The Tripartite Relationship among Savings, Investment and Economic Growth in Nigeria

Abstract

Despite Nigeria being regarded as the biggest economy in Africa, there have been rigorous debates on how the nexus between savings and investment can accelerate its growth sustainability. Unlike previous studies whose overreliance on simplified bivariate frameworks has constituted issues like omitted variable bias in the quest to successfully pass the diagnostic report, such approaches have hindered the true dynamic feedback of the trio and some selected control variables as it is in the real world. It is in this sense that this study investigates the dynamic interaction between savings and investment on economic growth, the extent to which a shock in savings and investment affects economic growth over time, the percentage of changes in economic growth that can be attributed to savings, investment, and other macroeconomic indicators, and the causal linkages between the underlying trio in Nigeria from 1980–2023. The study employed the Vector Autoregressive (VAR) methods, alongside Impulse Response Function (IRF), Forecast Error Variance Decomposition (FEVD), and Granger causality tests to achieve these objectives. The empirical results revealed that savings has positive and significant impact on economic growth in line with Keynesian postulations, investment showed an insignificant effect. The result further reveals the significant role of control variables such as domestic credit to the private sector and interest on lending in shaping the savings-investment-growth relationship. The IRF showed that savings shocks exert a stronger and more sustained effect on economic growth than investment shocks. Alternatively, the FEVD also revealed that variations in growth are largely explained by domestic credit to the private sector, while the Granger causality results confirmed bidirectional causality between savings and growth, as well as between savings and credit to the private sector. The study recommends that governments clamoring for growth must pay careful attention to the dynamic interaction between savings, investment, growth and the influence of certain control indicators (credits and interest on lending) that indirectly model the interdependence between the trios.

Keywords: Savings; Investment; Economic Growth; Vector Autoregression (VAR); Macroeconomic Indicators; Financial Intermediation; Harrod-Domar Model; & Structural Shocks.