2019, 109; 10.5089/9781498311991.002.A003
Mauritius: Private Saving Across Country Groups
(In Percent of GDP)
Citation: IMF Staff Country Reports 2019, 109; 10.5089/9781498311991.002.A003
Mauritius: Private Saving Across Country Groups
(In Percent of GDP)
Citation: IMF Staff Country Reports 2019, 109; 10.5089/9781498311991.002.A003
Mauritius: Private Saving Across Country Groups
(In Percent of GDP)
Citation: IMF Staff Country Reports 2019, 109; 10.5089/9781498311991.002.A003
4. What factors explain the decline in the private saving rate in Mauritius? The existing academic literature identifies several economic and structural factors—such as demographics, income growth, deposit rates, inflation, financial development, etc.—as the determinants of private savings across countries, but a systematic analysis for Mauritius has been lacking. This paper fills the gap by conducting a time-series analysis using data over 1980–2017. In addition, it conducts a panel data analysis of the private saving rate for a broad sample of 110 EMDEs to benchmark the private saving rate for Mauritius given its economic and structural characteristics.
5. The findings show that the deposit rate and income growth are important determinants of private savings in Mauritius. The analysis suggests that the private sector responds strongly to economic growth and the deposit rate. Notably, there is no evidence of substitutability between private and public savings for Mauritius, nor is there any evidence that the saving rate in Mauritius is responsive to the changing demographic trends. Results based on the panel data analysis suggest that Mauritius’ private saving rate is about 3 percent of GDP lower than that based on its economic and demographic characteristics. While economic growth would boost private savings, a rapidly rising old-age dependency ratio requires a higher level of savings to alleviate fiscal pressures and avoid abrupt policy adjustments in the future. In this regard, efforts should focus on generating greater public awareness and encouraging private savings—e.g., through old-age related saving schemes. Better targeting of social benefits and broader pension reforms (including increasing the contribution rates of employees and introducing mandatory contributions for the self-employed) could also help to boost savings.
6. The rest of the paper is organized as follows. Section B outlines the analytical framework and estimation model for examining the determinants of private savings in Mauritius. Section C presents the country-specific time series estimation results for Mauritius, as well as the results of the panel data analysis used to benchmark the private saving rate of Mauritius. Section D discusses the policy implications of our findings and concludes.
B. Analytical Framework
7. Given the significant role that savings can play in promoting economic growth, an extensive body of academic literature investigates the determinants of savings. Earlier literature, outlined below, was dominated by the life-cycle model, which emphasizes the role played by the age structure of the population in determining savings, while later studies have explored the importance of other possible factors (such as public savings, pension systems, income level, financial development, inflation, terms of trade, etc.) in stimulating the saving rate.
Life-Cycle Hypothesis
8. The life-cycle model has been the standard theory for explaining the behavior of savings (and consumption) over time and across countries. Assuming perfect capital markets and perfect foresight, the model predicts that consumption depends on expected lifetime income (and not on current income) as individuals smooth consumption over their lifetimes. Given the fluctuations in income, saving thus depends on the stage in the life cycle—with individuals being net savers during their working years and dis-savers during retirement (Modigliani, 1986).
9. At the macro level, an obvious implication of the life-cycle model is that a high share of working-age population would translate into higher savings as workers provide for their retirement. Conversely, the private (and aggregate) saving rate would decline as the share of elderly population that has reached retirement age increases. Given the rising longevity, however, not only the current but also future age dependency ratio may matter for the saving behavior as individuals save more to meet their post-retirement consumption. Thus, while a higher current share of elderly population may imply lower savings, a higher share of elderly population in the future would imply higher savings as the population prepares for retirement.
10. The impact of demographics on savings has been well established empirically. Several studies find a strong negative effect of the share of elderly population (in total population or relative to working-age population), and a positive effect of the future share of elderly population, on private savings (e.g., Masson and others, 1998; IMF, 2017). Given Mauritius’ demographics profile, all else held constant, this implies a lower saving rate as the share of elderly population in total population is increasing, while the sharp increase in the projected old-age dependency ratio (by far the highest in sub-Saharan Africa) suggests a higher saving rate (Figure 4).
