X-raying Nigeria’s weak links with savings, investment and growth
Despite availability of abundant mineral resources in Nigeria and huge income from crude oil, the country still wobbles in its path to growth and development.
This is the consequence of the fact that there has not been any synergy between savings and investment in Nigeria. The path to the Nigerian economic growth depends, to a large extent, on the relationship between savings and investment. Even economic theories agree with this.
Regrettably, the links among savings, domestic investment and economic growth in Nigeria are weak due largely to a number of factors, including low level of income, high lending rate, policy inconsistency, over reliance on crude oil sales for revenue and corruption.
Other factors are advanced by ripple effects and include general poverty, insufficient capital equipment, insufficient savings facilities to mobilise savings, especially in the rural areas, poorly developed natural resources, low labour productivity and inefficiency.
All these translate to low savings, low rate of capital formation, and low technical progress, which constitute the bane of sustainable economic growth and development in Nigeria
Indeed, in other emerging economies, savings and investments have been the catalyst for industrialisation and ultimately, economic growth. This is made possible by huge capital formation through savings mobilisation.
There is no gainsaying that countries that are capable of accumulating high level of capital tend to achieve faster rates of economic growth and development.
More so, to finance adequate investment required for proper economic growth, a country like Nigeria needs to generate enough savings or borrow internationally, even though it is clear that external debt has a foreign exchange risk as it affects the balance of payments position of the country.
Savings means that part of income that is not spent on current consumption while, investment means addition to capital stock.
To break the seeming jinx, capital market experts have urged government to promote national savings culture through the provision of appropriate incentives.
The stakeholders also stressed the need to ensure peaceful political atmosphere that is devoid of political upheavals because insecurity in the country has contributed immensely to the discouragement of the people from the cultivation of banking habit.
They linked consistent market growth to improved long term savings, noting that increased savings would accelerate development and bolster the economy.
The Executive Vice Chairman of Highcap Securities, David Adonri, said considering the importance of savings and investment in promoting economic development, clever and competent governments promote savings and subsidise investments.
He lamented that Nigerian government is well known for mainly subsidising consumption, as exemplified by fuel subsidy.
He pointed out that if the investment prospect in an economy is bright, major portion of incomes earned by households will rather go for investment than for consumption.
“The basic parameter for assessing economic development is the level of employment of the factors of production- Land, Labour and Capital.
“Macroeconomic indicators like GDP growth rate, population growth rate, inflation rate, interest rate, among others, merely interpret how well the factors of production have been employed.
“Of all the factors of production, capital is the most critical and difficult to acquire. The two forms of Capital stocks, Financial Capital and Capital Goods are two sides of the same coin. They are interchangeable.
“Their mobilisation and adequate employment play critical roles in economic development. If properly mobilised, capital plays catalytic role in employment of other factors of production,” he said.
He categorically stated that financial capital, which is money used to establish and run businesses and government comes from mobilisation and aggregation of savings through an intricate process called capital formation.
According to him, in modern economies, financial instruments like equities, bonds and various funds are created to serve as investment vehicles for mobilisation of savings, needed for production of goods and services.
He argued that investors invest their savings in financial instruments to earn income thus promoting capital formation in the economy.
These investments, according to him are aggregated into capital which governments and enterprises utilise for economic development. Investment and savings are mirror images.
An independent investor Amaechi Egbo, explained that the level of savings in an economy has a multiplier effect on its investment, adding that long-term savings will spur activities in the primary market segment and accelerate economic growth
To mobilise long- term savings, Egbo submitted that government must introduce the right incentives to encourage more people to save on a long-term basis.
He added that it is desirable for government to seek how to moderate the destabilising influence of foreign portfolio investors in the Nigerian capital market by boosting increased domestic participation in the market.
The Chief Relationship Officer of Foresight Securities and Investment Limited, Charles Fakrogha, explained that if there were no savings, there would be no investment.
According to him, Nigerian workers needed to embrace the culture of savings in order to provide more viable exit plans in the face of voluntary or compulsory disengagement.
He added that these savings would be channeled to stock market where the individual can monitor the movement and performance of the stocks and take appropriate investment decision.
“In basic economics, if there is no savings, there will be no investment. So, people are encouraged to develop savings habit. Savings should be a habit. If you pay me one million and I cannot save, if I am paid 10 million, I cannot save also.
“It is the savings culture that needs to be developed and once done in Nigeria, we will have enough savings and can now channel these savings to investment in the capital market and other areas of the economy.
“We advice professionals and other workers to invest in the stock market where they do not need any body to monitor their investment. They can monitor their investment by themselves.
“If you have a monthly salary of N10,000 and straight for 12 months which is N120,000, you can now invest part of it in blue chip companies in the capital market and it will be beneficial to the economy, to you, as an individual worker and the capital market in general,” he said.
Indeed, evidence of the country’s investment model shows that real Gross Domestic Product (GDP) and Gross Domestic Savings (GDS) are the two drivers of investment in Nigeria.
This means that if there is proper capital accumulation in the form of savings, investment would be great and sustainable. The multiplier effect would be seen on the well-being of the people through increased capital and output.
For instance, a look at the Nigerian economy shows that growth rate in GDP stood at 3.4 per cent in 2005 and rose to all time high of 8.2 per cent in 2006, before falling to 6.3 per cent in 2008.
By 2010, it rose to 7.8 per cent before falling to 4.3 per cent in 2012 and rose again to 6.3 per cent in 2015 and became negative through the first and second quarters of 2017.
The nation’s GDP in Q4, 2018 stood at 2.38 year on year. It recorded 1.93 per cent in full year. Also Q2, 2019 it stood at 1.94 per cent.
Additionally, when savings is applied to capital investment, output rises, causing the potential output of the country to increase above the previous level. This ultimately propels GDP growth.
The increase in output is made possible by the introduction of new innovations in the form of technology, which gives rise to economic growth and development.
Economic growth of a country would lead to the expansion in capital, labor force, output, consumption and of course, income and infrastructure.
It is therefore, convincing that for a developing country like Nigeria to attain economic growth, some economic variables within the context of the features of the Nigerian economy must be identified. This, of course, would help to mobilise savings to the necessary investment to encourage economic growth.
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