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This research work analyzed the National Savings, Capital Formation And Its Impact On The Economic Growth In Nigeria (1990-2015). Secondary data was adopted and sourced from CBN statistical bulletin. Ordinary Least Square with the aid of E-view version 9 was used to determine the effects of National Savings on Gross Domestic Product. The result showed that there is a positive and significant relationship between National Savings and Gross Domestic Product in Nigeria. The study recommends amongst others that; Government should ensure an adequate macroeconomic policy that will open up the economy in order to encourage foreign direct investment inflow and make Nigeria an export platform, where export commodities could be manufactured for established international market; so as to Strengthen Nigeria’s term of trade and induce Savings, Proper financial market development that would be able to meet the saving needs of the surging business world.




1.1 Background of study

A nation that needs to meet her objective of economic development needs a capital formation (physical capital stock) or capital accumulation. However, economic development may be measured through building of capital equipment on a sufficient scale to increase productivity in agriculture, mining, plantations and/or industry on the one hand. While on the other, capital is required to construct schools, hospitals, roads, railways, standards of living, research and development (R & D), etc. (Jhingan, 2006; Ainabor, Shuaib & Kadiri, 2014). The essence of economic development is the creation of economic and social overhead capitals (or costs), which leads to increase in national output and/or income through creation of employment opportunities and/or reduction of vicious circle of poverty both from the demand side and supply side. Economic development is sine qua non and/or is not normally achieved in the short run rather in the long run, where the citizenries of per se country could match up with the 21st century trends relatively to economies of the world. The discovered problem (s) that is/are responsible for the emerging economies is/are resulting from low capital formation (or base) (Jhingan, 2006; Ainabor, et. al., 2014). The emerging countries of the World have no opportunity costs or the attitude of sacrificing present consumption (i.e. save) for future consumption (.i.e. investment) in order to augment future national output and income (ibid.). Gross capital formation leads to technical progress which helps realize the economies of large scale of production (or economies of scale or operation) and/or increases specialization, in terms of providing machines, tools and equipments for growing labour force. Thus, the accumulated capital enables the acquisition of new factories alongside with machinery, equipment and all productive capital goods. In addition, to the construction of capital or mega projects and/or utilize (diverting) the gross capital formation into educational sectors, health sectors, etc (op.cit).


Capital formation is analogous (or prerequisite) to an increase in physical capital stock of a nation with investment in social and economic infrastructures. Gross fixed capital formation can be classified into gross private domestic investment and gross public domestic investment. The gross public investment includes investment by government and/or public enterprises. Gross domestic investment is equivalent to gross fixed capital formation plus net changes in the level of inventories (loc.cit). Capital formation perhaps leads to production of tangible goods (i.e., plants, tools & machinery, etc) and/or intangible goods (i.e., qualitative & high standard of education, health, scientific tradition and research) in a country. The paper examines the relationship between the domestic investment and public investment and GDP of the Nigerian economy and how capital formation raises the national output and national income. In Nigeria for example, capita output is low resulting from the fact that capita income is low. In Nigeria the marginal or average propensity to save is low, while the marginal or average propensity to consume is so high, this leads to unattainment of economic development. For economic development to be achieved in Nigeria, then there should be increase of domestic saving from 4% to thereabout 12% in national income, expansion of market, investment in capital equipment, decrease in population rate, correcting of imbalance of payments, declining of foreign debts, control of inflationary pressure, etc. These stated points are possible only and only if there is a rapid rate of capital formation in the country, that is, if smaller proportion of the community’s current income or output is partly devoted to consumption and/or the other part is saved and/or invested in capital or industrial equipment. Recently, the percentage of domestic investment and/or public investment has reduced drastically, which resulting from macroeconomic variables disequilibria—such as, inflation rate; exchange rate fluctuations; balance of payment problems; High external debt ratio; increase in population, corruption, etc. it was worsened when most recently there was a significant drop of crude oil prices in OPEC. This has had inverse relationship with countries that depended on crude oil or agriculture (monoeconomy) such as Nigeria. In other words, in Nigeria growth rate has dropped from 7% to 4.2%. This has led to devaluation of currencies and/or other stringent fiscal and monetary policies—such as reduction in taxes and deliberate attempt to make a mismatching of the unit of domestic currency and another currency (most especially American dollar as the commonest currency for exchange for goods and services) (Ainabor, et.al, 2014). Several countries that have achieved rapid economic development since World War II have two common features. First, they invested in education of men, women and in physical capital. Second, they achieved high productivity from this investment by providing efficient capital markets, competitive trade-lending roles, and higher level of economic efficiency driven by technological capabilities, stable polity, appropriate economic policy and economic system (World Bank, 2002). However, as a result of market failure that may likely occur in the process of growth, it may not be ideal to leave the process of economic growth entirely to the market forces especially in the developing economies like Nigeria.


