Understanding the Nexus between Savings, Investment and Economic Growth in Nigeria: an Empirical Analysis
Understanding the Nexus between Savings, Investment and Economic Growth in Nigeria: an Empirical Analysis

Summary/Abstract: For economic growth to take place, certain variables must be triggered. Among these variables are savings and investment. The economic theory establishes equity between savings and investment which is expected to translate into economic growth. However, in reality, certain factors may disrupt this equity. Individually, savings and investment are also influenced by certain variables that might influence the supply of savings and demand for investment. This study investigated the savings-investment and economic growth nexus while examining the determinants of savings and investment in Nigeria between 1981 and 2020. The study used secondary data sourced from the World Development Indicators and the Central Bank of Nigeria Statistical Bulletins. Vector Autoregressive model was adopted for the econometric analysis. Analysis was done using three separate models. The VAR results reveal an insignificant relationship between gross domestic savings, gross capital formation and economic growth. It was also found that gross domestic savings, gross domestic product and lending rate have insignificant impacts on gross capital formation. In contrast, gross domestic product and lending rate was found to impact gross domestic savings significantly. The Granger causality test shows that unidirectional causality runs from lending rate to gross capital formation and lending rate to the gross domestic product. In contrast, bidirectional causality was found to exist between gross domestic product and gross capital formation. These relationships imply that the blame of a poor link between savings, investment and economic growth in Nigeria should be primarily attributed to the inefficient financial intermediation in allocating savings to productive uses, underutilisation of monetary and fiscal policies to stimulate investment as well as other socio-economic and political factors that are not included in this study. The study recommends, among other things, that more savings should be encouraged by rising per capita income in Nigeria. This can be achieved by increasing productivity in all sectors of the economy. The study also recommends adopting flexible and efficient use of monetary and fiscal policies that are in line with current economic realities in the country to link savings and investment efficiently and, hence, promote economic growth.

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