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THE IMPACTS OF MONETARY POLICIES ON SAVINGS AND INVESTMENT IN DEVELOPING
ECONOMIES: A CASE STUDY
Kayode Bankole, Israel Ukolobi, Onyuka Mcdubus
To cite this version:
Kayode Bankole, Israel Ukolobi, Onyuka Mcdubus. THE IMPACTS OF MONETARY POLICIES ON SAVINGS AND INVESTMENT IN DEVELOPING ECONOMIES: A CASE STUDY. 2020. �hal- 02520027�
THE IMPACTS OF MONETARY POLICIES ON SAVINGS AND INVESTMENT IN DEVELOPING ECONOMIES: A CASE STUDY
Kayode O. BANKOLE1*, Israel O. UKOLOBI2 and Prof. Onyuka F.
McDUBUS3
1. Department of Accounting, University of Ibadan.
2. Delta State Polytechnic, Ozoro-Nigeria, 3. Novena University, Ogume-Nigeria
Bankolekayode02@gmail.com
Abstract
This Study was designed to explore the impact of money supply on savings and investment in developing countries. Nigeria was selected as the case study.
Literature related to the subject matter was reviewed. Secondary data for the seventeen (17) years on money supply, savings and investment were obtained from Central Bank of Nigeria Statistical Bulletin. The models were appropriately specified and the data collected were analysed using Eviews7 Statistical package. We found a high correlation between money supply, and the independent variables. This study recommends that the government should make money available to enable individuals engage in economic activities.
Also this study recommends that government should provide enabling environment for private investors to permit stress- free economic activities.
Government should release enough money for training and development of youths to encourage them to engage in entrepreneurship ventures that can stimulate savings and investment.
Keywords: Monetary Policies Savings and Investment, Developing Economies
1. Introduction
There are normally changes in monetary policy objectives from time to time, depending on the economic situation of a country. For instance, goals of monetary policy in Nigeria in 1993 were to reduce the inflation rate, minimize pressures on the external sector, stimulate growth in production and output, and reduce pressure on the balance of payments to ensure stable exchange and interest rates. By the end of that year, there was a rapid expansion of monetary and credit aggregates as broad money rose by 52.8 percent instead of the targeted 20 percent and narrow money by more than 50 per cent instead of the 18 percent target. The trend was the same for other key aggregates. The rate of growth of real output as measured by GDP at 1984 constant factor cost declined, inflation rose and unemployment increased. (CBN, Performance of Monetary Policy, 1993).
In 1996, the focus changed on consolidating and building on the modest gains made in growth and stabilization in 1995. The policies focused on improving economic performance, stemming the tide of high and rising inflation as well as improving the balance of payments position. (CBN, Performance of Monetary Policy, 1995).
In 2007, The Central Bank of Nigeria (CBN) adopted various policy measures aimed at containing the growth of monetary aggregates in order to achieve monetary and price stability. Open Market Operations (OMO) remained the major tool of liquidity management. Other policy measures included increased
issuance of treasury securities in the primary market to mop-up excess liquidity; use of deposit and lending facility to encourage inter-bank transactions as well as special sales of foreign exchange, including swap arrangements. NTBs of various tenors 91-, 182- and 364-day were auctioned during the period. (CBN, Performance of Monetary Policy, 2007).
Monetary policy in 2013 aimed primarily at sustaining the already moderated rate of inflation which was achieved in the first half of 2013. In 2014, monetary policy focus was shifted to achieving the objective of price and exchange rate stability (CBN, Performance of Monetary Policy, 2014).
It is the duty of the Central Bank of Nigeria (CBN) to formulate proper monetary policies to cater for the economy deployment of the nation. This duty is backed by various statutes of the bank such as the Central Bank of Nigeria Act of 1958, as amended in CBN Decree No. 24 of 1991, CBN Decree 1993 (Amended), CBN Decree No. 3 of 1997, (Amended), CBN Decree No. 4 of 1997 (Amended), CBN Decree No. 37 of 1998 (Amended), CBN Decree No.
