1.1 Background of the Study
The study of dynamic relation between savings and macroeconomic shocks has received considerable attention in recent years especially in emerging economies like India. However, it is a well recognized fact that the dynamic response of savings to macroeconomic shocks can be very significant in developing countries and Nigeria in particular. Agenor, McDermott, and Prasad (2000) argued that terms of trade disturbances are highly correlated with output fluctuations and can be a major source of aggregate economic volatility. Such disturbances tend also to have a large impact on savings (both private and public), because of their large income effects. Moreover, terms of trade shocks can also entail an asymmetric response in savings, as a result, of the existence of borrowing constraints on world financial markets. World Bank (1999) argued that the experience of the past few years suggests that households (and governments) from poor countries may be able to deposit their windfall savings on the international capital market in good times, but that they may be unable to borrow as much as they would like in bad times because of collateral problems or a (perceived) high risk of default. Deaton (1992) suggested that this asymmetry can create an incentive for precautionary savings, because in the case of a negative shock, consumption can be smoothed only by running down previously accumulated assets.
There exists some disagreement about what counts as savings. For example, the part of a person’s income that is spent on mortgage loan repayments is not spent on present consumption hence; this is savings, even though people do not always think of repaying a loan as savings. Savings is closely related to investment. By not using income to buy consumer goods and services, it is possible for resources to instead be invested by being used to produce fixed capital, such as factories and machinery. Savings can therefore be vital to increase the amount of fixed capital available, which contributes to economic growth (Bower, 2011).
Pertinent to note here is that on one side, countries that save more tend to grow faster provided that 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. More so, low savings rate has been cited by some studies as one of the most serious constraint to sustainable economic growth, one of those studies is that of World Bank (1989) which concludes that on the average, third world countries with higher growth rates incidentally are those with higher savings rates. 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 a subject of critical consideration while Nigeria strives to attain economic growth and development.
The rate at which savings fluctuate remains a source of challenge to policy-makers world over, and Nigeria in particular. Consequently, the critical importance of savings for the maintenance of strong and sustainable growth in the world economy and particularly Nigeria cannot be over emphasized. Hence, savings rates have doubled in East Asia and stagnated in Sub-Saharan Africa, Latin America and the Caribbean for more than three decades (Loayza, Schmidt-Hebbel and Serven, 2000).
In Nigeria, savings rate has not been stable. It is worthy of note here that nothing stops countries that are faced with different preferences, income streams and demographic characteristics from choosing different savings rates theoretically. In practice, the intertemporal choices that underlie savings for instance, in Nigeria, depend on an array of market failures, externalities and policy-induced distortions that are likely to drive savings away from socially desirable levels (Heijdra and Ligthart, 2004).
Savings accumulation helps countries in promoting economic growth which in turn, leads to economic development. Generations differ in their savings propensities and possibly creativity; consequently, innovations may come more frequently at certain stages in life. Thus, both investment opportunities and the supply of available savings may depend on the age distribution of the population thereby generating Macroeconomic shocks. However, when a bad shock hits the economy, the responsiveness of savings to macroeconomic shocks depends on a lag response of real interest rate to change in national or private savings as well as to output growth, and other macroeconomic variables (Uremadu, 2007).
Olusoji (2003) maintained that when applied to capital investment, savings increase output. More so, institutions in the financial sector like deposit money banks (DMBs) or 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. In Nigeria, the problem of mobilizing savings and deposits has always been the bane of economic growth and development.
However, in Nigeria, savings rates have been fluctuating overtime. The ratio of total savings to Gross domestic product (GDP) in Nigeria fluctuated between 7.8 percent and 8.5 percent in the 1970 to 1975. Thereafter, in the year 1976 to 1980, it fluctuated but, increased from 8.5 percent to about 11.6 percent. Furthermore, it remained on the increase from about 13.8 percent to 18.4 percent between the periods 1981 to 1985.
During the period 1986 to 1989, Nigeria’s savings GDP ratio averaged 16.4 percent. However, with the distress in the financial sector of the 1990s, the rate of aggregate savings to GDP ratio declined significantly. The distress syndrome resulted in a significant fall in Nigeria’s domestic savings in the period 1990 to 1994, with the savings to GDP ratio dropping to 11.6 percent on the average. Between the periods 1995 to 2000, it dropped further to about 6.9 percent on the average. Between the periods 2001 to 2005, the figure increased to about 8.4 percent on the average. More so, from 2006 to 2011, the ratio of aggregate savings to GDP increased on the average, to about 16.6 percent.
As evidenced from the Nigerian data, Central Bank of Nigeria (CBN, 2011), the ratio of savings to GDP is dynamic as the year increases but, between 2005 and 2008, it increased significantly. However, the periods between 2009 and 2011 show that the dynamism in the savings/GDP ratio is on the decrease. However, the transformation of these fluctuations in savings/GDP ratio into a sustained output expansion remains a source of challenge to policy makers and government. It is certain that without a significant increase in the level of savings (public and private), no meaningful growth in output would be achieved. Hence, this will make the stability of savings difficult.
From the foregoing discussions, it is clear that an understanding of the nature of aggregate national savings behaviour is critical in designing policies to promote savings, investment and growth (Umoh, 2003). Accordingly, for an effective mobilization of savings, it is vital to understand how savings responds to its core and leading determinants in Nigeria since this has not been sufficiently established by policymakers and researchers.
1.2 Statement of the Problem
REQUEST FOR NEW PROJECT TOPICSREQUEST NEW PROJECT TOPICS HERE
Welcome to Project, Thesis and Dissertation Services. We are here to help you produce a high-quality and properly documented project and thesis. We ensure that every project meets Nigerian University’s regulations for formatting and style.
If you cannot find your proposed project topic on our project database/library or your project supervisor changed your topic and case study, kindly click the request new project topics button below and fill the short form and our project expert will get in touch with you.