Expanding Credit, Shrinking Savings: IMF Sounds Alarm for Emerging Markets

A new study jointly produced by the International Monetary Fund's Research Department and the Institute for Capacity Development has revealed how expanding credit and deepening financial systems are changing the saving behavior of households across emerging markets. The working paper, "Private Saving and Credit in Emerging Markets: Cross-Country Evidence and the Role of Financial Depth," uses data from 60 economies over nearly three decades to examine how financial inclusion and credit growth are influencing domestic savings. The research arrives as many developing nations face the dual challenge of rising household debt and weakening saving buffers amid global uncertainty.

Credit Access Expands, Savings Shrink

The IMF study finds that as private credit access increases, household saving tends to decline. Using data from 1995 to 2022, the researchers estimate that a 10-percentage-point rise in private credit to GDP reduces the private saving rate by about 0.6 to 0.8 percentage points. The trend is strongest in middle-income economies where financial markets have matured and banks offer a wide range of consumer credit, mortgages, and business loans. This financial deepening helps households smooth consumption and invest more confidently, but it also erodes the domestic savings base that sustains long-term investment and economic resilience. The authors note that this pattern mirrors the experience of advanced economies before the 2008 financial crisis.

When Deep Finance Becomes a Double-Edged Sword

To establish causality, the paper employs instrumental variable techniques and distinguishes between household and corporate credit. The results show that the fall in saving rates is mainly driven by household borrowing, while corporate credit has a smaller effect. The findings are particularly strong in countries with advanced financial systems where regulatory oversight and access to credit are broad. In such environments, borrowing becomes a tool for consumption smoothing rather than precautionary saving. By contrast, in less developed systems where credit remains limited, households still rely on saving to cope with uncertainty. A graph in the paper illustrates this vividly: nations like Chile, Malaysia, and South Africa show steep declines in saving rates as credit expands, while countries such as Nigeria and Pakistan remain relatively unaffected.

Demographics, Pensions, and the Dissaving Trend

The paper also highlights how demographic shifts amplify these effects. As populations age, saving naturally decreases, but in countries with growing access to credit, the drop becomes sharper. Older households increasingly rely on loans for consumption or to supplement retirement income. In East Asian and Eastern European economies with aging populations and extensive social safety nets, precautionary saving needs are already low; easy credit further accelerates the move toward dissaving. Pension reforms and welfare programs, while socially beneficial, have indirectly contributed to this trend by reducing the incentive to build personal savings. The study suggests that policymakers should account for these structural changes when assessing financial stability risks.

Institutions Matter in Preventing Credit Overreach

A central insight from the IMF's analysis is the crucial role of institutional quality. Countries that have reformed their financial systems, strengthening supervision, improving credit reporting, and promoting responsible lending, tend to avoid the destabilizing effects of rapid credit growth. In contrast, economies with weak oversight often experience unsustainable credit booms, asset bubbles, and heightened financial vulnerability. The paper argues that financial deepening without matching institutional strength leads to "premature financial development," where expansion of credit outpaces households' financial literacy and regulatory capacity. Policymakers are urged to ensure that financial inclusion goes hand in hand with safeguards that sustain savings and reduce debt distress.

Balancing Inclusion and Stability

The IMF researchers caution that a simultaneous rise in credit and fall in private saving could make emerging markets more dependent on external financing, leaving them exposed to global shocks. They recommend reinforcing macroprudential regulations, encouraging long-term saving through pension and insurance markets, and sequencing reforms to match financial expansion with institutional maturity. Rapid credit growth can fuel consumption and short-term growth, but it risks undermining the very foundation of investment-led development. The report concludes that while financial deepening has brought millions into the formal economy and expanded opportunity, it also carries hidden risks. "The challenge," the authors write, "is to make finance not just more inclusive, but also more sustainable."