One of the cardinal economic objectives of the developing countries, including Nigeria is to achieve high economic growth that will lead to economic development and reduce poverty from whatever theoretical angle that one may look at it, economic growth indicates the ability of an economic to increase production of goods and services with the stock of capital and other factors of accumulation with the right combination of other factors of production will bring about their higher output growth.


Utemadu (2002) stated that economic growth countries that are able to accumulate high level of capital tend to achieve fast rates of economic growth and development. Secondly, the quality of the government and its economic policies matter a lot. The radical theorist and early proponents of development economics were of the view that growth could be internalized. Developments in the world economies have shown that it is futile for economies to isolate themselves from rapidly integrating world (Essien & Bawa, 2007).


Therefore, to finance adequate investment required for proper economic growth, every economic needs to generate sufficient savings or borrow from abroad. However, borrowing from abroad is not proper strategy for economic growth, as it may not only have adverse effects on the balance of payment as the loans will have to be serviced in the future, but also carries foreign exchange risks, national savings becomes necessary for economic growth, because, they can provide the domestic resources that are needed to fund the investment effort of a country (Gotera, 2002). Savings which is defined as that part of income not immediately spent or consumed but reserved for future consumption, investment or for unforeseen contingencies, is considered as an indispensable weapon for economic growth and development. Its role is reflected in capital formation through increase capital stock and the impact it makes on the capacity to generate more and higher income.


(Akinbobola & Ibrahim, 2011).   Higher savings leads to higher investment, which in turn leads to higher economic growth (Lewis, 1955). The Harrod-Domcar model proposed by Harrod (1939) and Domar (1946) postulates that savings as the major determinant of economic growth depends on marginal propensity to save and capital output ratio.

Economic theories suggest that the national savings of a nation is the aggregate of public savings and private savings. Usually, it is equivalent to the income of a country after subtracting the government buys and expenditures. National savings function according to the economic model of national savings. According to the basics closed economy model, the GDP (Gross Domestic Product or the commodities and services manufactured within a year) can be utilized for three purposes.

It is believed that the people of less developed countries (LDCs)are incapable of high level of individual savings for reasons like; low level of per capital income, indulgence in luxurious and conspicuous consumption by the view who could afford to save. Looking at it by intuition, according to investment, the capital stock will grow faster and a higher growth of income will result but it is instructive to note that the connection among savings and growth is not as simple as it looks (Osundina & Osundina, 2014).


It is widely agreed on one side that countries that save more also tend to grow faster provided the financial system is deep while on the other hand, some analysts fear that a rising savings rate could hamper economic recovery if consumer expenditures from a large component of aggregate demand. Low savings rate has been cited by some study as one of the most serious constraints to sustainable economic growth, one of those studies is that of World Bank that concludes that on the average, third world countries with higher growth rates incidentally are those with higher saving rates (World Bank, 1989). United Nation also maintained that increasing savings and ensuring that they are directed to productive investment are central to accelerating economic growth (UN Department of Economies and Social Affairs, 2005). This makes savings as a macroeconomic variable to attain economic growth a subject of critical consideration.

The expansionary measure introduced by Nigeria‟s government in the early 70‟s was aimed at increasing the liquidity in the economy so as to aid the growth of the economy. It is aimed that this will increase the disposable income of the people which is expected to be distributed over both savings and consumption. This is consequently expected to raise the level of investments and thus increase the growth of the economic (Akinbobola & Ibrahim, 2011).

