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THE IMPACT
OF MONETARY POLICY ON SAVINGS MOBILIZATION IN NIGERIA
ABSTRACT
The study
examined the impact of monetary policy on savings mobilization in Nigeria
between 1985 and 2016. The study attempted to investigate the impact of
monetary policy variables such as broad money supply, deposit rate, inflation
rate and real GDP on private domestic savings mobilization in Nigeria.
The study
made use of secondary data on the variables of interest. Savings mobilization
was captured as national savings. Broad money supply, deposit rate and
inflation rate were captured as monetary policy indicators and real GDP was
deployed as the control variables.
The
estimation techniques adopted in the study are Augmented-Dickey Fuller test,
Johansen Cointegration test, Error Correction Model and the Granger Causality
test. The estimation techniques are carried out electronically by the use of
Econometrics Views (EVIEWS).
The results
showed that there is cointegration or long run relationship between savings
mobilization and monetary policy in Nigeria. Furthermore, it was found that the
speed of adjustment from short run to long run equilibrium is approximately 56%
per annum. Also, broad money supply to be core monetary policy tool that had
robust impact on savings mobilization in Nigeria.
The study
concludes that various monetary policies administered through those variables
have not been adequately applied to effectively mobilize savings for investment
activities in Nigeria.
To this end,
the study suggested amongst others that; the issue of low deposit rate offered
by commercial banks has rendered interest rate inactive to savings mobilization
in Nigeria; For effective operation of monetary policy measures in Nigeria, the
Central Bank of Nigeria should be granted full autonomy on its monetary policy
functions; Monetary policy to a great extent depends on the coordination with
fiscal policy; Proper measures should be devised to encourage banks to open
branches in the rural areas in order to mop up deposits; There should be
determined effort by the monetary authorities to bridge the widening gap between
deposit rate and lending rate.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The issue of
the persistence low level of economic development in Nigeria has been a matter
of concern to economists and policy makers. It has been argued that economic
underdevelopment is an outcome of capital shortage (Noko, 2016). It has also
been contended that the fragmented state of domestic resource mobilization and
the resultant inefficient intermediation between savings and investment are key
bottlenecks to self-sustainable development in Nigeria (Egoro & Obah,
2017). Capital shortage portends the need to mobilize greater domestic
resources if sustainable economic development is to be achieved. However,
mobilizing domestic resources through savings and then, channeling the savings
into productive investment can hardly be done without the existence of a sound
monetary policy capable of directing the resources into major productive
investment (Nasko, 2016).
Monetary
policy can be described as an array of policies employed by the Central Bank to
control the stock of money as an instrument for achieving the macroeconomic
goals. Chikere (2013) posited that monetary policy is the use of open market
operations, change in discount rate, change in reserve requirement and other
measures available to the monetary authorities to control the rate of growth of
money supply. Monetary policy in the Nigerian context encompasses actions of
the Central Bank of Nigeria that affect the availability and cost of commercial
and merchant bank reserve balances and thereby the overall monetary and credit
condition in the economy. The major objective of such action is to ensure that
over time, the long-run needs of the growing economy at stable prices.
According to CBN (2015), the aim of monetary policy are basically to control
inflation, maintain a healthy balance of payment positions for the country in
order to safeguard the external value of the national currency and promote an
adequate and sustainable level of economic growth and development. The
formulation is done by the federal government, mostly announced during budget
speeches while the enforcement of the policy is solely the responsibility of
the Central Bank of Nigeria.
The two
major issues that pertain to developing economies are how to stimulate
investment and how to use savings to enhance investment (Jhingan, 2007).
Developing economies have accepted the responsibility of ensuring proper
mobilization of domestic funds by manipulating monetary policy and/or fiscal
policy to actualize their objectives. For many economies, financial sector and
balance of payment liberalization have widened access to foreign capital to
finance domestic investment. However, due to the fact that many developing
economies have huge external debt. They are unable to attract foreign capital
to finance domestic investment, thus leaving them with an only option of using
domestic savings to finance investment. In mobilizing savings, macroeconomic
indices such as income, interest rate, inflation rate, fiscal balance, external
debt, capital formation, money supply and exchange rate are important. The
proper utilization of these indices would help developing economies to promote
savings for financing investment.
