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NATIONAL SAVINGS AND ECONOMIC GROWTH IN NIGERIA (1980 – 2007).

NATIONAL SAVINGS AND ECONOMIC GROWTH IN NIGERIA (1980 – 2007).

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NATIONAL SAVINGS AND ECONOMIC GROWTH IN NIGERIA (1980 – 2007).

Chapter one

1.1 Background of the Study

Saving is an integral part of the economic growth and development process. Savings dictate the nation’s ability to invest and so produce, which influences economic growth potential.

Low savings rates have been identified as one of the most significant barriers to long-term economic growth. Growth models developed by Romer (1986) and Lucas (1988) suggest that increased savings and capital accumulation can result in a long-term increase in growth rates.

The strong association between the economy’s savings rate and economic growth is a stylized trait that has been thoroughly proven in numerous empirical studies.

This is the conclusion of multiple sensitivity analyses, albeit it is emphasised that causality should be inferred from this positive development literature, such as Leveine and Renelt (1992) and Sala-i-Martin (1997).

Contemporaneous correlation. The close relationship between saving and growth has also been an important finding in the empirical saving literature; the idea that country disparities in saving rates could be explained by differences in growth rate was identified early on.

According to modern saving theories, the rate of growth in aggregate real income is an important factor influencing national saving rates. Rapid growth increases the savings rate. Higher national savings free up resources for the investments required to sustain strong growth.

If investment is discouraged, both the growth and saving rates fall. Prior to the Structural Adjustment Programme (SAP) in 1978, Nigeria experienced significant external sector disequilibrium due to a huge current account deficit and capital inflows.

As we witnessed during SAP, Nigeria’s balance of payment troubles are caused by a large savings and investment discrepancy.

1.2 Statement of the Problem

Prior to the Structural Adjustment Programme (SAP) in 1987, Nigeria’s external sector was significantly disequilibrated due to a high current account deficit and capital inflows.

The large savings-investment disparity caused balance-of-payments issues. Between 1973 and 1985, Nigeria’s national saving rate of 6.1% of GDP was insufficient to finance domestic investment, which increased to 20.5% during the same time. Between 1973 and 1985, there was a 14.4% savings-investment imbalance (Adebiyi 2001).

Following the SAP, Nigeria’s saving rate increased dramatically, rising from 6.1% of GDP between 1973 and 1985 to 11.7% between 1994 and 1998. This was reflected in the growth rate of real GDP, which increased from 1.5% between 1973 and 1985 to 2.7% between 1994 and 1998 (Adebayo 2001).

This demonstrates the relationship between saving rates and economic growth. On the other hand, if banks and financial institutions fail to provide more soft loans to Nigerians, encourage small and medium-sized businesses, and provide funds for the burgeoning number of unemployed youths to engage in meaningful economic activities, saving may never lead to economic growth in Nigeria.

Instability in the saving rate would result in low investment and output, which would lead to a large demand for imported commodities.

This will produce disequilibrium in Nigeria’s external economy, as we observed during the SAP period. Based on the preceding analysis. As a result, we can deduce the following research question.

1. Is there a long-term relationship between saving and economic growth in Nigeria?

2. Is there a correlation between saving and economic growth?

This research will attempt to answer as many of the questions raised above as feasible.

1.3 Research Hypothesis

1. H0 (Null Hypothesis): Saving rates and GDP growth rates do not cointegrate.

2. i H0 (Null Hypothesis): The GDP annual saving rate does not affect GDP growth rate.

3. ii H0 (Null hypothesis): The GDP growth rate does not affect national savings.

1.4 Justification for the study.

Understanding the relationship between national savings and economic growth has important implications for Nigeria’s economy. Economic crises have emphasised the reality that low (and declining) savings rates have contributed to many countries’ unsustainable current account deficits. In the case of Nigeria, prior to the Structural Adjustment Programme (SAPs) of 1987.

There was a significant imbalance in its external sector due to a substantial current account deficit and high capital inflows. The large saving and investment discrepancy caused balance-of-payment issues.

Between 1973 and 1958, national savings were 6.1% of GDP, which was insufficient to finance domestic investment, which increased to 20.5% during the same time period. Between 1973 and 1985, there was a significant savings-investment gap of 14.4% of GDP.

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