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.
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).