The
financial sector reforms started with the deregulation of interest rates in
August 1987. Prior to this period, the financial system was under regulation
and interest rates were said to be repressed. Mckinnon (1973) maintained that
financial repression arises mostly when a country imposes a ceiling on deposit
and lending nominal interest rates at a low level relative to inflation. The
resulting low or negative interest rates discourage saving mobilization and
channeling of mobilized savings through the financial system. This has a
negative impact on the quality and quantity of investment. The link between
savings, investment and growth has been emphasized that if individuals or firms
save, there is a greater possibility of investing in the nearest future
(Olayemi & Jolaosho, 2013). Huge amount of savings increases the available
of resources for investment. A higher level of savings leads to a higher level
of investment, which is capable of creating brighter chances of sustainable
economic development.
1.2 Statement of Problem
Over three
decades ago, the economy of Nigeria experienced the introduction of Structural
Adjustment Program (SAP) which shifted focus from public sector to private
sector. The objectives were, amongst others, to encourage private domestic
savings, private domestic investment and capital formation in order to improve
economic growth. By encouraging savings, resources were diverted from current
consumption and invested in capital enterprises. Unfortunately, SAP failed to
produce expected results. Although the
reform led to privatization and commercialization of many state
enterprises and improvement in some macroeconomic variables like interest rate
and money supply, but not without its disappointing performances. For example,
Nigeria continued to be confronted with low savings and investment ratios,
subsequently low rate of real economic growth. Besides, aggregate supply
continued to dwindle leading to demand-pull inflation.
Savings, an
important engine of economic growth has been very low in Nigeria. The ratio of
domestic savings to GDP in most developing economies is very low. The ratio of
domestic savings to GDP in Nigeria between 1980 and 2015 averaged less than 25%
(CBN, 2016). The apparent low savings in Nigeria can be attributed to a number
of micro and macroeconomic factors such as high rate of poverty, low per capita
income, high rate of unemployment and underdeveloped financial system. In an
attempt to overcome the problem of low savings in Nigeria, various monetary
policies have been pursued over the years, but did not produce desired
outcomes. Thus, there is need to put the economy on track via savings
mobilization predicated on effective monetary policies, which would eventually pave way for higher levels
of investment and economic growth.
1.3 Objectives of the Study
The main
objective of the study is to examine the impact of monetary policy on savings
mobilization in Nigeria. In specific terms, the study attempts to:
Investigate the impact of monetary policy
variables (broad money supply, deposit rate and inflation rate) on savings
mobilization in Nigeria.
Ascertain the existence of long-run
relationship between monetary policy and savings mobilization in Nigeria.
Investigate the nature of causal
relationship between monetary policy variables and savings mobilization in
Nigeria.
1.4 Research Questions
Based on the
research objectives, the study attempts to provide answers to the following
questions:
To what extent have monetary policy
variables (broad money supply, deposit rate and inflation rate) impacted
savings mobilization in Nigeria?
Is there any long-run relationship between
monetary policy and savings mobilization in Nigeria?
Is
there any causality between monetary policy variables and savings mobilization
in Nigeria?
1.5 Research Hypotheses
Three
hypotheses are developed to guide the study. The hypotheses are stated in their
null form:
H01: Monetary policy has no significant
impact on savings mobilization in Nigeria.
H02:
There is no long-run relationship between monetary policy and savings
mobilization in Nigeria.
H03: There is no causality between monetary
policy variables and savings mobilization in Nigeria.
1.6 Significance of the Study
The study is
beneficial to stakeholders in the financial sector, monetary authority,
government, academic and students. The study would provide empirical evidence
upon which to assess the effect of monetary policy on savings mobilization in
Nigeria. The study would also provide policy recommendations to policy makers
on ways to revamp the economy through monetary policy. Academic and students
will benefit from the study as it provides an objective view of the
effectiveness of monetary policy in Nigeria and also serve as a basis for
further research.
1.7 Scope of the Study
The study
covered a 31-year period ranging between 1986 and 2016. The study concentrates
to ascertain the effectiveness of monetary policy on mobilizing savings for
investment in the SAP and Post-SAP period. Structural Adjustment Programme
(SAP) hinges on liberalization and deregulation. Thus, this time frame is
appropriate for the study. Furthermore, the monetary policy variables
considered in the study are broad money supply, deposit rate and inflation
rate).
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