Saving-investment nexus and the current account balance in Tanzania

Abstract

The saving–investment nexus and its linkage with the current account remains one of the subjects of considerable interest in the field of international economics and finance. Movements in the current account offer information about the relations and prospects of all the economic agents in an open economy and imitate the position of overall macroeconomic policies. The extent to which the higher rate of savings in a nation is transformed into higher investment rely upon a well-connected financial structure. This study investigates the saving–investment nexus and its effect on the current account balance for Tanzania using annual time series data for the period 1980-2020. The study adopts the Autoregressive distributed lag (ARDL) approach since the series had mixed order of integration. In the short run, the results suggest a negative and statistically significant relationship between saving to GDP with the Current account balance to GDP, while Gross investment to GDP has a positive statistically significant relationship with Current account balance to GDP. In the long run, the results indicate that saving to GDP has a positive and a statistically significant effect on current account balance to GDP in Tanzania, while Gross Domestic Investment has a negative and statistically significant effect on the current account to GDP in Tanzania. The study recommends increasing income generating activities that will accelerate savings in private as well as government, in addition incentive policy on savings should be of emphasize to encourage savings rate in both short run and long run, also the study recommends the provision of financial literacy to enhance saving knowledge and increase savings rate to GDP that affect positively the current account balance. On the other hand, the government is advised to improve investment opportunities in the short run and encourage saving to finance long run project investment through implementation of industrialization and a competitive economy strategy embraced in the National Development Plan III. The paper observed a high magnitude of investments below savings therefore the government should look at the way it finances her investment in order to alleviate the current account deficit. Finally, the government should promote savings by building a conducive and competitive environment for financial sector development that will accelerate savings rates and improve financial inclusion.