ABSTRACT
This research work examined the impact of savings and investment on economic growth of Nigeria. The research was carried out as a result of low savings in Nigeria economy. The research work was guided by three research questions and two hypotheses. The study was carried out within the period of 1994-2013. The data series were examined using econometric models of the ordinary least square (Simple Linear Regression). Statistical analyses were performed using SPSS version 20. The findings of the study revealed that savings had a significant impact on the economic growth of Nigeria within the period of 1994-2013 with a t value of 14.62 and investment had a significant impact on the economic growth of Nigeria within the period of 1994-2013 with a t value of 8.393. It was recommended that foreign investor should be encourage by the government in Nigeria, Shares and bonds should be should sold in every companies and industries and government should encourage new investors by the reducing the level of tax on the industries.
CHAPTER ONE
INTRODUCTION
1.1. Background of the Study
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). Vividly, saving represents that part income is not spent on current consumption, but when applied to capital investment, output increase (Olusoji, 2003). This output is increased by introducing new innovations in form of technology, which leads to a plant that increases the productivity of the economy.
Savings which is defined as that part of income not immediately spent or consumed but reserved for future consumption, investment or for unforeseen contingencies, is considered as an indispensable weapon for economic growth and development. Its role is reflected in capital formation through increase capital stock and the impact it makes on the capacity to generate more and higher income. It is widely agreed on one side that countries that save more also tend to grow faster provided the financial system is deep while on the other hand, some analysts fear that a rising savings rate could hamper economic recovery if consumer expenditures form a large component of aggregate demand. Low savings rate has been cited by some study as one of the most serious constraint to sustainable economic growth, one of those studies is that of World Bank that concludes that on the average, third world countries with higher growth rates incidentally are those with higher saving rates (World Bank 2009). United Nation also maintained that increasing savings and ensuring that they are directed to productive investment are central to accelerating economic growth (UN Department of Economics and Social Affairs 2005). This makes savings as a macroeconomic variable to attain economic growth a subject of critical consideration.
In Nigeria Nnanna, Odoko and Englama (2004) are of the view that the level of funds mobilization by financial institutions is quite low due to a number of reasons, ranging from low savings deposits rates of the poor banking habit or culture of the people. According to them, another impediment to funds mobilization is the attitudes of banks to small savers.
Real investments by governments, business firms and households boost capital formation in any economy and help to increase productivity, employment opportunities and income. A matter of concern however is the level of investment in a country relative to the level of potential or aggregated or financial savings in the domestic financial system. If the level of savings and investment is low, the tendency to undertake external borrowing by both private and public sectors becomes high. In sum, the potential level of income is determined by the amount of capital available. When domestic capital is not available, there is the tendency to resort to external borrowing Ajayi (2000). At most times capital inflows or outflows in the domestic economy has been fostered more by the ability of capital to freely flow from one country to another than by any deliberate monetary policy management. The opening process of the capital account and the liberalization of the exchange rates regime have somewhat allowed freely flowing capital into hitherto closed economies. Those economies have taken advantage of such capital to maximise investment in the domestic economy.
Moreover, the relationship between savings and investment can have significant implication on the state of the economy. High savings and investment gap can have resultant effect on balance of payment equilibrium. Although attracting foreign capital remain a necessity that cannot be avoided especially for a developing economy like Nigeria. Long term and heavy dependence on foreign capital can have adverse effect on economic stability. This will leave countries vulnerable to external shocks and in terms of Foreign Direct Investment there may be a continual outflow of profits lasting much longer than outflow of debt service payment on loan of equivalent amount in term of repatriation of profits. While a loan involves an obligation for a definite number of years, FDI may be a long term commitment.
Financial institution, market, regulators and instrument all comprises a set of complex and closely interconnected financial system, providing financial services in an economy, such services include mobilization and allocation of resources, distribution of investment funds among firms, financial intermediation and foreign exchange transactions. Capital formation, buying and selling of bonds and securities, creation of new assets and liabilities, executing monetary and credit policies of the central bank etc, are the roles and functions of financial system geared towards economic development of an economy. Patriotic researchers and policy makers have observed a declining savings rate in Nigeria over the past decades; this is due to the critical importance of savings for the maintenance of strong and sustainable growth in the world economy particularly in Nigeria.