38 of 1998 (Amended), CBN Decree 1999 (Amended) and CBN Act of 2007 (Amended). (CBN, Performance of Monetary Policy, 1993).
Several Laws have been enacted to encourage savings and investment in the country, such as Banks and Other Financial Institutions Act (BOFIA).
Boosting the level of savings is no doubt the objective of Nigerian government to increase investment and level of output. In economy theory, growth in output is a function of capital accumulation which in turn depends on the
1.1 The Statement of the Problem
It is observed from the monetary policies of the CBN over the years and related literature that the Nigerian economy is characterized by inconsistency in government policies, political instability, ineffective policy statement, deficit philosophical framework and excessive money supply. Monetary policies are designed to ensure that money supply in the economy is adequate to support desirable and sustained economic development without generating inflation pressures.
Considering all the policies and efforts of the government in improving the economy of Nigeria, this study was designed to find out whether its monetary policies have been able to bring about improvement in savings and investment in the country.
1.2 The Objective of the Study
The main objective of the study is to determine the impacts of monetary policy on savings and investment in the Nigerian economy. In line with the above objective, this study has the following sub-objectives:
1. To examine the effect of money supply on the level of savings in Nigeria 2. To examine the effect of money supply on the level of investment in
Nigeria.
1.3 The Research Hypotheses
The research hypotheses were designed to test the relationship between monetary policy on savings and investment in Nigerian economy. Therefore, the study will be based on two null hypotheses:
1. Money supply has no effect on the level of savings in Nigeria.
2. Money supply has no effect on the level of investment in Nigeria 1.4 Review of Related Literature
The Nigerian economy has been severely affected by an accumulation of shocks that have complicated policy making in an environment of increasing vulnerabilities. With oil receipts dominating fiscal revenue and exports, the economy has been hit hard by low oil prices, a significant fall in oil production owing to sabotage of infrastructure, and inadequate policy implementation.
Investor confidence waned, as the slowdown in the economy that started in 2014 turned into a recession and macroeconomic conditions worsened- with inflation doubling, domestic arrears mounting, borrowing costs rising, distortions in the foreign exchange (FX) market dampening activity and investment, and banking sector risks growing. These increasing vulnerabilities compound an already challenging environment- a large infrastructure deficit, weak business environment, strictures of fiscal federalism arrangements, high unemployment and poverty rates, inequities across regional political zones, militant tensions in the Niger Delta, and an evolving insurgency-related humanitarian crisis in the North East (IMF Country Report No. 17/80).
Afolabi (2006) stated that as the watchdog of the economy, Central Bank of Nigeria has the duty to ensure that policies are set in motion to ensure that monetary system and real system move hand-in-hand and that monetary variables do not constitute hindrance in the achievement of national objectives.
The level of money in circulation must not be too high in order to avoid inflation and must not be too low to discourage investment. He further stated that, if monetary sector is not controlled in line with the changes in real system, a situation of disequilibrium will occur, creating problems in the economy.
Asiedu (2002) carried out a research on the effects of Foreign Private Investment on economic growth in Nigeria from 1980 to 2001. The result showed that FPI had significant impact on Nigeria’s economic growth, and therefore concluded that the presence of Foreign Private Investment in the developing nations especially Nigeria is not totally useful.
Browning & Lusardi (1996) found that savings rates are higher for wealthy or more educated households. Likewise, savings rate increases with age until retirement and decreases after retirement (Oluwakemi Obayelu, 2013).
Gersovitz (1995) identified several reasons as to why savings behavior in developing countries may diverge from saving patterns in developed countries.
The reasons include: (a) households are dynastic and survive beyond individual members; (b) a household is an indecomposable unit and savings are decided at the household rather than individual level; (c) households have
lower and more uncertain income; (d) borrowing constraints may be much more pervasive; and (e) savings provide a buffer for uncertain and unpredictable income rather than inter-temporal consumption smoothing.
