1.1 Background of the Study
Economic growth is a fundamental requisite to economic development. This informs why in Nigeria growth continuous to dominate the main policy thrust of government’s development objectives. Essentially, economic growth is associated with policies aimed at transforming and restructuring the real economic sectors. Nevertheless, the lack of sufficient domestic resources, Savings and investment to support and sustained the sectors is a major impediment to economic development in the country because of the gap between savings and investment.
Savings represents that part of income that is not spent on current consumption, but when applied to capital investment, output increases (Olusoji, 2003). This output is increased by introducing new innovations in form of technology, which leads to a faster economic growth and development by creating the possibility of investing in a new plant that increases the productivity of the economy.
Savings provides developing countries (including Nigeria) with the much needed capital for investment which improved economic growth. Increase in savings leads to increase in capital formation and production activities that will lead to employment creation and reduce external borrowing of government. Low domestic saving rates may maintain low-growth levels because Harrod Domar model suggested that savings is an important factor for economic growth. Malunond (2007) asserts that depending on foreign sources to financed investment makes the country highly sensitive to external shocks.
Therefore, domestic savings will continue to be a priority as a source of investment financing in order to minimize vulnerability to international economic fluctuations. Many empirical studies have been carried out on the determinants of savings across the world. The reason has been that savings rate of many countries; particularly the less developed countries have been declining. In addition the role of investment (via Savings) in economic growth and development has induced many researchers to continuous to investigation on the factors that influence savings (Gobna and Nurudeen, 2009).
In Nigeria, according to World Bank national account data and OECD national account data file, gross domestic savings decrease continuously from 1981 to 1984 with an increased value of N15,572,590,000 and N13,008,490,000 respectively. As at 1989 to 1997 there was a continuous increase from N89,821,570,000 to N437,777,000,000 and alittle fluctuation between 1998 and 2001, while from 2002 to 2014 domestic savings increased from N1,109,720,000,000 to N19,562,000,000,000. In terms of the growth rate, national savings has being fluctuating (declining and increasing).
As capital formation through savings mobilization, is an important factor in economic growth, countries that are able to accumulate high level of capital, tend to achieve faster rates of economic growth and development (Utemadu, 2002).
Therefore, to finance adequate investment required for proper economic growth, every economy needs to generate sufficient savings or borrow from abroad. However, borrowing from abroad is not a proper strategy for economic growth and development, as it may not only have adverse effects on the balance of payments as these loans will have to be serviced in the future, but also carries a foreign exchange risk. Thus, domestic savings become necessary for economic growth because, they can provide the domestic resources that are needed to fund the investment effort of a country without flipside.
Consequently, financial intermediation is an important activity that helps to promote a more efficient and dynamic economy, by allowing the fund to be channelled from people who might not otherwise, invest in productive use; to people that will invest in productive ventures. Countries that save more tend to grow faster, provided that their financial system is deep (World Bank,1989). Increasing saving and ensuring that they are directed to productive investment are central to accelerating economic growth and development (United Nations, 2005). Higher saving leads to capital accumulation, which in turn leads to economic growth and development (Solow, 1956). Hence, the enormous importance of saving in the overall growth and development of the Nigerian economy cannot be over stressed. It is against this background that this research seeks to investigate the impact of domestic savings on the economic growth of Nigeria.
1.2 Statement of the Problem
The growth rate of Nigerian economy remains a challenging issue. It is because, domestic savings which serves as a tool for capital mobilization towards financing aggregate investment, needed for economic growth, is very low. Infact, low level of savings and high interest rate have been identified and highly conjectured to contribute to the declining level of investment that will promote growth in Nigeria, and other less developed countries (LDCs) in general. Thus, having observed the above impediments the need is felt to research on the impact of private domestic savings on Nigerian economy.
In Nigeria, Olusoji (2003) identified financial institutions such as deposit money banks as the main agents of savings mobilization. To effectively mobilize deposits, the deposit money banks should offer relatively high deposit rates while inflation rate should be relatively stable. Unfortunately, the deposit rates offered by banks in Nigeria have been generally low in the last five decades with an average of 9%; while inflation rate has been relatively high with an average of 19% in the last decade. Furthermore, a trend analysis of the ratio of total savings to GDP in Nigeria shows that the saving rate has been fluctuating over time. The savings/GDP ratio was 30%in 1981. It increased to 32.09% and 39.11% in 1990 and 2000, respectively. In 2005 and 2009, it declined to 18.03% and 11.83% respectively. In 2011, the savings/GDP ratio in Nigeria stood at26.08%, while from 2012 to 2015, it fluctuated at 33.41% 19.95%, 21.7% and 12.4% respectively (CIA World Factbook October 8, 2016) Clearly, the relatively poor rates at which domestic savings in Nigeria is growing is a source of worry to policy makers in Nigeria.
The strong positive correlation which exists between saving, investment and growth is well established in the literature. The dismal growth record in most African countries, relative to other regions of the world has been of concern to economists. This is because the growth rate registered in most African countries is often not commensurate with the level of investment. In Nigeria for instance, the economy witnessed tremendous growth in the 1970s and early 1980s as a result of the oil boom and this led to the investment boom especially in the public sector. However, with the collapse of the oil market in the 1980s, investment fell, thereby resulting in a fall in economic growth
It has been argued that savings affects investment, which in turn influences growth in output. The transformation of initial growth into sustained output expansion requires the accumulation of capital and its corresponding financing. An output expansion in turn sets in motion a self-reinforcing process by which the anticipated growth encourages investment, which supports growth, as well as financial development. It is certain that without a significant increase in the level of investment (public and private), no meaningful growth in output would be achieved. Indeed if private investment remains at the current low level, it will slow down potential growth and reduce long run level of per capita consumption and income, thereby leading to low savings.
In fact, low level of savings and high interest rate have been identified and highly conjectured to contribute to the declining level of investment that will promote growth in Nigeria (GDP), and other less developed countries (LDCs) in general.
Thus, having observed the above impediment the need is felt to research on the impact of domestic savings on Nigerian economy.
1.3 Research Questions
To serve as study guide, we provide the following lead questions for which this study seeks to provide the answers:
1.4 Objectives of the study
The general objective of this study is to examine the impact of domestic savings on Nigeria’s economic growth. The specific objective includes
1.5 Research Hypothesis
The working hypotheses of the study are stated as follows:
H0
: There is no long-run relationship existing between domestic savings and economic growth of Nigeria.H0
: ` Domestic savings does not significantly impact on the economic growth of Nigeria.H0
: There is no causal relationship between domestic savings and economic growth of Nigeria1.6 Significance of the Study
This research work will be beneficial to all and sundry in the following; To afford the opportunity for society government as well as school administrators, to access the viability of private domestic savings in Nigeria, To act as a source of information on various factors that can determine domestic savings, To also guide policy makers towards policy initiation, To also help students and researchers to do further work related to this research project.
1.7 Scope of the Study
This study covers the impact of private domestic saving savings on Nigerian’s economy within the period of 1980-2015. This period is chosen based on the available data, which would help us to determine the effectiveness of private domestic savings before and after SAP.