A study of fiscal and monetary policies used to enhance savings mobilization for investment purpose
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A study of
fiscal and monetary policies used to enhance savings mobilization for
investment purpose
CHAPTER ONE
1.1
HISTORICAL BACKGROUND
An economy
whether developing or developed is out to achieve certain objectives which
include growth in the gross domestic product, reduction in the relit of
inflation and unemployment, favorable balance of payment, and long term
Socio-economic development. The growth of output of any economy depends on
Capital accumulation; and capital accumulation requires investment and an
equivalent amount of saving to match it. Two of the most important issues in
development economics, and tor developing countries, are how to stimulate
investment, and how to bring about an increase in the level of saving 10 fund
increased investment. To this end. many less developed countries' government
have made it a point of duties to ensure proper mobilization of domestic funds
by manipulating both fiscal and monetary policy as a tool to achieve their set
objectives For many countries, financial sector and balance of payment
liberalizations have broadened access to foreign capital to finance domestic
investment. However, many developing economies, in part because of their high
level of external indebtedness cannot benefit from foreign sources of capital.
For men. domestic savings remains the main source of funds to finance
development and to promote economic growth. However, due to low income per head
in less developed countries, a perception that poor people are too poor to save
has been prevailing for a long time and most financial institutions still do
not cater to this type of clients. It is clear that poor
3
people's
savings constitutes a potentially substantial source of savings and lapping
into that source of funds is essential However in mobilization of saving,
determinants such as income level, interest rates, economic growth level,
inflation rate, fiscal balance, external debt, among other have come to play
important roles. If developing economies are to promote savings for the
financing of investment, its determinants must be clearly identified, Until
recently, financial development was assumed to enhance the saving rate. It
consists of elimination of credit ceilings, interest rate liberalization,
easing of entry for foreign financial institutions, enhanced prudential
guidelines and supervision, and the development of capital markets. Loayza and
Shankar (2000) find that financial development has led the private sector to
increase the durable goods component of their assets. the effect of financial
development on saving rates can be separated into a direct short-run impact,
which is usually negative, and an indirect long-run impact, which is generally
positive (See Loayza et al, 2000). However, whether increased financial
development itself significantly increases overall propensity to save depends
on me extent of substitution between financial saving and other items in the
household's asset portfolio. Consequently, the expected signs of this
relationship in the private saving function are ambiguous (Athukora) and Sen,
2004). This study attempts to determine the effects of fiscal and monetary
policies on saving mobilization in Nigeria. It also attempts to find influence
of other Macroeconomics variables on both domestic and mobilization as a means
of attaining economic growth and development 1.2 STATEMENT OF THE PROBLEM
4
Savings, a
necessary engine of economic growth has been very low in Nigeria, Gross
Domestic Savings as a percentage of GDI1 in less developed countries has been
low; between 1980 and 2001, it averaged 6,4% in Ghana, 37.4% in Botswana, 2!.4%
in Cameroon, 21.6% in Nigeria, 13.9% in Kenya and 7.3% in Malawi (WDTS 2003),
He apparent low savings in Nigeria has been due to a combination of micro and
macroeconomic and political factors such as high level of poverty, low income
per head, high level of unemployment, inefficient financial institutions, and
many more. In order to overcome the problem of low savings in Nigeria, various
monetary and fiscal policies have been pursued over the years but these have
no! yielded the required results The objectives of monetary policy since 1986
have remained the same as in the earlier period - the stimulation of output and
employment, and the promotion of domestic and external stability. In line with the
general philosophy of economic management under SAP, monetary' policy was aimed
at inducing the emergence of a market-oriented financial system for effective
mobilization of financial savings and efficient resource allocation. The main
instrument of the market-based framework is the open market operations. This is
complemented by reserve requirements and discount window operations. The
adoption of a market-based framework such as OMO in an economy that had
5
been under
direct control for the required substantial improvement in the macroeconomic.
legal term regulatory environment . Fiscal policy is therefore a government
policy that attempts to influence the direction of the economy through changes
in government spending (expenditure) or taxes or simply put. fiscal policy
refers to the overall effect of the budge! outcome on economic activity. With
the other main type of economic policy, like the monetary policy which attempts
to stabilize the economy by controlling interest rates and the supply of money,
budgetary actions that raise the growth of government expenditures, reduce the
growth of revenues and either increase the deficit or reduce the surplus are
the sort of fiscal policies that tend to stimulate short-term growth and
capital formation through savings mobilization in the economy. Actions that
reduce expenditures; increase government revenues and shrink the deficit or
increase the surplus tend to dampen short-term economic growth. The three
possible stances of fiscal policy are neutral, expansionary and Contractionary:
A neutral stance of fiscal policy implies a balanced budget where G = T
(Government spending - Tax revenue). An expansionary stance of fiscal policy
involves a net increase in government spending (G > T) through EL rise in
government spending or a fall in taxation revenue or a combination of the two.
