National Savings, Capital Formation and Its Impact on the Economic Growth in Nigeria
Chapter One
Objectives of the Study:
The general objective of this study; is to examine the effects of national savings and capital formation on economic growth in Nigeria, but specifically;
- To determine the effect of national savings on GDP in Nigeria
- To determine the effect of capital formation on the GDP in Nigeria.
- To analyze the long-term relationship between national savings and GDP
CHAPTER TWO
RELATED LITERATURE
Conceptual review
Savings
Ayanwu & Oaikhenan (1995) defined savings as the amount of income per capital time period that is not consumed by economic units. For the household, it presented that part of disposable income not spend on domestically produced or imported consumption goods and services. For the firm, it represents undistributed business profits. Savings is a flow variable being measure overtime. Concisely, savings may be defined as after tax income not spent. It may rightly be referred to or presumed “deferred consumption”, being income left over for the future consumption on capital investment or for precautionary and speculative motives. Succinctly, savings is summed as “disposable income less consumption”. In developing countries and Nigeria in particular, private savings constitutes the main source of capital accumulation for investment purposes.
Nkah (1997), savings is seen as the amount of income per time that is not consumed by economic units. Accordingly, Samuelson at el (1998) defined savings as income minus consumption following from the above, savings can be made by individuals (personal or private saving) or by corporate organizations such as firms (corporate savings or retained savings). Personal savings is that part of disposable income that is not consumed, while corporate savings is that part of the firm‟s profit that is not distributed as dividends to shareholders. Therefore, for a country, the total supply of available savings is simply the sum of domestic savings and foreign savings. Smith (1976) recognized the importance of savings when he observed that capital is increased by parsimony and diminished by prodigality and misconduct. Prior to 1936, the classical economists propounded their theory on the savings, and asserted that a negative relationship existed between savings and interest rates is the equilibrating force between savings and investments and the decision to save or invest, depend solely on the rate of interest. Thus, at any particular level of income, the amount saved will increase with any rise in the rate of interest.
Following Mckinnon (1973) and Shaw (1973) argued that for the typical developing country, the net impact of a change in real interest on saving is likely to be positive. This is because, in the typical developing economy where there is no robust market for stocks and bonds, cash balances and quasi-monetary assets usually account for a greater proportion of household saving compared to that in developed countries. In addition, in an environment where self-financing and bank loans constitute the major source of investment funds, accumulation of financial saving is driven mainly by the decision to invest and not by the desire to live on interest income. Given the peculiarities of saving behavior, in addition to the fact that bulk saving comes from small savers, the substitution effect is usually larger than the income effect of an interest rate change.
Lewis (1955) noted that people would save more if saving institutions were nearer to them than if they were farther. As a result, a negative relationship is assumed to exist between population per bank branch and household financial saving. However, whether increased financial intermediation itself significantly increases the overall propensity to save depends also on the degree of substitution between financial saving and other items in the household‟s asset portfolio.
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
Esene (2005) while quoting Yomere and Agbonigho (1999) defined research methodology as the methods, procedures, or modalities through which the researcher intends to accomplish his objectives. Thus, this chapter sets out the rationale for choosing the research population and samples. It also includes a highlight of the data collection process and the statistical technique adopted for testing the validity of the hypotheses already formulated.
Research Design
Research design requires the structuring of the investigation aimed at identifying the validity of the most of the hypothesis and their respective relationship with one another. This is used for the purpose of obtaining data to enable the researcher test the hypotheses questions (ThankGod, 2004).
This research design employed is the ex-post facto design which seeks to establish the cause- effect relationship and the variables of interest are not under the control of the researcher and therefore cannot be manipulated.
Research Population and Sample Size
Because of the researcher‟s interest to carryout a study the impact of National Savings and Economic Growth in Nigeria; as measured by the various Economic Growth indicators such as Gross Domestic Product (GDP). The population of this study shall consist of the whole economy in Nigeria. However, the sample population will be drawn from all available data representing National Savings and Economic Growth as stated above. This study will cover the period of 1990 to 2015.