A sound, healthy and reliable financial system relates to savings mobilization and efficient financial intermediation roles; first, reduces hoarding and help spread the risk between household and firms. Second, lowers interest rates thereby bringing about stability in capital market. Third, they create liquidity in the economy by borrowing short-term and lending long-term. Fourth, disseminate information between ultimate lenders and ultimate borrowers thereby mobilizing savings from surplus units and channeling them to deficit units through the help of financial techniques, instruments and institutions. Fifth the intermediaries promote developmental investment.
The relationship among saving, investment and growth has historically been very close; hence, the unsatisfactory growth performance of several developing countries. Example; Nigeria has been attributed to poor saving and investment. This poor growth performance has generally led to a dramatic decline in investment. Domestic saving rates have not fared better, thus worsening the already uncertain balance of payments position (Chete, 1999). The role of savings in the economic growth of any country cannot be overemphasized. Conceptually, savings represents that part of income not spent on current consumption. Institutions in financial sector like deposit money banks (DMBs)/ commercial banks mobilize savings deposit on which they pay certain interest. To effectively mobilize savings in an economy, the deposit rate must be relatively high and inflation rate stabilized to ensure a high positive real interest rate, which motivates investors to save from their disposable income.
1.2 Statement of the Problem
The growth rate of Nigeria 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.
In Nigeria, there is lasting need of further efforts especially in mobilizing small savings and investment in both urban and rural areas, and the process of financial intermediation itself, knowing the saving and investment culture in Nigeria is very poor relative to other developing economies (Uremadu, 2006). In this respect, Commercial banks in performing their roles, was found to have potential scope and prospects for mobilizing financial resources and allocating them to investment.
Infact, low level of savings and high interest rate have been identified and highly conjectured to the declining level of investment that will promote growth in Nigeria, and other less developed countries in general. Thus, having observed the above impediments there is need to investigate into the impact of savings and investment on the economic growth of Nigeria.
1.3. Objectives of the Study
In the light of the above problems, the objectives of this research work include:-
1. To ascertain the level of savings and investment in Nigeria.
2. To ascertain those factors that reduces savings and investment in Nigeria.
3. To determine the impact of saving and investment on the economic growth.
1.4. Research Question
Based on the objectives of this research work, the following research questions will be answered;
1. What is the level of savings and investment in Nigeria?
2. What are the factors that reduce savings and investment in Nigeria?
3. What are the impacts of saving and investment on the economic growth?
1.5 Statement of the Hypothesis
The hypotheses to be tested in this research work are:
HO 1: investment has no significant impact on economic growth.
HO 2; savings have no significant impact on economic growth
1.6 Significance of the Study
This research work will be of immense help to policy formulators particularly those involved in the development of the Nigerian economic agenda. It will help them in choosing the appropriate policy in the macroeconomic policy management, particularly those affecting savings and investment in Nigeria.
Also, through the findings and suggestions of this research project work, a greater awareness will be generated in the financial arena or sectors so as to appreciate the efforts being carried out by the federal government of Nigeria through the Central Bank of Nigeria and Federal Ministry of Finance in improving the policies affecting positively saving and investment in recent years.
Finally, this study will assist in a modest way to increasing students’ knowledge on the practical and real-life situations of the theories they learn in the everyday classroom.
1.7 Scope of the Study
The scope of this study is to examine the relationship between savings and investment on Nigeria economic development from (1994-2013).
1. 8. Operational Definition of Terms
Savings: It is the income not spent on goods and services for current consumption.
Economic Growth: It is the increase in Gross Domestic product (GDP), it is the monetary value of all the economic activities produced within a given period usually one year.
Capital: It is the real assets like factories or equipment that can be used in production of other goods Jhingan (2003).
Capital Formation: It is the accumulation of capital through savings mobilization.
Investment: It is the act of spending money on productive ventures.
Interest: It is the price paid for borrowed money (Onwukwe, 2003)
){kind=link}