CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
According to Uremadu (2006), savings can be defined as “the amount left over when the cost of a person’s consumer expenditure is subtracted from the amount of disposable income that he or she earns in a given period of time”. Saving, therefore, is the decision to defer consumption and to store this deferred consumption in some form of asset (Aghevli, et al., 2005).
Savings is described as a financial assets accumulated by the public- bothgovernment and private agents in the organized financial system (Tochukwuet al., 2008).Saving naturally play an important role in the economic growth and development process. Savings determine the national capacity to invest and thus to produce, which in turn, affect economic growth potential. Low saving rates have been cited as one of the most series constraints to sustainable economic growth. Growth models developed by Romer (1986) and Lucas (1988) predict that higher savings and the related increase in capital accumulation can result in a permanent increase in growth rates.
The close relationship between the savings rate of the economy and the economic growth is stylized feature which has been well documented in number empirical investigations. This is result which has been found in several sensitivity analysis, although it is emphasized that causality should be inferred from this positive growth literature, example, Leveine and Renelt (1992) andSala-i-Martin (1997).
Saving refers to the part of income not immediately spent or consumed but reserved for future consumption, investment or unforeseen contingencies, it is considered as an indispensable weapon for economic growth and development. Its role is reflected in capital formation through increase in capital stock and the impact its makes on the capacity to generate more and higher incomeOnuoha, (2013).
Savings can also be known as a sacrifice of current consumption that provides for the accumulation of capital, which in turn, provides additional output that can potentially be used for consumption in the future Onuoha, (2013). In other words savings is the difference between current earnings and consumption. We can also define savings as the deposit and saving ability acquired by the organized financial institution including bank and non-banking financial intermediaries or it is described as a finance accumulated by the public, both government and private agents in the organized financial channels. These financial assets include savings and time deposit in the banking institution provident funds, insurance premium stocks and bonds etc.the intermediation process involves moving funds from surplus sectors of the economy to deficits sector units(Nnann and Englama 2004).Nigerians savings still falls below the requirement of its financial system due to low per capital income, under investment in productive instruments, and investment in unproductive channels e.g. Gold, jewel, income inequalities and demonstration effects, etc.to remedy this problem depend on the level of development of the financial sector as well as the saving habit of the citizens. The availability of investible funds can be a starting point for all investment. In the economy which will eventually translate to economic growth and development (Uremadu 2006).
The relationship between savings, investment and growth has been veryclose, hence the unsatisfactory growth performance of several developing countries like Nigeria which has been attributed to poor savings and investmentwhich has resulted to poor economic growth Onuoha, (2013). Domestic savings rates have not yet improved for better, thus worsening the already uncertain balance of payment position, the role of savings in the economic growth of any country cannot be overemphasized (Cheta 1999).
According to Cheter, (2014), a sound, 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 channelling them to deficit units through the help of financial techniques, instruments and institutions. Fifth the intermediaries promote development investment.
According to Friedman (1952) the impact of savings has been long recognized in theory, but its effect on the aggregate savings have been considered to be over shadowed by another factor, inflation causes price of tangible assets to rise sharply and changes in net worth based on rising market value giving the illusion of well-being the magnitude of the impact of wealth on saving rate may have the reassured experiences of economic crisis have highlighted the fact low and declining saving rate have contributed to generate unsustainable current account deficits in many countries Measuring a country’s net imports or net exports is a difficult task, which involves different accounts that measure different flows of investment. These accounts are the current account and the financial account, which are then totalled to help form the balance of payments figure. The current account is used as a measure for all of the amounts involved in importing and exporting goods and services, any interest earned from foreign sources, and any money transfers between countries (Transel, 2012). The financial account is made up of the total changes in foreign and domestic property ownership. The net amounts of these two accounts are then entered into the balance of payments (Zelds, 2013).
