Saving in Transition Economies: The Summary Report

September 1995
Savings in transition economies have declined since independence, but something else has happened, too: Financial assets have shifted from bank deposits to alternative financial instruments, including foreign currency, trust company shares, and private loans. Government are not typically prepared to borrow savings from these new instruments since they are denominated in foreign currency or are offered only at positive real interest rates. That attitude must change if governments are to make needed investments in infrastructure and to avoid creating inflationary credit.
The stimulation of private saving is essential to both stabilization and structural adjustment in the transition economies.
Private saving in these countries has declined sharply since independence, and this decline has been a factor in the onset of extreme inflation because governments have resorted to an inflation tax to finance deficit spending.
Conway examines evidence on spending in Belarus, Georgia, Kazakhstan, and Ukraine. He examines decisions about whether to save, and in which specific financial or real instruments. He summarizes the evolution of financial sectors in these countries to provide a history of the success or failure of financial institutions to intermediate between private savers and the government as borrower.
He concludes that private saving has indeed declined since independence, but less than is indicated by banking-system statistics. Concurrent with this downturn has been a shifting of financial assets from bank deposits to alternative financial instruments, including foreign currency, trust company shares, and private loans. The financial sector has reacted slowly to this change, but the most successful commercial banks have recognized the change in demand for financial instruments and have accommodated the savers. The state commercial banks --- especially the successor to the Soviet Saving Bank --- have been slow to adjust to the new environment. As a result, the near-monopoly that bank once held on deposits has been rapidly eroded.
Government methods for mobilizing funds must change, contends Conway. Governments are not typically prepared to borrow savings from these new instruments, since they are denominated in foreign currency or are offered only at positive real interest rates. That attitude must change if governments are to make needed investments in infrastructure and to avoid creating inflationary credit.
This paper --a product of the Country Operations Division, Europe and Central Asia, Country Department IV -- is part of a larger effort in the region to analyze credit markets and savings in transition economies. The study was funded by the Bank's Research Support Budget under the research project Credit Markets and Savings Mobilization in Transition Economies (RPO 679-07).