Dynamic analysis of savings and economic growth in Nigeria

Abstract

This study focuses on the direction of causality between savings and economic growth in Nigeria during the period 1980-2010. The study was motivated by the low and declining savings rate currently prevailing in Nigeria on the one hand and the dwindling level of economic growth experienced in the country during the 1980s, 1990s and 2000s on the other. Relevant literature having been reviewed, a trivariate dynamic Granger causality model with savings, economic growth and foreign capital inflows was adopted as against the weak bivariate Granger causality technique that is common in existing literature. Using the cointegration-based error-correction mechanism, it is found that there is uni-directional causality between savings and economic growth in Nigeria, and the direction runs from growth to savings. Overall, it is found that growth-led savings is predominant in Nigeria. The results show that foreign capital inflow and savings do not Granger-cause each other, while economic growth does not Granger-cause foreign capital inflow. It is recommended that in the short run, policies in Nigeria should be geared towards achieving both higher savings and growth in order to boost investors’ confidence and to attract foreign capital inflow. However, in the long run, the country should shift its focus towards achieving higher economic growth in order to boost the domestic savings and to sustain a steady flow of foreign capital investment.

Key Words: Nigeria, Savings, Economic growth, Granger-causality