In Nigeria there is basically lack of incentives to savings which had adversely affected savings. Some of these factors include poor banking habits, attitude of banks to small savers, poor orientation, unemployment, instability in the political system etc. corrupt taxation system, instability in banking system etc. one of the problems of mobilizing savings and deposits has always been a major problem for economic growth and development in NigeriaOnuoha, (2013).
However, increased saving does not always correspond to increased investment. If savings are stashed in or under a mattress, or otherwise not deposited into a financial intermediary such as a bank, there is no chance for those savings to be recycled as investment by business. This means that saving may increase without increasing investment, possibly causing a short-fall of demand (a pile-up of inventories, a cut-back of production, employment, and income, and thus a recession) rather than to economic growth. In the short term, if saving falls below investment, it can lead to a growth of aggregate demand and an economic boom. In the long term if saving falls below investment it eventually reduces investment and detracts from future growth. Future growth is made possible by foregoing present consumption to increase investment. However savings kept in a mattress amount to an (interest-free) loan to the government or central bank, who can recycle this loan. Modiliani, franco (1988).
According to Sebastin (2007), “A trade deficit, which is also referred to as net exports, is an economic condition that occurs when a country is importing more goods than it is exporting. The deficit equals the value of goods being imported minus the value of goods being exported, and it is given in the currency of the country in question. For example, assume that Nigeria imports 800 billion Naira worth of goods, while exporting only 750 billion Naira. In this example, the trade deficit, or net exports, would be 50 million Naira”.
In terms of the stock market, a prolonged trade deficit could have adverse effects. If a country has been importing more goods than it is exporting for a sustained period of time, it is essentially going into debt (much like a household would). Over time, investors will notice the decline in spending on domestically produced goods, which will hurt domestic producers and their stock prices. Given enough time, investors will realize fewer investment opportunities domestically and begin to invest in foreign stock markets, as prospects in these markets will be much better. This will lower demand in the domestic stock market and cause that market to decline.
A trade deficit is caused when a country cannot produce all it needs. There are underlying causes as well. A country cannot have a trade deficit unless other countries are willing to loan it the funds needed to finance the purchases of imports.
Therefore, a country with a trade deficit will most likely have a current account deficit.
A trade deficit can also result if a domestic company manufactures a lot of its products in other countries. If the raw materials are shipped overseas to its plant, that’s counted as an export. When the finished good is shipped back home, that’s counted as an import — even though it’s made by a domestic company. It’s subtracted from the country’s Gross Domestic Product, even though the earnings will benefit the company’s stock price, and the taxes will benefit the country’s revenue stream. Initially, a trade deficit is not a bad thing. It raises the standard of living of a country’s residents, since they now have access to a wider variety of goods and services for a more competitive price. It can reduce the threat of inflation, since the products are priced lower. A trade deficit can also indicate that the country’s residents are feeling confident, and wealthy, enough to buy more than the country produces.
Over time, however, a trade deficit can cause jobs outsourcing. That’s because, as a country imports certain goods rather than buying domestically, the local companies start to go out of business. The domestic business itself will lose the expertise needed to produce that good competitively. As a result, fewer jobs in that industry are created in the home country.
Instead, the foreign companies hire new workers to keep up with the demand for their exports.
For this reason, many leaders propose reducing the trade deficit to increase jobs. They often blame trade agreements for causing deficits. A great example is the world’s largest agreement, the North American Free Trade Agreement, or NAFTA. A response to trade deficits is often to raise import tariffs, or other forms of trade protectionism. However, these rarely work. That’s because the industry is usually already moribund, and the skills lost, by the time these policies are suggested.
Economic theory dictates that a trade deficit is not necessarily a bad situation because it often corrects itself over time. However, a deficit has been reported and growing in the Nigeria for the past few decades, which has made some economists worried. This means that large amounts of the Nigeria naira are being held by foreign nations, which may decide to sell at any time. A large increase in naira sales can drive the value of the currency down, making it more costly to purchase imports (http://investopedia.com). Suppose an increase in government spending (or a reduction in income taxes) causes national spending to rise at the expense of savings. If the pool of savings is insufficient for the needs of domestic borrowers (investment demand), then this usually drives interest rate higher. Higher interest rate in one country (assuming no increase in financial risk) causes foreigners to want to invest their saving in Nigeria _ a capital inflow. Since foreigners have to buy Nigerian currency to buy Nigerians asset, this capital inflow pushes the value of the naira higher. A higher value of the naira leads to more Nigeria import and less export of goods and services. Thus a government deficit causes trade deficit.