Mauritius: Old-Age Dependency Ratio
Citation: IMF Staff Country Reports 2019, 109; 10.5089/9781498311991.002.A003
Mauritius: Old-Age Dependency Ratio
Citation: IMF Staff Country Reports 2019, 109; 10.5089/9781498311991.002.A003
Mauritius: Old-Age Dependency Ratio
Citation: IMF Staff Country Reports 2019, 109; 10.5089/9781498311991.002.A003
11. Based on the life-cycle model, income growth also has implications for savings. With an unchanged saving rate by age group, higher income growth would increase the aggregate income of the working-age population (relative to the older age population not earning labor income), thereby raising aggregate savings (Modigliani, 1966). Tobin (1967), however, notes that if workers expect income growth to be permanent, then based on the life-cycle model, such wealth effects may induce more consumption today. Empirical literature has generally documented a significant positive effect of income growth on the saving rate.
12. Interest rate on bank deposits may also influence private savings under the life-cycle model. The net effect of interest rates on savings is theoretically ambiguous because of potentially offsetting substitution and income effects. A higher real interest rate increases the present price of consumption relative to the future price, providing an incentive to increase saving. But if the individual is a net creditor in financial assets, a higher real interest rate increases lifetime income, and may increase consumption (reduce saving) through the income effect.2 Paralleling the theoretical ambiguity, empirical research documents mixed results on the impact of real interest rates on savings (Schmidt-Hebbel and others, 1992).
Public-Private Saving Offset
13. Under the Ricardian equivalence hypothesis, public and private savings are perfect substitutes. Any change in public savings is offset by private savings as it will be accompanied by a change in future taxation; public saving will thus not affect national saving (Barro, 1974). Empirical evidence on the private saving offset to government saving is decidedly mixed with studies generally finding limited evidence of a full offset. This may be because of liquidity constraints faced by the private sector, or because of the differential effects of different types of government expenditure and revenue on private savings. In particular, if government investment is viewed as productive, and not expected to require tax increases in the future, it may not generate a response by the private sector.
Other Factors
14. Several other macroeconomic and structural factors could also potentially affect the private saving behavior:
Financial development could lower the saving rate by increasing private sector’s access to credit. At the same time, it could also raise private savings by providing more opportunities for saving. Empirical evidence generally supports a negative relationship between financial liberalization (access to foreign savings) or financial development (proxied by domestic credit to GDP ratio) and private (or national) savings.
Inflation is another factor that may affect saving through several channels. In the life-cycle model, the impact of inflation on saving stems through its effect on the real interest rate (i.e., real returns to saving), but inflation could also impact real wealth (if consumers want to maintain a certain level of wealth relative to income, saving will rise with inflation). Moreover, by increasing uncertainty about future income stream, inflation could lead to higher savings on precautionary grounds as well.
Terms of trade improvement could increase savings (through the Harberger-Laursen-Metzler effect); though recent literature argues that the impact may depend on whether the terms of trade change is transitory or permanent. A transitory change in income should increase savings, while permanent shocks to the terms of trade would have ambiguous effects that should be small in magnitude. Cross-country evidence generally supports the positive association between terms of trade changes and the saving rate.
Level of per capita income could be another important factor influencing savings. At subsistence levels, the potential for savings is limited, a rise in per capita income therefore may lead to higher savings. Existing studies generally find strong evidence that rising income levels that expand the savings base are associated with private savings.