He also noted that families who earn low income from their rural farming or non-farming enterprises have little or no savings when compared to farmers who earn high incomes from a combination of both farming and non-farming enterprises. However, the literature suggests the determinants of savings will include but are not limited to the income of the household (Oluwakemi Obayelu, 2013).
Gorg and Strobl (2004) also investigated the impact of Foreign Private Investment on economic growth in Nigeria, for the period 1970 to 2001. The ECM results showed that both private capital and lagged foreign capital have small effect on the economic growth. The results seem to support the argument that extractive FPI might not be growth enhancing as much as manufacturing FPI. Obadan (2001) addressed the various issues associated with capital flows in both conceptual and empirical contexts. He posits that the desirability or otherwise of foreign capital depends on the use to which such capital is put.
Keynes (1936) also identified absolute disposable income as an important determinant of savings. He defined savings as the amount left over when the cost of consumer expenditure is subtracted from the disposable income that he or she earns in a given period of time. Permanent Income Hypothesis (PIH) differentiates between permanent and transitory income and indicates that savings is influenced by both permanent and transitory income as well as
present level of wealth, both human and nonhuman. In developing countries, like Nigeria, income plays a significant role in determining household savings.
The desire and ability to save depends on having more than the resources dedicated to basic needs (Carpenter and Jensen, 2002). Recent studies have confirmed that savings is highly influenced by income (Browning & Lusardi 1996; Pailwar et al. 2010).
Kingsley (2012) stated that interest rates have a positive and significant impact on aggregate savings in Nigeria. This was confirmed by a positive interest rate coefficient. Also there was positive correlation between interest rate and aggregate savings, thus an increase in interest rate will lead to an increase in Aggregate savings in the economy. (Kingsley, 2012).
Nzotta (2006) explained monetary policy as the combination of discretionary measures designed to regulate and control the money supply in an economy by the monetary authorities with a view to achieving stated macroeconomic goals.
He stated also that monetary policy refers to any conscious action undertaken by the monetary authorities to change or regulate the available quantity, cost or direction of credit in an economy in order to attain stated economic objectives.
Onyiodo (2006) stated that the CBN has the responsibility of formulating and implementing policies aimed at maintaining money supply growth at a level that is consistent with the absorptive capacity of the economy. In his perspective, monetary policy refers to actions taken by the CBN to effect monetary and other financial conditions in pursuit of the policy objectives of price stability, sustainable output growth and a healthy balance of payments.
The discretionary control of the money stock involves the expansion or contraction of money and influencing interest rates (cost of credit) to make money cheaper or more expensive depending on the prevailing economic conditions or thrust of policy.
Osinubi and Amaghionyeodiwe (2010) carried out a research on foreign private investment and the Nigerian economy from 1970 to 2006. Their result showed that foreign private investment and export growth was positively related with Nigeria’s economic growth.
Baghebo and Edoumlekumo (2012), empirically examined the relationship between foreign Private Capital accumulation and economic development in Nigeria from 1970 to 2010. Using a group unit root tests, he discovered the variables were stationary after first difference. Also long run equilibrium relationship was also established using the Johansen co-integration test. Its impact on the Nigerian economy was seen to be stable and statistically insignificant probably due to the relative stability in the economy then (Okpoto, 2015).
Studies by Browning and Lusardi (1996), Loayza & Shankar (2000), and Gardiol (2004) and Orbeta (2006) point out that large family sizes have lower household savings. Conversely, in developing countries, the intergenerational links of large families are particularly strong, which lengthen the effective planning horizon of households (Gersovitz, 1988) and reduce the need for savings for retirement or for intergenerational transfers (Deaton, 1991). Like many other issues, the empirical evidence on the impact of
children on household savings is relatively scarce in developing countries (Oluwakemi Obayelu, 2013).
1.5 Materials and Methods
Secondary source of data was adopted for this study. Data were obtained from CBN online Publications (Statistical Bulleting, 2016).
This research work considered the relationship between monetary policy, savings and investment. The sampled years ranges from 1999-2016. The reason for the selected period was to see how the democratic dispensation has contributed to development in the nation. .