Contractionary fiscal policy (G < T) occurs when net government spending is
reduced either through higher taxation revenue or reduced government spending
or a combination of the two. The findings of this study will provide answer to
these and many more questions that would be raised in the count of the study.
6
1.3 RESEARCH
QUESTIONS This research question was asked and answered: 1. What are the fiscal
and monetary policies that can be used to enhance savings mobilization for
investment purpose? 2. What are the key variables explaining effective
mobilization of savings? 3. What arc the problems encountered in the process of
taxing mobilization? 4. What policy option have been formulated to correct
these problems and to sustain savings mobilization process?
1.4 Research
Hypothesis
To
effectively achieve the above mentioned objectives we adopt a null hypothesis:
HO: The
monetary policy instrument does not have significant impact on National Savings
HI: The
monetary policy instruments have significant impact on National Savings
7
1.5
HYPOTHESIS TESTING HYP. 1 HQ: The monetary policies do not have significant
effect on national savings HI: The monetary policies have significant effect on
national savings HYP. 2 HQ: The fiscal policies do not have significant effect
on national savings HI: The fiscal policies have significant effect on national
savings
1.6
Methodology
This aspect
of the research work aims at giving detailed information about the method used
in gathering relevant and useful data for the study. Basically, the methods
used in this research work are analytical. The work is based on data collected
from secondary sources such as Statistical Bulletin of Central Banks of Nigeria
(CBN) and annual reports of Nigerian Deposit Insurance Corporation (NDIC). The
data collected are in form of statistical data and tables which are analyzed to
arrive at a conclusion. 1.7 Method of Data Analysis of Statistical Method or
Econometric Method Using E-view To be able to exhaust the subject matter of
this study that is, the effects of fiscal and monetary policies on savings
mobilization in Nigeria, the study will cover the period of 1981 to 2013. The
finding(s) of this study will only be limited, consistent
8
and
applicable to Nigerian economic system. 1.8 PLAN OF THE STUDY Domestic
resources serve as a vital engine of growth and poverty reduction. However, the
effective mobilization of domestic resources depends on an efficient and well
developed financial market Capital formation is a prerequisite for development.
However, in Third World countries the inadequacies of the financial systems
often prevent the accumulation of financial resources. These systems need to
fulfill their role as agents between (abundantly available) savings and
investments to a greater extent. Economic development in Third World countries
means growth and the participation of the poor in such growth. This requires
large investments and thus capital. This is not something that has been discovered
recently but something that was already recognized at the start of development
co-operation about 40 years ago. However, nowadays many development aid
organizations are bemoaning cash shortages. Moreover, capital aid within the
scope of development cooperation has often led to the recipient country
becoming over borrowed. Is it possible to promote capital formation in less
developed countries through the use of its fiscal and monetary policies? When
economists address this subject, they like to point out that a national economy
can only invest to the same extent as it also saves - and saving mean forgoing
consumption. Statistics show there are major differences from country to
country when it comes to their ability to forego consumption. For example,
between 1980 and 2000 the national savings rates were between 23% and
9
58% in
Singapore, between 34% and 42% in The People's Republic of China, between -5%
and 24% in Ghana and between -4% and 14% in Senegal. The rationale behind this
study emanated from the desire to examine how government policies particularly
fiscal and monetary policies has affected mobilization of savings in the
economy and to clarify issues that can manifest in the process. Besides many
studies have been conducted on fiscal and monetary policies in the past but
little have been done to relate these studies to savings mobilization in
Nigeria. Because of the importance of capital formation on economic growth and
development it is very essential to study the effect of these macroeconomic
policies on saving mobilization. Thus, to design policy instruments through
which savings mobilization can be enhanced and sustained through fiscal and
monetary policies and to be able to channel it to appropriate capital
investment, remains the important rationale behind this study.
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