Therefore, fiscal deficit occurs when government spending is greater than tax revenue. The deficit is annual government borrowing requirement, measured by public sector net borrowing. To finance fiscal deficit, government tend to borrow from central bank (printing more currency), or the market, or raising external debt.
The trade deficit and national savings rates are inversely related. A country’s trade balance (current account balance) is the difference between the value of exports of goods and services and the value of imports of goods and services. Through national accounting identities, the trade balance can also be expressed as the difference between national (both public and private) savings and investment.
The above arguments underscores the fact that there exist a link between savings and trade deficit and the growth performance of the economy, both in Nigeria and in the world over. This necessitates the need to carry out a detailed study of what actually determines the rate of savings in the contexts of Nigeria economyOnuoha, (2013).
The diagram above depicts an example of a Nigeria balance of trade. The red line (savings) represent an observed increase in savings, while the blue line (Balance of trade) shows the recovery if there is trade deficit or trade surplus. From 1982 to1994 Balance of trade and savings is flat on the zero (0) trend, while in the year 1996 and also 2000 there was trade deficit, and in the year 1998 and 2002 there was trade surplus, from 2003 the balance of trade rises to the year2005, and from these year 2005 to 2008 Balance of trade was a little bit flat, decreasing in the year 2008, also from the year 2009 the Balance of trade trend increases to the year 2013 were the blue line returns to meet and follow the dashed trend line at point 2014.
1.2 Statement of the Problem
Savings and balance of trade is a macro-economic variable used to attain economic growth and development. If trade deficit result from importing goods or technology that make the economy more productive and stronger, then perhaps trade deficit aren’t so bad. Second, this depends on what is causing what. It is well known that the large deficit of the1990s were the result of a massive inflow of capital from abroad. What causes this desire by foreigners to invest in Nigeria? Surely a number of things but economist believe it was a combination of poor investment project abroad and the thriving market in Nigeria. Why would this cause trade deficit-isn’t this all about the financial account? There are two parts to this answer. The first is the accounting identity between current account deficit and financial account surpluses. This is a good reason to pay attention to this problem. To ascertain the relationship between savings and trade deficit in Nigeria.
1.3 Objectives of the Study
In the light of the above stated problems, the objectives of this work includes:-
- To ascertain the relationship between savings and trade deficit in Nigeria.
- To determine the effect of the factors that reduces saving on aggregate savings in Nigeria.
1.4 Statement of the Hypothesis
The hypotheses to be tested in this research work are:
H0: there is no significant relationship between savings and trade deficit in Nigeria.
H1: there is significant relationship between savings and trade deficit in Nigeria.
- Significance of the Study
This research work will be an immense helps to policy formulators particularly those involved in the development of the Nigerian economic agenda. It will also help them in choosing the appropriate policy in the macroeconomic policy management, particularly those affecting savings in Nigeria.
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 effects being carried out by the federal; government of Nigeria through the Central Bank of Nigeria and Federal Ministry of Financial in improving the policies affecting positive saving in recent years. It will also help researchers to get knowledge about the behavior of the economy.
Finally, this study will assists in a modest way to increasing students’ knowledge on the practical and real- life situation of the theories they learn in the classroom.
1.6 Scope of the Study
The scope of this study is to estimate and evaluate the factors impacts of savings and trade deficit in Nigeria (1981-2014).
1.7 Limitations of the Study
The Limitations are constrained to lack of fund, human error and limited time frame, which imposed difficulties when serious attempt to effect a general in – depth towards the study of the factors that reduce savings in Nigeria.
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