Eviews 7 was used to analyse the data collected from CBN Statistical Bulletin.
Table 1: Model Specification Inv. = f(M2, S, R)
Explicitly:
Inv = bo+b1M2+b2S+ b3R +b4GDP+e Where: Inv = investment
M2 = Money Supply S = Savings
R = Reserves
GDP = Gross Domestic Product e = error term
bo, b1, b2, b3,b4 = coefficients
A priori Expectation
Money supply, savings and GDP are expected to have positive linear relationship with investment while reserves was expected to have negative relationship.
1.6 Data Presentation and Results Table 1: HYPOTHESIS 1
Dependent Variable: SAVINGS Method: Least Squares
Variable Coefficient Std. Error t-Statistic Prob.
C -398.5988 378.2749 -1.053728 0.3270
SAVINGS(-1) -0.358021 0.392078 -0.913136 0.3915 SAVINGS(-2) -0.586350 0.473665 -1.237900 0.2557
R -4.46E-05 4.17E-05 -1.070562 0.3199
D(R) 3.72E-05 5.95E-05 0.625947 0.5512
D(D(R)) -3.84E-05 3.36E-05 -1.141183 0.2913
M2 1.224407 0.438531 2.792067 0.0268
D(M2) -0.306626 0.835697 -0.366910 0.7245
D(D(M2)) 0.060098 0.513641 0.117004 0.9101
R-squared 0.991389
Adjusted R-squared 0.981549
F-statistic 100.7430
Prob(F-statistic) 0.000002 Durbin-Watson stat 2.467177
From the statistical results above, there is high correlation between the dependent variable and the independent variables.
Durbin-Watson Statistics value of 2.46, shows that the variables are not serially or auto-correlated.
The calculated value of F-Statistic (100.74) is more than the table value. This means that both variables (reserves and money supply) significantly affect savings either positively or negatively as the case may be.
The prob(F-Statistics) value of 0.00002 that tends towards zero is far lower than 0.05 (our significance level). This shows that shows that our model fits the data. Money supply has significant impacts on savings.
1.7 Table 2: HYPOTHESIS 2 Dependent Variable: INV
Variable Coefficient Std. Error t-Statistic Prob.
C 304591.5 109530.5 2.780882 0.0498 INV(-1) -0.395350 0.211723 -1.867301 0.1353 INV(-2) 1.104275 0.441831 2.499315 0.0668 SAVINGS 569.8347 250.5425 2.274403 0.0853 D(SAVINGS) 1233.466 604.1488 2.041659 0.1107 D(D(SAVINGS)) -748.1383 322.3376 -2.320978 0.0810 R -0.031003 0.018174 -1.705885 0.1632 D(R) 0.040595 0.030213 1.343628 0.2502 D(D(R)) -0.010384 0.015540 -0.668191 0.5406 M2 -421.4579 148.6799 -2.834667 0.0471 D(M2) 831.8670 192.0240 4.332099 0.0123 D(D(M2)) -383.8083 103.8645 -3.695280 0.0209
R-squared 0.991536
Adjusted R-squared 0.968260 F-statistic 42.59915 Prob(F-statistic) 0.001248 Durbin-Watson stat 1.062731
From the statistical results above, there is high correlation between the
The calculated value of F-Statistic (42.60) is more than the table value. This signifies that money supply significantly affects the level of investment in the economy. Thus if money supply increases, there is tendency for investment to increase.
The prob(F-Statistics) value of (0.0012) is far lower than 0.05 (our significance level). Hence, the model fits the data. Based on the results, Money Supply has an impact on Investment in the economy.
1.8 Conclusion and Recommendation
In economic theory, it is assumed that if the individual can save a portion of his income, he will be able to invest the saved portion to engage in economic activities.
This study suggests that the government should make money available to enable individuals engage in economic activities. Also this study recommends that government should provide enabling environment for private investors to permit stress- free economic activities. Government should release enough money for training and development of youths to encourage them to engage in entrepreneurship ventures that can stimulate savings and investment.
