The Dynamic Effect of Financial Sector Development in Stimulating the Gross National Savings of Djibouti

Abstract Savings are important determinants of wealth. At the macroeconomic level, governments attach importance to saving money in order to make new investments, produce new capital goods, and sustain economic growth. However, due to the high level of internal and external debt in Djibouti, it is nearly impossible for the country to achieve domestic savings. Hereby, the major aim of this study is to examine the dynamic effect of financial sector development in stimulating the gross national saving of Djibouti from the period 1987 to 2021. The paper considered numerous indicators as measurements of the financial sector development including FDI inflows, domestic loans to the private sector, central bank assets to GDP, and money supply. To proceed with the analysis, Non-Linear Autoregressive Distributed Lag (NARDL) was performed and according to the model, the findings highlighted that the Djiboutian financial industry is still in its early development and has not yet made a substantial contribution to boosting the country’s national savings. Nevertheless, the gross national saving of Djibouti was still positively prompted by significant components of the financial sector development, such as the positive shocks of FDI inflows and both the negative shocks of central bank assets and money supply. While both the positive and negative shocks of the credit offered to the private sector were uncovered to diminish the national savings in the long run. In conclusion, the current research will help governments and policymakers understand the best ways to use the financial sector to raise gross national savings. It will also present evidence of how to implement long-term initiatives that can lower public debt and encourage savings. Not to mention, the article provides information on the value of long-term investments.