Impact of inflation on savings in Nigeria 1981-2015

Impact of inflation on savings in Nigeria. Inflation is a household issues that has cripled many economy. It is one of the many macroeconomy probem facing the Nigeria economy has often distort saving. The lack of domestic saving in Nigeria has led to poor investment cum low economic growth and development. Read the post and enjoyed.

CHAPTER ONE

INTRODUCTION

  • Background to the Study

The word inflation has become a household name in most African countries. It has become a significant problem for Africa and Nigeria to be specific for several years now. In the words of Adenuga (2012), it is a monster which threatens all economies because of its undesirable effects. Indeed the conventional view in macroeconomics holds that permanent and predictable changes in the rate of inflation are neutral. But in the long term, they do not affect real activity. However, a substantial body of evidence suggest that sustained high rate of inflation can have adverse consequences for real economic growth even in the long-run.

Turkey (1951), defined inflation as “the process resulting from competition in attempting to maintain total real income, total real expenditure, and or total output at a level which has become physically impossible or attempting to increase any of them to a level which is physically impossible”. Inflation as defined by Turkey therefore consists of successive and alternatively increases in price and cost resulting from the struggle between social groups.

On the other hand, Wilson (1961), defined inflation as “a symptom of inconsistency resulting in a failure to constraint monetary demand within limit set by real resources”. Leaner (1949), however, defined inflation “as an excess of demand over supply”. According to Webster’s Seventh Collegiate Dictionary, inflation is an increase in the volume of money and credit relative to the available goods resulting in a substantial and contriving rise in the general price level. The Magrans Hill Dictionary of Modem Economics defines inflation as a persistent upward movement in the general price level, which results in a decline in purchasing power. Anyanwu (1995) noted that the literature on inflation is full of plethora of definition of inflation. These definitions however, examine two different types of inflation; shock inflation and different-state inflation as against pure inflation.

Savings on the other hand represents that part of income that is not spent on current consumption, but when applied to capital investment, output increases (Olusoji, 2003). This output is increased by introducing new innovations in form of technology, which leads to a faster economic growth and development by creating the possibility of investing in a new plant that increases the productivity of the economy.

Savings provides developing countries (including Nigeria) with the much needed capital for investment which improved economic growth. Increase in savings leads to increase in capital formation and production activities that will lead to employment creation and reduce external borrowing of government. Low domestic saving rates may maintain low-growth levels because Harrod Domar model suggested that savings is an important factor for economic growth. Malunond (2007) asserts that depending on foreign sources to financed investment makes the country highly sensitive to external shocks. Therefore, domestic savings will continue to be a priority as a source of investment financing in order to minimize vulnerability to international economic fluctuations.

ln 1960’s after independence, Nigeria’s economy was strong and cherished by all. Inflation rate then was mild and could help boost investment and economic growth. However, a soaring price was observed in the late 1960’s and double-digit inflation rate followed in the early 1970’s. The soaring price has its roof cause from the Nigeria civil war.

In the later 1970’s (1974-1979) when the freeze was discontinued as a result ‘of the Udoji Salary Review Commission of 1974, inflation rate grew very steadily. This increase in wages as a result of the Udoji award which was not followed with a corresponding income in productivity, sky-rocketed the average price level and caused inflationary pressure, induced by increase in money circulation.

The early 1980’s drove home the truth, which had been emerging in the 1970’s that the Nigerian economy was becoming increasingly unstable. The combined effects of the oil shock, prolonged slump in real commodity price, the out-break of the debt crisis in the economy exacerbated the inflationary problem as cited by Anyanwu (1997).

The inflation rate rose to 22.95 percent in the 1980’s as against 15.28 percent in the 1970’s Central Bank of Nigeria (statistical bulletin (2006). The rate of increase in inflation soared high in the post Structural Adjustment Programme (SAP) days. In historically, inflation rate reached its peak at 73.1 percent in 1995 (CBN opp cit). This period in the history of Nigerian economy witnessed the worst period of inflation and had continued with the volatility of price, including relative price of interest rates and exchange rate associated with different regimes of deregulation and regulation, the macroeconomic environment of Nigeria cannot be described as particularly stable.