References
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Appendix
Year
SAVINGS (N'
Billion)
GDP AT CURRENT BASIC
PRICES (N' Billion)
RESERVES IN USD($) '000
INVESTMENT (N' Billion)
Money Supply2 (M2) (N' Billion) 1999 277.67 5,307.36 5,649,725 13,571.1 628.95 2000 385.19 6,897.48 10,099,450 14,072.0 878.46 2001 488.05 8,134.14 10,646,600 28,153.1 1,269.32 2002 592.09 11,332.25 7,566,806 57,683.8 1,505.96 2003 655.74 13,301.56 7,415,088 59,406.7 1,952.92 2004 797.52 17,321.30 17,256,540 120,402.6 2,131.82 2005 1,316.96 22,269.98 28,632,050 225,820.0 2,637.91 2006 1,739.64 28,662.47 42,735,470 262,935.8 3,797.91 2007 2,693.55 32,995.38 51,907,040 470,253.4 5,127.40 2008 4,118.17 39,157.88 53,599,290 1,076,020.4 8,008.20 2009 5,763.51 44,285.56 45,509,820 1,679,143.7 9,411.11 2010 5,954.26 54,612.26 35,884,920 685,717.3 11,034.94 2011 6,531.91 62,980.40 36,263,660 799,911.0 12,172.49 2012 8,062.90 71,713.94 47,548,400 638,925.7 13,895.39 2013 8,656.12 80,092.56 46,254,760 808,991.4 15,160.29
2014 12,008.24 89,043.62 37,497,240 2,350,875.7 17,679.29 2015 11,458.13 94,144.96 31,334,500 1,334,783.1 18,901.30 2016 12,320.23 101,489.49 30,029,810 961,221.5 21,607.68
About the Authors
1). Onyuka Felix McDubus, 67. Is a Chartered Accountant, Chartered Tax Practitioner and Certified Teacher. He is Professor of Accounting and Managerial Finance at Novena University, Nigeria where he has been Head, Department of Accounting and Finance since 2006.
He had his Bachelor of Science degree from University of Jos (1980) and a Master of Science degree from University of Lagos (1991). In addition he holds the Master of Science degree in Telecommunication and Information Systems Management of Novena University, Nigeria, (2018).
He earned his Doctorate Degree in Finance from Our Saviours University, New York, USA (2004). He is Fellow, Institute of Chartered Accountants of Nigeria (1995), Fellow, Chartered Institute of Taxation of Nigeria (1996) and Fellow Institute of Strategic Management, Nigeria (2004).
Prof Onyuka F. McDubus is the Principal Partner, Felix McDubus & Co (Chartered Accountants) and Director, Business Education Int’l Resource Centre, Lagos, Nigeria.
He is the Publisher of Anatomy of Investment Projects (Symptoms, Diagnosis and Prescriptions). A minister of the Gospel of Jesus Christ, he is married with children.
2). Kayode Oluwadamilare Bankole is a native of Ayedun, Kwara State, Nigeria. Kayode has a Diploma in Cooperative Management from the Kwara State Polytechnic, Ilorin, Nigeria (2010) after which he proceeded to Obafemi Awolowo University, Ile-Ife in Nigeria, where he obtained the Bachelor of Science degree in Accounting (2016). Currently, he is a Professional Student Member, Institute of Chartered Accountants of Nigeria. Kayode is currently a member of audit team of Felix McDubus & Co. Chartered Accountants, Lagos, Nigeria.
3). Ukolobi Omohefe Israel, 52 holds the Bachelor of Science degree in Accounting of the Rivers State University of Science and Technology, Port Harcourt (1988), and the Master of Science degree in accountancy of Nnamdi Azikiwe University, Awka (2017) both in Nigeria. He is Associate Member, Institute of Chartered Accountants of Nigeria and Associate Member Nigerian Institute of Management (Charted). He is currently a Senior Lecturer and Director of the Evening Programmes of Delta State Polytechnic, Ozoro.
Nigeria. He is married with children.
