Domestic Savings and Financial Sector Development in Sri Lanka

Abstract

Economic growth is an important macroeconomic objective in every economy. It is a general condition even in Sri Lanka. In order to maintain a high economic growth, it is important to keep up the level of investments. If Sri Lanka could able to fulfill the needs of total investment resources domestically, it will result in sustainable economic growth. Therefore, it is necessary to develop the financial resources domestically. In order to do that, it is important the development of domestic savings. There are three sectors that contribute to the Sri Lankan domestic savings which is, Government, Firms and Household sector. Among these three sectors household sector has emphasized because of the highest contribution. Therefore, whenever put an effort to develop the domestic savings of Sri Lanka, it is important to pay special attention to the household sector. Before 1987 the government sector has contributed to the domestic savings in a low degree. Furthermore, it has shown a minus value after 1987. Therefore, in present domestic savings are totally depend on the private savings. There are several factors that effect on private savings has identified in savings theory and empirical studies regarding savings. Among those the development in finance sector has been identified as the most crucial factor. In Sri Lanka the development in finance sector after the 1977 caused to the development in financial intermediating activities too. The competition and the development in banking and non- banking sector caused to generate the competitive interest rates. Therefore, it has helped to promote the savings and these situations had an effect on domestic savings. In this case, this study is an effort to identify the relationship between domestic savings and financial sector development in Sri Lanka. In fact, when analyzing the data of the period 1977- 2015 has confirmed that there’s a positive relationship between domestic savings and the financial sector development in Sri Lanka.