To many nations and individuals, borrowing may pave way to greatness but to some (those unable to manage debt) it may lead to impoverishment and great sorrows. External debts have thus become one central problem in Nigeria. It has generated much public concern prior to 1980 (Osundina & Osundina, 2014).


There is an implicit belief that the Nigerian economic environment has been unable to attract foreign direct investment to its fullest potentials, given the unstable operating environment, which is characterized by inefficient capital markets, high rate of inflation, unstable polity, stringent policies and fragile financial system, among others. Another major problem is the element of fiscal dominance. A size of fiscal deficit has an implication of national savings and investment and ultimately economic growth, (Uwakaeme, 2015).

In Nigeria, the main factor underlying these outcomes is the volatility of government expenditure arising from the boom and burst cycle of government revenue which is derived mainly from single export commodity (oil), whose price is also volatile. To worsen the problem, these expenditures are not channeled to productive sectors of the economy (Yesuf, 1996). Thus, this low level of savings in Nigeria is a result of high incidence in poverty and low level of disposable income, underdeveloped saving channels reflecting underdeveloped capital markets, conspicuous. Consumption and unfavorable economic environment characterized by high unemployment and inflation (Ahortor & Adenutsi, 2009).


1.2 Statement of problem

Savings remain a major concern for most countries in their bid to attain sustainable economic growth. Although Nigeria’s GDP has been growing over the past three decades, the country continues to face a current account deficit. However, the relevance of savings, which is a key factor in the deficit creation, has largely been ignored in the understanding of economic growth with focus being given to other macroeconomic indicators such as inflation and political factors.

Without empirical evidence of the relationship between savings and economic growth, most developing countries continue to undertake measures such as infrastructure development towards their goal of improving economic growth rather than address the current deficit gap. These interventions are often expensive and are financed through dissaving and external borrowing, which presents a subsequent challenge of debt financing.

Scholarly studies in Nigeria have focused on poverty, external borrowing, foreign direct investment, public expenditure in explaining economic growth (Obwona, 2001; Fan & Zhang, 2008; Ayanwale, 2007). However, there has been limited scholarly work focused toward explaining the relationship between savings and economic growth (Obwona & Ddumba, 1995; Atuhairwe, 2013; Samuel & Abebe, 2015). Further, global studies on the relationship between savings and economic growth have presented mixed evidence with some finding bidirectional causality (AbuAl-Foul, 2010) and others unidirectional causality (Oladipo, 2010; Romm, 2005;


Sothan, 2014; Jagadeesh, 2015). It is to this end that this study provides a portrait of Nigeria’s experience with regard to the impact of national savings and capital formation on economic growth.


1.3  Objectives of the Study:

The general objective of this study; is to examine the effects of national savings and capital formation on economic growth in Nigeria, but specifically;

  1. To determine the effect of national savings on GDP in
  2. To determine the effect of capital formation on the GDP in Nigeria.
  3. To analyse the longterm relationship between national savings and


1.4  Research Questions

In other to achieve the above objectives, this study will be guided by the following questions:

  1. What is the extent of the effect of national savings on GDP in Nigeria?
  2. What is the effect of capital formation on the GDP in Nigeria?
  3. What is the long term relationship between national savings and GDP?


1.5  Statement of Hypotheses

From the research questions presented, the hypothesis is presented in Null (H0) and Alternate (H1) form:

  1. H0: GDP has no positive effect on National Savings in

H1   GDP has positive effect on National Savings in Nigeria.


1.6    Significance of the Study

However, this study will be significant to policy makers to draw conclusion on where to strengthen the effort of investors. It will form a measuring tool to access the efforts of the financial sector as well as government agencies in managing polices that affect savings positive in recent years.

It will also act as a source of information on various factors that can determine national savings. It will also help the students and researchers to do further work related to the research project in creating a fountain of knowledge.

This study will extend the frontiers of the existing literature by emphasizing the roles of savings on economic growth.

1.7    Scope of the Study

This research work is designed to look into National Savings, capital formation, GDP, market capitalization in Nigeria. The study covers a period of (1990-2015).


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