Low savings rates: Where are the savings to investment assets?

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The logic of savings is a very simple one for a country. To produce we need investments.In general, more investments mean more production. Investments in things like infrastructure, machinery and all that stuff which help us be more productive. Investments don’t just appear though.

They generally come from savings. Savings here meaning whatever we produce that we don’t consume. To use a very simple example based on agriculture: if a farmer consumed all his produce from the previous harvest then the farmer would have no way of farming in the next season. So, the farmer has to save something from the previous harvest to enable him or her farm during the next season. As it is for this farmer, so it is for countries. Savings is the left hand and investment is the right.

Nigeria unfortunately has a relatively low savings rate, that is, the fraction of income that is not consumed. On average it has been about 20 percent of GDP over the last few decades, although it dropped to 13 percent in 2016 and 15 percent in 2017. For comparison it is about 33 percent in Indonesia, 32 percent in Malaysia, 25 percent in Vietnam, 37 percent in Algeria, and 47 percent in China.

To be fair we aren’t the worst country. There are many countries with lower savings rates than us. You also can’t forget to mention foreign savings. In terms of thinking about investment a country can mobilize domestic savings as well as foreign savings. That is the “left hand” of foreign investment. We don’t do a great job at mobilizing foreign savings either, as foreign direct investment in Nigeria is relatively very low at 0.9 percent of GDP in 2017. The rest of the world mobilized some of our savings too, at 0.3 percent of GDP in 2017. So net foreign direct

investment was very low at 0.6 percent of GDP. Net portfolio investment was actually negative in 2017 although I’m sure it would have reversed in 2018. Still in general the story is the same, we don’t mobilize that much savings either from domestic or foreign sources.

All this has me worrying about what role the financial sector,with its relative lack of good income generating assets, has played. In theory the financial sector is supposed to mobilize those savings and direct it to the best investments that increase productivity the most while minimizing risk. But there are just not that many assets which both incentivize savings and direct that to good investments.

The current deposit rate on savings accounts return only about 4 percent, with twelve month fixed deposits return averagely 10.7 percent, both lower than inflation. In other words, if you actually save money with banks you may end up losing money. In terms of converting deposits to investments, 40 percent of all bank lending goes to the oil and gas sector and government. This is systematically problematic as one doesn’t create jobs and the other is not known for spending very well. There is the option of bypassing the banks and investing directly in Nigerian businesses but that is a risk that most are not willing to take.

Government securities are an alternative in terms of mobilizing savings for investment. Returns on government securities are typically higher than inflation so they beat the banks on that front. However, the investment “right hand” isn’t great. We know what federal government spending looks like. In 2018 over 70 percent of all government spending, including that raised from debt, went to consumption i.e. debt service payments and salaries and entitlements. Mobilizing savings for government consumption is not systematically ideal either. Corporate securities are better in terms of mobilizing for investment, but they are still a very tiny fraction of traded debt instruments.

The stock exchange is supposed to be another financial alternative for mobilizing savings for investment. In this case both hands are bad. On the left hand the returns to investing in the stock market have been very poor, with the exception of a few stocks. There have also been very few IPOs so in terms of investment you might as well chuck that in the bin.

Then there is land, which given the way we practice it, is identical to locking assets in a safe and throwing away the key and then finding the key ten years later. Land is a good investment for savers looking for good returns but is a very poor asset for investment as people typically just sit on the land waiting for the value to appreciate.

Then there is foreign exchange, which has historically been a very good investment in terms a making sure you don’t lose money. For instance, the US dollar has been a better investment that almost all other options over the last twenty years. A good left hand for savings but a not so great right hand for investment. Anytime you buy dollars you are essentially indirectly loaning money to the US government. Some banks give foreign currency loans but that is also a very small fraction of lending.

So, there we have it. On the one hand, a bunch of assets and institutions that are good for savers but not good for investment. On the other a bunch of assets and institutions that are not so good for savers but good for investment. Where are the systematically useful assets that are both good for regular savers and that still transmit to investment? These are some of the challenges we need to think harder about.

 

Nonso Obikili

Dr. Nonso Obikili is chief economist at BusinessDay

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