Total wealth may also be a driver of private savings. While the theoretical prediction under the life cycle model is straightforward—that is, by reducing dependence on current income, higher wealth allows higher consumption (and lower saving)—the empirical evidence is less clear. While several studies find a statistically significant effect of changes in wealth (proxied by changes in house prices given that housing wealth tends to be the dominant form of household wealth) on private saving in advanced countries (e.g., Muellbauer and Murphy, 1997; Benjamin and others, 2004; Case and others, 2005), the association between private residential property prices and the private saving rate is not documented to be statistically strong for some Asian countries (Phang, 2002; IMF, 2006). Given the unavailability of data on house prices for Mauritius, we are unable to test the importance of this channel in our analysis.
Empirical Model
15. Drawing on the literature outlined above, we empirically examine the drivers of private savings in Mauritius by estimating the following equation:
where St is private saving in percent of GDP in year t; St-1 is lagged private saving in percent of GDP to capture any persistence in saving behavior; D includes demographic variables such as the share of elderly population in total population and (20-year ahead) projected elderly age dependency ratio; X reflects different macroeconomic variables that may influence private saving such as public saving (in percent of GDP), real income growth, returns to saving (proxied by the deposit rate), the inflation rate, change in the terms of trade, and financial sector development (proxied by domestic private sector credit in percent of GDP); and ε is the random error term.3 We estimate eq. (1) using ordinary least squares (OLS) with robust standard errors, as well as with the Prais-Winsten generalized least squares method to allow for possible first-order serial correlation in the error term.
16. To benchmark Mauritius’ private saving performance given its characteristics, we also estimate the private saving function for a large panel of emerging market and developing countries. To compare the drivers of private savings in Mauritius with those of other countries, and to benchmark its saving performance given its economic fundamentals and demographic profile, we estimate the following equation for a panel of 110 EMDEs using data for 1980–2017:
where Sit is private saving in percent of GDP in country i in year t; Sit-1 is lagged private saving to GDP; D and X are matrices including the demographic and macroeconomic variables indicated above, respectively; ω reflect the time-invariant country-specific factors, and µ is the random error term. We estimate eq. (2) using OLS (with standard errors clustered by country) and the Prais-Winsten method.4
C. Estimation Results
Country-Specific Function
17. The estimation results of equation (1) suggest that the deposit rate and income growth are key drivers of private savings in Mauritius. Controlling for other relevant factors, an increase in the deposit rate by 100 basis points is strongly associated with an increase in private savings by about one percent of GDP (Table 1, cols. [1]-[8]). In addition, higher real GDP growth is also statistically significantly associated with higher savings, suggesting that much of the income gains are perceived to be temporary by the private sector (cols. [5]-[8]).
18. The private saving behavior in Mauritius is highly persistent, but there is no evidence of a private-public savings trade-off. The coefficient on the public saving rate is negative but mostly statistically insignificant, suggesting that the private sector does not strongly offset lower public savings (and vice versa). There is, however, strong evidence of persistence in private saving behavior—the coefficient on the lagged private saving rate is highly statistically significant in all specifications, implying a half-life of deviation of about 2–3 years.
19. Private savings do not appear to respond strongly to demographic trends. The association between private savings and the demographic variables (the share of elderly population and the projected elderly population ratio) is statistically insignificant, suggesting that the private sector remains oblivious to the changing demographic profile of the country, and the sharply rising old-age dependency ratio.5 Including other variables to capture the demographics trends such as population growth, the working-age population ratio, and the 10-year ahead projected old-age dependency ratio, we do not find their coefficients to be statistically significant either. The association of the other macroeconomic variables such as terms of trade change, credit to GDP ratio, and inflation with the private saving rate is also statistically insignificant.