Many empirical study studies have been carried out on the impact of inflation on savings across the world. The reason has been that savings rate of many countries; particularly the less developed countries have been declining. In addition the role of investment (via Savings) in economic growth and development has induced many researchers to continuous to investigate the factors that influence savings (Gobna and Nurudeen, 2009). In Nigeria, national savings increase continuously in absolute terms from 1981 to 1994 with a continuous increased value of N6562.60million and N8062901.35million respectively. The value decreased to N108490.3million in 1995 and continuously increased to N8062901.35million in 2012. In terms of the growth rate, national savings has being fluctuating and declining. For example in 1982 the growth rate was 14percent and decreased to 11.28 percent in 1986. As capital formation through savings mobilization, is an important factor in economic growth, countries that are able to accumulate high level of capital, tend to achieve faster rates of economic growth and development (Utemadu, 2002). It is against this background that this research work seeks to examine the impact of inflation on domestic savings in Nigeria.

1.2 Statement of the Problem

The growth rate of Nigerian economy remains a challenging issue. It is because, domestic savings which serves as a tool for capital mobilization towards financing aggregate investment, needed for economic growth, is very low. Infact, low level of savings and high interest rate have been identified and highly conjectured to contribute to the declining level of investment that will promote growth in Nigeria, and other less developed countries (LDCs) in general. Thus, having observed the above impediments the need is felt to research on the impact of inflation on domestic savings on Nigerian economy.

In Nigeria, Olusoji (2003) identified financial institutions such as deposit money banks as the main agents of savings mobilization. To effectively mobilize deposits, the deposit money banks should offer relatively high deposit rates while inflation rate should be relatively stable. Unfortunately, the deposit rates offered by banks in Nigeria have been generally low in the last five decades with an average of 9%; while inflation rate has been relatively high with an average of 19% in the last decade. Furthermore, a trend analysis of the ratio of total savings to GDP in Nigeria shows that the saving rate has been fluctuating over time. The savings/GDP ratio was 2% in 1960. It increased to 7.8% and 11.6% in 1970 and 1980, respectively. In 1990 and 2000, it declined to 11.1% and 8.4% respectively. In 2011, the savings/GDP ratio in Nigeria stood at 17.4% (CBN, 2011). Clearly, the relatively poor rates at which domestic savings in Nigeria is growing is a source of worry to policy makers in Nigeria.

Since its establishment in 1959, the Central Bank of Nigeria (CBN) has continued to play the traditional role expected of a central bank. This role is anchored on the use of monetary policy that is usually targeted towards the achievement of price stability among other goals. Over the years, inflation targeting and exchange rate policy have dominated CBN’s monetary policy focus based on the assumption that these are essential tools of achieving macroeconomic stability (Aliyu and Englema, 2009). The exchange rate regime was in vogue in Nigeria between 1959 and 1973 while the direct monetary control technique was in place from 1974 till 1993 when the CBN formally introduced its open market operation (OMO) as a major indirect tool of monetary policy; hence indirect monetary control has been in vogue from 1993 till date.

It will be recalled that the major objective of Nigeria’s monetary policy is the maintenance of macroeconomic and price stability. Using this as a take-off point, the outcome of monetary policy in Nigeria has been generally mixed. A country is said to have price stability when its inflation rate is very low or has attained zero level. It is a situation which arises when the general price level either grows at a minimal level or does not grow at all (Olajide, Vanguard May 5, 2004, p. 23). In Nigeria, price stability refers to the achievement of a single digit inflation rate on an annual basis.

During the period 1960-1972, average inflation rate was relatively low, the historical average being 5.01%. When assessed on an annual basis however, rising prices became a concern for the then military government when in 1969, the inflation rate hit double digit at 10.36% (Cosito, 2010). By 1976 however, the inflation rate stood at 23%. It decreased to 11.8% in 1979 and jumped to 41%, 57.2% and 72.8% in 1989, 1993 and 1995 respectively. By 1998, the inflation rate had however reduced to 9.5% from 29% in 1996. Between 1999 and 2011, inflation rate in Nigeria hovered between 5% and 18% with an average of 11.82%

Giving that during inflation, money losses value and people are discouraged from saving which ultimately affect the volume of money in the money market and investment as well, various governments had introduced lots of policy measures in Nigeria prominent among which are fiscal and monetary policy. But despite the intensified use of these policies over the years, inflation still remains a major threat to Nigeria’s savings.

Since mid-1960s, inflation has become so serious and contentions a problem so serious and contentious a problem in Nigeria. Though inflation rate is not new in the Nigerian economic history, the recent rates of inflation have been a cause of great concern to many. During the period under review (1981–2003), there has been an upsurge in the inflationary rates leading to major economic distortions.

