DOMESTIC SAVINGS AND ECONOMIC GROWTH IN NIGERIA 1986-2017

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

The fast declining trend of domestic savings among developing countries, Nigeria is inclusive has caught attention of policy makers, development economists and researchers, knowing full well that savings play vital role in promoting and maintaining economic growth of any given economy (Eze & Okpala, 2014). Overtime, the development economists have appreciated the role executed by domestic saving mobilization in sustaining the relationship between saving and economic growth in both the developed and developing countries. Agheli et al. (2011) cited in Eze & Okpala (2014) unvieled that saving rates and human capital investment indeed, have significant positive impact on growth of economy of a country. This implies that close relationship exists among saving, investment and economic growth in a development process. However, the poor economic growth performance existing in the developing economies, including Nigeria is directly linked to poor saving and investment culture in the developing countries. According to Solow (1956) in neoclassical growth model argued that saving has positive relationship with economic growth. In that, the model postulated that higher saving results to higher investment, and hence, improves economic growth. Musa et al. (2014) explained that savings create capital formation, which is very critical factor for economic growth and development of countries that are able to accumulate higher level of capital in their economies. The effects of capital formation on investment and economic growth are largely depended on aggregate demand in the economy. Increase in investment demand leads to proportional increase in the production of investment goods, which in turn results to economic growth and development of countries. Thus, the productive capacity of the economy expands as capital formation increases through savings mobilization of commercial banks. Therefore, investment in new plants and machinery helps to facilitate productivity growth and brings about new technical innovation and technology, and increases specialization that propels economic growth of countries. Ayanwu et al. (2015) postulated that capital formation involves increase in the volume of savings mobilization through commercial banks and investment. Both private and public sectors accumulates capital for investment through domestic savings mobilization in order to promote output growth and standard of living of citizen in a country. The more savings are accumulated by economic agents (private and public), the higher investment and economic growth are achieved in the economy. Furthermore, Lira & Kalebe (2015) stated that economic growth is a vital factor that leads to country’s success. Every nation in the world strives to acquire improved economic growth through higher savings.  However, low saving rates have been identified as the major factor that limits the attainment of higher national output growth, and living standard of citizens in most countries, especially in the developing countries like Nigeria. In classical economist’s theory, higher saving results to higher savings, employment opportunities and long run economic growth. Hence, understanding the nexus among saving and economic growth in an economy is needed to achieve some macroeconomic objectives that would help to create conducive environment required for sustainable economic growth and improve living standard of citizens. Solow (1956) revealed that saving is an important factor necessary for growth and development of any economy. It leads to full utilization of nation’s scarce resources in an efficient manner, and promotes national output level, employment and national income. It also helps to solve inflation problem, balance of payments deficit problem, high unemployment, national debt burden, income inequality and high poverty rate in many economies of the world; in Nigeria however, it is not clear whether savings actually have significant effect on growth of the country, as these ugly situation appeared to persistently exist in the economy. Nigeria is situated in West Africa in the continent of Africa and belongs to a member of African Union (AU) and organization of petroleum exporting countries (OPEC) by the virtue of its discovery of oil in commercial quantities and its attendant oil boom in earlier 2015s. Since then, the country has operated mono-product economy without diversification, with crude oil being the major foreign exporting product in its engagement in international trading. This new development destroyed economic structure of the Nigerian economy, especially when agriculture that was the economic base of the economy neglected by government toward developing dependence on oil sector. Hence, this study examines domestic savings and economic growth in Nigeria 1986-2017.

STATEMENT OF PROBLEM

The economy suffered external shocks and vulnerability due to instability of oil price in the world market; the financial sector in response collapsed and some banks closed down leading to low savings and economic growth; exchange rate depreciated against US dollar, debt profile rose sharply, and national income decreases as well. Thus, it should be noted here that the slow rate of growth in developing countries today, are largely linked to low level of national savings, which has constrained its capacity to invest in the productive sectors of the economy due to low capital formation. The implication therefore, is that the low saving rate in the developing countries has resulted in lower rate of growth and development, as against the developed countries that accumulate higher savings and attained higher economic growth and development (Dhanya, 2015).  It is against this backdrop, this study examines domestic savings and economic growth in Nigeria 1986-2017

AIMS OF THE STUDY

The major aim of the study is to examine domestic savings and economic growth in Nigeria 1986-2017. Other specific objectives of the study include;

1. To examine the components of domestic savings in Nigeria.
2. To examine the sources of savings in Nigeria.
3. To examine the impact of domestic savings on economic growth in Nigeria.
4. To examine the determinants of domestic savings in Nigeria.
5. To examine the relationship between domestic savings and economic growth in Nigeria.
6. To examine the macroeconomic determinants of economic growth.

RESEARCH QUESTIONS

1. What are the components of domestic savings in Nigeria?
2. What are the sources of savings in Nigeria?
3.  What is the impact of domestic savings on economic growth in Nigeria?
4. What are the determinants of domestic savings in Nigeria?
5. What is the relationship between domestic savings and economic growth in Nigeria?
6. What are the macroeconomic determinants of economic growth?

RESEARCH HYPOTHESES

Hypothesis 1

1. : There are is no significant impact of domestic savings on economic growth in Nigeria.
2. : There is a significant impact of domestic savings on economic growth in Nigeria.

Hypothesis 2

H0: There is no significant relationship between domestic savings and economic growth in Nigeria.

H1: There is a significant relationship between domestic savings and economic growth in Nigeria.

SIGNIFICANCE OF THE STUDY

This study will be significant to policy makers to draw conclusion on where to strengthen the effort of investors. It will form a measuring tool to access the efforts of the financial sector as well as government agencies in managing polices that affect savings positive in recent years. It will also act as a source of information on various factors that can determine national savings. It will also help the students and researchers to do further work related to the research project in creating a fountain of knowledge. This study will extend the frontiers of the existing literature by emphasizing the roles of savings on economic growth.

SCOPE AND LIMITATION OF THE STUDY

The study is restricted to domestic savings and economic growth in Nigeria 1986-2017.

LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

OPERATIONAL DEFINITION OF TERMS

Savings: according to Keynesian economics, are what a person has left over when the cost of his or her consumer expenditure is subtracted from the amount of disposable income earned in a given period of time. For those who are financially prudent, the amount of money left over after personal expenses have been met can be positive; for those who tend to rely on credit and loans to make ends meet, there is no money left for savings. Savings can be used to increase income through investing in different investment vehicles.

Economic growth:  is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.