Mauritius: Private Saving Function, 1980–2017
Mauritius: Private Saving Function, 1980–2017
| Ordinary Least Squares | Prais-Winsten | |||||||
|---|---|---|---|---|---|---|---|---|
| (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | |
| Private saving/GDP (lagged) | 0.707*** (0.091) | 0.701*** (0.088) | 0.696*** (0.094) | 0.693*** (0.103) | 0.836*** (0.062) | 0.828*** (0.067) | 0.830*** (0.066) | 0.829*** (0.073) |
| Public saving/GDP | -0.596 (0.436) | -0.630 (0.419) | -0.494 (0.498) | -0.531 (0.566) | -0.690** (0.298) | -0.679** (0.303) | -0.406 (0.317) | -0.430 (0.396) |
| Real GDP growth | 0.508 (0.409) | 0.434 (0.457) | 0.375 (0.485) | 0.384 (0.488) | 0.858*** (0.282) | 0.780*** (0.256) | 0.766*** (0.229) | 0.772*** (0.228) |
| Deposit rate | 1.149* (0.661) | 1.285* (0.636) | 1.289* (0.660) | 1.303* (0.710) | 0.923** (0.384) | 1.074** (0.465) | 1.028** (0.451) | 1.034** (0.479) |
| Inflation | -0.324 (0.285) | -0.350 (0.281) | -0.346 (0.288) | -0.195 (0.189) | -0.221 (0.168) | -0.217 (0.168) | ||
| Terms of trade change | -0.051 (0.068) | -0.047 (0.068) | -0.114* (0.066) | -0.110 (0.068) | ||||
| Private credit/GDP | 0.038 (0.185) | 0.021 (0.168) | ||||||
| Old-age population ratio | 1.699 (1.468) | 1.553 (1.457) | 1.619 (1.495) | 1.659 (1.594) | 1.388 (0.851) | 1.337 (0.880) | 1.552* (0.801) | 1.572* (0.872) |
| Proj. old-age dependency ratio | -0.182 (0.316) | -0.204 (0.341) | -0.223 (0.356) | -0.361 (0.848) | -0.149 (0.204) | -0.155 (0.216) | -0.211 (0.209) | -0.287 (0.696) |
| Observations | 37 | 37 | 37 | 37 | 37 | 37 | 37 | 37 |
| Adjusted R2 | 0.546 | 0.559 | 0.549 | 0.532 | 0.832 | 0.830 | 0.861 | 0.855 |
Mauritius: Private Saving Function, 1980–2017
| Ordinary Least Squares | Prais-Winsten | |||||||
|---|---|---|---|---|---|---|---|---|
| (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | |
| Private saving/GDP (lagged) | 0.707*** (0.091) | 0.701*** (0.088) | 0.696*** (0.094) | 0.693*** (0.103) | 0.836*** (0.062) | 0.828*** (0.067) | 0.830*** (0.066) | 0.829*** (0.073) |
| Public saving/GDP | -0.596 (0.436) | -0.630 (0.419) | -0.494 (0.498) | -0.531 (0.566) | -0.690** (0.298) | -0.679** (0.303) | -0.406 (0.317) | -0.430 (0.396) |
| Real GDP growth | 0.508 (0.409) | 0.434 (0.457) | 0.375 (0.485) | 0.384 (0.488) | 0.858*** (0.282) | 0.780*** (0.256) | 0.766*** (0.229) | 0.772*** (0.228) |
| Deposit rate | 1.149* (0.661) | 1.285* (0.636) | 1.289* (0.660) | 1.303* (0.710) | 0.923** (0.384) | 1.074** (0.465) | 1.028** (0.451) | 1.034** (0.479) |
| Inflation | -0.324 (0.285) | -0.350 (0.281) | -0.346 (0.288) | -0.195 (0.189) | -0.221 (0.168) | -0.217 (0.168) | ||
| Terms of trade change | -0.051 (0.068) | -0.047 (0.068) | -0.114* (0.066) | -0.110 (0.068) | ||||
| Private credit/GDP | 0.038 (0.185) | 0.021 (0.168) | ||||||
| Old-age population ratio | 1.699 (1.468) | 1.553 (1.457) | 1.619 (1.495) | 1.659 (1.594) | 1.388 (0.851) | 1.337 (0.880) | 1.552* (0.801) | 1.572* (0.872) |
| Proj. old-age dependency ratio | -0.182 (0.316) | -0.204 (0.341) | -0.223 (0.356) | -0.361 (0.848) | -0.149 (0.204) | -0.155 (0.216) | -0.211 (0.209) | -0.287 (0.696) |
| Observations | 37 | 37 | 37 | 37 | 37 | 37 | 37 | 37 |
| Adjusted R2 | 0.546 | 0.559 | 0.549 | 0.532 | 0.832 | 0.830 | 0.861 | 0.855 |
Panel Data Analysis
20. In other emerging market and developing countries, economic and demographic factors play an important role in determining private savings. The estimation results for equation (2) suggest that, consistent with the life-cycle hypothesis, a higher share of elderly population is associated with a lower private saving rate (although the coefficient is not statistically significant when country-fixed effects are included in the model), while a higher projected old-age dependency ratio implies significantly more savings (Table 2). On average, a one percentage point increase in the projected future age dependency ratio raises the saving rate by about 0.2–0.3 percentage points. Higher real GDP growth and better terms of trade are also strongly positively associated with the private saving rate, with a one percentage point increase in the economic growth rate, on average, implying an increase in savings of about 0.1–0.2 percent of GDP, while a 10 percent improvement in the terms of trade increases the saving rate by about 0.5 percent of GDP.