CHAPTER FOUR
DATA ANALYSIS AND RESULT PRESENTATION
Table 4.1.1 shows the data used in the study. The data comprises the National Savings, Real Domestic Product from 1990 – 2015.
CHAPTER FIVE
CONCLUSION AND RECOMMENDATIONS
This study examined the Impact of National Savings and capital formation on economic growth in Nigeria from the period of 1990 to 2015. To achieve this, a model was formulated which we related National Savings to economic growth indicators (Gross Domestic Product (GDP). The summary of findings of the study showed that;
The result showed that National Savings have positive significant impact on economy‟s growth of the Nation (as measured by Gross Domestic Product (GDP). The study confirmed to the positions of Tang & Chau (2009), Lean & Song (2009), Mphuka (2010), Nicholas & Odhiambo (2008, 2009), Anorou & Ahmad (2001), and Sinha & Sinha (1998) who found that National Savings significantly impact on economic growth of Nigeria. In other words, the National Savings has impacted greatly on the Nigerian economy. So the government should adopt an appropriate approach to encourage savings and foster economic growth.
Following the empirical findings of this study, the following recommendations are made for the purpose of effective policy formulations in the area of National Savings and economic Growth.
- Government should ensure that adequate macroeconomic policies that will open up theeconomy are put in place to encourage foreign direct investment inflow and make Nigeria an export platform, where export commodities could be manufactured for established international market; this will help to Strengthen Nigeria‟s term of trade and induce private
- There is need for proper financial market development. The financial sector should be This would enable the sector to function properly, thus rising up to the challenge of building a strong, virile and competitive sector that would be able to meet the saving needs of the surging business world.
- Greater efforts should be made to make available, short, medium and long term loans toproductive investments like small scale industries/businesses as they constitute an integral part of the growth and transformation process of an agro based economy like that of Nigeria this will induce employment and income of the various economic agent which will have a spillover effect on private
- There is need for the government to retain tight monetary and fiscal policies in order tofight inflation in the Nigeria economy. Since inflation have negative and significant influence on private savings in Nigeria.
- Government expenditure should be tied to specific viable economic projects in the All nonviable projects should not be sourced through deficit financing and adequate machinery should be put in place by all sectors of government to arrest corruption and penalize those perpetrate it. This will make fiscal policy to have positive and significant impact on private savings in Nigeria.
- Public saving has been shown to be a complement rather than a substitute for privatesaving in Nigeria. Government should therefore sustain its oil-32 price-based fiscal rule (OPFR) which is designed to link government spending to notional long run oil price, thereby de-linking government spending from current oil revenues. This mechanism will drastically reduce the short term impact of fluctuations in the oil price on government‟s fiscal programmes. State governments should also desist from spending their share of excess crude oil revenue indiscriminately. This is because this practice can severely test the absorptive capacity of the economy in addition to risking the fuelling of inflation. The challenge is for state governments to save excess revenue or spend it directly on imported capital goods in order to sustain Nigeria‟s hard-won macroeconomic stability. Third, monetary policy should focus on ways of increasing the abysmally low real interest rate on bank deposits. It should also devise means of substantially reducing the interest rate Lastly, it is pertinent to note that even though this paper has concentrated on Nigeria, its results can be applied to other African countries not previously studied. They contain some valuable lessons for informing policy measures in the current thrust towards greater mobilization of private saving in the African continent.
- Endemic corruption in Nigeria prevents funds borrowed by the government from achieving their objective of economic stimulation, thus, making servicing (or repaying) such loans burdensome to the Therefore, unrestrained borrowing by government from international agencies along with the biting effects of corruption must be checked so as not to crowd out national saving.
- Macroeconomic projections should guide the overall level of Savings. As such, theirprojections need to be more realistic, internally consistent and based on more accurate and timely
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