Vol. 7(10), pp. 213-221, October, 2015 DOI: 10.5897/JEIF2015.0708 Article Number: 304DDD255745 ISSN 2141-6672 Copyright © 2015 Author(s) retain the copyright of this article http://www.academicjournals.org/JEIF Journal of Economics and International Finance Full Length Research Paper Savings, investment and economic growth in Lesotho: An empirical analysis Lira P. Sekantsi 1* and Kalebe M. Kalebe 2 1 National Payment System, Central Bank of Lesotho, P.O. Box 1184, Maseru 100, Lesotho. 2 Department of Economics, National University of Lesotho, P.O. Roma 180, Maseru 100, Lesotho. Received 6 August, 2015; Accepted 6 October, 2015 This paper empirically examines the relationship among saving, investment and economic growth in Lesotho for the period 1970 to 2012, with a view to contributing to the body of literature on this topic and informing economic policy design in Lesotho. Using autoregressive distributed lag (ARDL) bounds testing approach to cointegration and vector error correction model (VECM) based Granger causality test; the paper finds the existence of cointegration among the variables and short-run causal flow from economic growth to saving. However, in the long-run, the paper provides evidence of Granger causality from saving to economic growth. Furthermore, the results indicate the existence of short-term and long-term Granger causality from saving to investment in addition to short-term and long-term causal flow from investment to economic growth. The findings not only suggest that saving precedes and drives short-term and long-term capital accumulation but also contributes to long-term economic growth in Lesotho. In addition, there is empirical evidence for investment-led growth. Therefore, increased capital accumulation is likely to contribute to enhancing sustainable economic growth. Key words: Savings, investment, economic growth, ARDL bound testing, Lesotho, Granger causality. INTRODUCTION Economic growth is a key indicator of societal progress. In this regard, countries around the globe strive to achieve higher economic growth in order to provide higher standard of living for their citizens. Nevertheless, low saving rates have been identified as one of the major growth-inhibiting factors among countries in the world, especially in developing countries such as Lesotho. This is because as postulated by the classical economists, increased saving is likely to lead to increased investment, which is a key to promoting long-run economic growth. Therefore, a sound understanding of the interaction among saving, investment and economic growth in a country’s economy is important for the achievement of macroeconomic policy conducive to sustainable economic growth and hence higher standard of living of citizens. There are numerous empirical studies in the literature that examine the direction of causality among saving, investment and economic growth. This is on account of the important policy implications that can be derived from this relationship regarding the course of action that can be done to accelerate economic growth since saving and *Corresponding author. E-mail: skantsy@hotmail.co.uk Authors agree that this article remain permanently open access under the terms of the Creative Commons Attribution License 4.0 International License