21. The results suggest a partial but imperfect private sector offset to public savings. The coefficient on the public saving rate is negative and statistically significant (at the one percent level), but formal tests reject the Ricardian Equivalence hypothesis. Across specifications, a one percentage point rise in the public saving rate implies a reduction in private savings by about 0.3–0.4 percent of GDP. Among other factors, there is no strong evidence of a statistically significant relationship between private savings and the deposit rate, inflation, and financial development in the panel estimations, though the coefficient on the autoregressive term is significantly positive, implying persistence in the private saving behavior.6
Mauritius: Actual and Predicted Private Saving
(In Percent of GDP)
Citation: IMF Staff Country Reports 2019, 109; 10.5089/9781498311991.002.A003
Source: IMF, World Economic Outlook, and IMF staff calculations.Mauritius: Actual and Predicted Private Saving
(In Percent of GDP)
Citation: IMF Staff Country Reports 2019, 109; 10.5089/9781498311991.002.A003
Source: IMF, World Economic Outlook, and IMF staff calculations.Mauritius: Actual and Predicted Private Saving
(In Percent of GDP)
Citation: IMF Staff Country Reports 2019, 109; 10.5089/9781498311991.002.A003
Source: IMF, World Economic Outlook, and IMF staff calculations.22. Given the economic and demographic characteristics of Mauritius, its private saving rate is about 3 percent of GDP below potential. Benchmarking Mauritius’ private saving rate using the estimates obtained from the panel regressions, the actual saving rate in recent years turns out to be about 3 percent of GDP lower than that predicted by the model. This is in contrast to the 1980s and 1990s, as well as the first half of the 2000s, when the actual private saving rate was, on average, higher relative to domestic fundamentals.