The continued over valuation of the naira in 1980, even after the collapse of the oil boom engendered significant economic distortions in production and consumption as there was a high rate of dependence on import which led to balance of payment deficits. This resulted to taking loans to finance such deficits. An example was the Paris Club loan, which was a mere Five Billion, Thirty nine million dollars ($5.39billion) in 1983 rose to twenty one billion, six million dollars ($21.6billion) in 1999 (CBN 2001). The oil glut from 1981, that resulted into balance of payment deficits also led to foreign exchange crises that necessitated various measures of import restrictions. These restrictions reduced raw materials for domestic production and spare parts for machinery operation. The resultant shortage of goods and services for local consumption spurred the inflation rate to rise from 20% in 1981 to 39.1% in 1984 (Itua, 2000).

With the adoption of the Structural Adjustment Programme (SAP) in 1986, there was a temporal reduction in fiscal deficits as government removed subsidies and reduced her involvement in the economy. But as the effects of the Structural Adjustment Programme (SAP) policies gathered momentum, there was a fall in the growth rate of Gross Domestic Product (GDP) in 1990 from 8.3% to 1.2% in 1994, with inflation rising from 7.5% (1990) to 57.0% (1994) Again, the devaluation of the naira by the Central Bank of Nigeria (CBN) through the Second Tier Foreign Exchange Market (SFEM) led to a fall in agricultural outputs as machines and raw materials (mostly imported) were out of reach.

Many studies have, indicated that inflation has a recessionary impact on domestic savings whereas other schools of thought observed a positive effect of inflation on savings. Hence the debate on the precise relationship between inflation and savings and the mechanism by which inflation affects economic performance in Nigeria. The former noted, that inflation is a major contributing factor in the depression of saings in Nigeria. They pointed out that high rate of inflation raises the rate of interest on loanable fund which will accordingly reduce savings. The later on the other hand emphasized that inflation is just necessary to raise savings and promote growth. But what is the rate of inflation that will be adopted to maintain stable and optimal savings in Nigeria. This research will be able ascertain this and the nature of relationship that exist between them.

1.3       Research Questions

This research work is guided by it following questions;

  1. Is there any significant impact of inflation on savings in Nigeria?
  2. What is the degree of causality that exist between inflation and domestic savings in Nigeria?
  3. Does long-run relationship exist between inflation and domestic savings in Nigeria?

1.4 Objectives of the Study

This research work aims;

  1. To examine if there is any significant impact of inflation on savings in Nigeria.
  2. To evaluate the degree of causality existing between inflation and domestic savings in       Nigeria.
  3. To ascertain the extent to which long-run relationship exists between inflation and  domestic savings in Nigeria.

1.5       Hypothesis of the Study

The research work will be guided by the following hypothesis;

H0: There is no significant impact of inflation on domestic savings in Nigeria.

H0: There is no causal relationship between inflation and domestic savings in Nigeria.

H0: There is no long-run relationship existing between inflation and domestic savings in Nigeria.

1.6 Significance of the Study

This study is being carried out with the view of bringing to light the impact, cause and history of inflation on savings in Nigeria. By this study, much important or relevance to investing firm, government, individual household and future researchers. To the firm, it will aid them in making decision as to what projects to embark upon and at the right time. Also, it will help the government since it will act as a guide to her policy makers and agencies in formulating the right policies to achieve only desirable inflation rate so as to increase domestic savings.

The study will add more literatures to the existing ones on the concepts of inflation and domestic savings in Nigeria. Hence, acting as an aid and or stepping stone to the future researchers.

Finally, this study is important because it will try to examine these issues with an aim of making adequate findings and recommendation which would be of assistance also an avenue for further research work by those who will be opportune to access this work.

1.7 Scope and Limitations of the Study

This study shall attempt to, empirically examine the impact of inflation on mestic savings in Nigeria for the period of 1981 to 2013. These selected years have shown periods of low moderate and high inflation rate in Nigeria.

This study focuses on inflation in its entire ramification as its affects domestic savings in Nigeria. This time frame of the study, will therefore serve as a precede for provoking further though on the study. Also it’s give on appraising glance on the determinant of domestic savings since each of them demands individual attention together with causes and control of inflation. Hence, their impacts would be better understood when studied independently.

The limitation of the study, like many others, is constrained by prohibitive cost and short-time available for the study. The mere fact that the study was carried out as a study research project suggests the numerous financial landscape of the study. In addition; the limitations of the study were observed in the areas of finance, time and data collection. In terms of finance, the cost of transportation in search of data was exorbitant.

On the part of time, the study was carried out concurrently with school activities. Moreover, the period given to carry out the research was relatively short, more comprehensive analysis was not possible. Meanwhile, notwithstanding the aforementioned limitation or prohibiting factors, the study remains a compendium of the relationship between inflation and domestic savings in Nigeria specially.

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