Mauritius: Private Saving Function in Emerging Market and Developing Countries, 1980–2017
Mauritius: Private Saving Function in Emerging Market and Developing Countries, 1980–2017
| Ordinary Least Squares | Prais-Winsten | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (1) | (2) | (3) | (4) | (5) | (6) | U) | (8) | (9) | (10) | |
| Private saving (lagged) | 0.817*** (0.020) | 0.618*** (0.034) | 0.612*** (0.038) | 0.600*** (0.032) | 0.615*** (0.030) | 0.861*** (0.016) | 0.625*** (0.034) | 0.594*** (0.039) | 0.589*** (0.032) | 0.596*** (0.030) |
| Public saving/GDP | -0.139*** (0.026) | -0.343*** (0.044) | -0.348*** (0.041) | -0.343*** (0.040) | -0.335*** (0.039) | -0.102*** (0.021) | -0.336*** (0.043) | -0.362*** (0.042) | -0.352*** (0.041) | -0.350*** (0.040) |
| Real GDP growth | 0.092*** (0.029) | 0.172*** (0.030) | 0.195*** (0.030) | 0.169*** (0.032) | 0.166*** (0.031) | 0.080*** (0.027) | 0.171*** (0.030) | 0.197*** (0.030) | 0.171*** (0.032) | 0.169*** (0.032) |
| Deposit rate | -0.008 (0.006) | -0.012** (0.006) | -0.008 (0.010) | -0.011 (0.010) | -0.007 (0.010) | -0.007 (0.005) | -0.012** (0.006) | -0.008 (0.010) | -0.011 (0.010) | -0.007 (0.011) |
| Inflation | 0.002 (0.007) | 0.007 (0.007) | 0.005 (0.008) | 0.003 (0.008) | 0.007 (0.007) | 0.006 (0.008) | ||||
| Terms of trade change | 0.050*** (0.012) | 0.052*** (0.013) | 0.050*** (0.012) | 0.052*** (0.013) | ||||||
| Private credit/GDP | -0.008 (0.014) | -0.009 (0.014) | ||||||||
| Old-age population ratio | -0.307*** (0.100) | -0.238 (0.346) | -0.212 (0.379) | -0.303 (0.380) | -0.343 (0.378) | -0.231*** (0.078) | -0.234 (0.341) | -0.220 (0.395) | -0.310 (0.389) | -0.358 (0.394) |
| Proj. old-age dependency ratio | 0.139*** (0.041) | 0.172* (0.094) | 0.191* (0.103) | 0.216** (0.104) | 0.272** (0.117) | 0.107*** (0.033) | 0.168* (0.093) | 0.200* (0.107) | 0.222** (0.107) | 0.287** (0.123) |
| Country-fixed effects | No | Yes | Yes | Yes | Yes | No | Yes | Yes | Yes | Yes |
| Observations | 2,557 | 2,557 | 2,357 | 2,240 | 2,159 | 2,557 | 2,557 | 2,357 | 2,240 | 2,159 |
| Countries | 110 | 110 | 110 | 107 | 107 | 110 | 110 | 110 | 107 | 107 |
| Adjusted R2 | 0.731 | 0.763 | 0.774 | 0.783 | 0.795 | 0.795 | 0.768 | 0.762 | 0.776 | 0.783 |
Mauritius: Private Saving Function in Emerging Market and Developing Countries, 1980–2017
| Ordinary Least Squares | Prais-Winsten | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (1) | (2) | (3) | (4) | (5) | (6) | U) | (8) | (9) | (10) | |
| Private saving (lagged) | 0.817*** (0.020) | 0.618*** (0.034) | 0.612*** (0.038) | 0.600*** (0.032) | 0.615*** (0.030) | 0.861*** (0.016) | 0.625*** (0.034) | 0.594*** (0.039) | 0.589*** (0.032) | 0.596*** (0.030) |
| Public saving/GDP | -0.139*** (0.026) | -0.343*** (0.044) | -0.348*** (0.041) | -0.343*** (0.040) | -0.335*** (0.039) | -0.102*** (0.021) | -0.336*** (0.043) | -0.362*** (0.042) | -0.352*** (0.041) | -0.350*** (0.040) |
| Real GDP growth | 0.092*** (0.029) | 0.172*** (0.030) | 0.195*** (0.030) | 0.169*** (0.032) | 0.166*** (0.031) | 0.080*** (0.027) | 0.171*** (0.030) | 0.197*** (0.030) | 0.171*** (0.032) | 0.169*** (0.032) |
| Deposit rate | -0.008 (0.006) | -0.012** (0.006) | -0.008 (0.010) | -0.011 (0.010) | -0.007 (0.010) | -0.007 (0.005) | -0.012** (0.006) | -0.008 (0.010) | -0.011 (0.010) | -0.007 (0.011) |
| Inflation | 0.002 (0.007) | 0.007 (0.007) | 0.005 (0.008) | 0.003 (0.008) | 0.007 (0.007) | 0.006 (0.008) | ||||
| Terms of trade change | 0.050*** (0.012) | 0.052*** (0.013) | 0.050*** (0.012) | 0.052*** (0.013) | ||||||
| Private credit/GDP | -0.008 (0.014) | -0.009 (0.014) | ||||||||
| Old-age population ratio | -0.307*** (0.100) | -0.238 (0.346) | -0.212 (0.379) | -0.303 (0.380) | -0.343 (0.378) | -0.231*** (0.078) | -0.234 (0.341) | -0.220 (0.395) | -0.310 (0.389) | -0.358 (0.394) |
| Proj. old-age dependency ratio | 0.139*** (0.041) | 0.172* (0.094) | 0.191* (0.103) | 0.216** (0.104) | 0.272** (0.117) | 0.107*** (0.033) | 0.168* (0.093) | 0.200* (0.107) | 0.222** (0.107) | 0.287** (0.123) |
| Country-fixed effects | No | Yes | Yes | Yes | Yes | No | Yes | Yes | Yes | Yes |
| Observations | 2,557 | 2,557 | 2,357 | 2,240 | 2,159 | 2,557 | 2,557 | 2,357 | 2,240 | 2,159 |
| Countries | 110 | 110 | 110 | 107 | 107 | 110 | 110 | 110 | 107 | 107 |
| Adjusted R2 | 0.731 | 0.763 | 0.774 | 0.783 | 0.795 | 0.795 | 0.768 | 0.762 | 0.776 | 0.783 |
D. Conclusion
23. The private saving rate in Mauritius has declined over the last decade, falling below its peer countries. The decline has contributed to a lower national saving rate and an increase in the current account deficit. Empirical analysis shows that private savings in Mauritius respond to the deposit rate as well as to economic growth, while the effect of demographic factors is statistically mute. Though, on average, there is no strong evidence of private savings offsetting public (dis)savings, the private saving behavior in Mauritius exhibits high persistence.
24. Estimates show that the private saving rate in Mauritius is about 3 percent of GDP lower given its economic and demographic characteristics. While the private saving rate has been higher than potential for the most part of the sample, it has been consistently below potential by about 3 percent of GDP over the last decade. While economic growth would boost private savings, a rapidly rising old-age dependency ratio requires a higher level of savings to alleviate fiscal pressures and avoid abrupt policy adjustments in the future. In this regard, efforts should focus on generating greater public awareness and encouraging private savings—e.g., through old-age related saving schemes. Better targeting of social benefits and broader pension reforms (including increasing the contribution rates of employees and introducing mandatory contributions for the self-employed) could also help to boost savings.
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Prepared by Raveesha Gupta and Mahvash S. Qureshi.
The saving behavior of pensions plans enhances the empirical importance of the income effect on private saving. For defined benefit plans, for example, higher interest rates increase the income available to pay pensions, allowing lower contributions (Bernheim and Shoven, 1988).
In addition, equation (1) also includes a binary variable equal to one for the global financial crisis years (and zero otherwise) to capture the extraordinary size of the shock and its potential impact on the saving rate.
The fixed effects estimation of models with lagged dependent variable can produce biased estimates (the so-called “Nickell bias”). The bias (equal to 1/T) is serious for short panels, but disappears as T→∞ (for our sample, T=40; so the fixed effects estimator is likely to perform at least as well as many alternatives; Judson and Owen, 1999). To check the robustness of our results, however, we also apply the System GMM estimator for dynamic panels and find the results to be generally robust.
While it could be argued that the private sector may not be responding to the increasing longevity and rising future elderly dependency ratio as it expects public saving to increase (to provide old-age benefits), the lack of private-public savings trade-off does not support this argument. Moreover, estimating the national savings function, the results show no statistically strong association between the demographic variables and the old-age dependency ratio, implying that overall savings are not responding much to the changing demographic profile.
Restricting the sample to sub-Saharan African countries only, the results show that, on average, private savings respond strongly to several economic factors (the public saving rate, real GDP growth, change in terms of trade, and inflation), but not to demographic variables.
