Nigeria ranks within the lowest rung of global savings and investments. Ironically, Nigeria stands high on the global list of infrastructural deficit and financing gap. Savings and investments are at the core of Nigeria’s ambitious Economic Recovery and Growth Plan (ERGP). In this report, Capital Market Editor Taofik Salako examines the challenges and opportunities to boost the Nigerian capital formation
The maiden offer of the Federal Government of Nigeria Savings Bond (FGNSB) made two salutary effects on the economy. The epochal offering opened up opportunities for the retail and sundry minority investors and savers to participate in sovereign issue.
With the minimum subscription fixed at N5, 000 and a double-digit annual coupon or interest of 13.1 per cent payable quarterly on the two-year bond, it was perhaps the sweetest offer for that category. But it also brought home the low level of savings and investments in the economy.
Despite the country’s population of about 170 million, the maiden FGNSB only received a nationwide total subscription of 2,577 bids with total size of N2.067 billion. It was a commendable start but it unearthed the underlying cause of Nigeria’s economic instability and susceptibility-paucity of savings and investments. The results aligned with other facts.
The United States Central Intelligence Agency (CIA) estimated Nigeria’s Gross National Savings (GNS) at 13.10 per cent, 131st position among 180 countries tracked by the US agency. Nigeria occupied the lowest rank within the emerging countries bloc of Brazil, Russia, India, China, South Africa and Nigeria (BRICSN). China ranked atop the global chart with 46 per cent while India ranked third with 30 per cent. Brazil and South Africa had 17 per cent and 16 per cent.
Nigeria’s Economic Recovery and Growth Plan (ERGP) also lent credence to this, with the GNS indicated at 11.29 per cent in 2016. The GNS is the difference between the Gross National Disposable Income (GNDI) and Total Consumption (C) and it serves as underlining benchmark to determining the national savings and investment culture, wealth creation and standards of living.
GNDI aggregates the gross disposable incomes of all resident institutional sectors. The GNS comprises of personal savings, business savings and government savings with the exception of foreign savings. The ERGP indicated GNDI at 101.73 per cent of the Gross Domestic Products (GDP) in 2016 while Total Consumption was put at 90.44 per cent. Gross National Income (GNI) was estimated at 97.48 per cent. The GNS is a vivid illustrator and it tells the stories of the economy, culture and habits. The higher the GNS, the higher the savings culture and vice versa. A relatively high and steady GNS contributes to national capital formation and development. The depth of domestic capital formation often determines the terms, access and flexibility of foreign capital.
Missing links
The low level of savings and investments also reflects in the nature and scope of participation in the capital market. Less than four per cent of the Nigerian population are investors in the nation’s capital market and only about six per cent of the domestic investors participate in mutual funds, otherwise known as collective investment schemes (CIS).
These compare with an average of 15 to 20 per cent among several emerging economies. The absence of a large domestic investors’ base has been major factor in the long-running depression of the stock market. With the slowdown in foreign portfolio investments, Nigerian equities have been under intense sell pressure, forcing most companies into significant undervaluation.
Reports on capital importation by the National Bureau of Statistics (NBS) and foreign portfolio investments (FPIs) by the Nigerian Stock Exchange (NSE) underlined the linkage and susceptibility of the capital market to the volatile fluctuations of foreign investors.
According to NBS, Capital importation declined by 46.9 per cent to $5.12 billion in 2016 as against $9.6 billion in 2015, the lowest value since the NBS started tracking the inflow in 2007.
FPI, which directly relates to the stock market, recorded the highest decline of 69.8 per cent while foreign direct investment (FDI) dropped by 27.8 per cent. A full-year foreign portfolio investment (FPI) report by the NSE showed that total foreign transactions decreased by 49.51 per cent from N1.03 trillion in 2015 to N517.55 billion in 2016.
It was the lowest in six years and it was the first time that domestic transactions would outpace foreign transactions since 2011. The drag-on effect also saw domestic transactions decreasing by 28.02 per cent from N880.56 billion in 2015 to N633.82 in 2016.
Altogether, total transactions at the stock market declined by 39.58 per cent from N1.91 trillion in 2015 to N1.15 trillion in 2016. The drag-on effect of the declining FPIs has continued to sustain a grueling depression since 2014, in spite of the near-consensus on the undervaluation of most stocks at the market. The stock market has been on a losing streak since 2014. Investors lost N1.75 trillion in 2014 and followed this with another loss of N1.63 trillion in 2015. Against the general expectation that political transition and new government would quicken a rebound, equities also closed 2016 with a net capital loss of N604 billion. Aggregate market value of all quoted equities on the NSE closed 2016 at N9.247 trillion as against N13.226 trillion recorded at the start of trading in 2014, representing a net capital loss of N3.98 trillion.
“It has been established that there is significant relationship between savings, investments and economic growth. Savings is known in economic parlance to equal investments. Savings is also known as the amount left over when the cost of a person’s consumer expenditure is subtracted from the amount of disposable income that he or she earns in a given period of time. Savings is also the portion of disposable income not spent on consumption of consumer goods but accumulated or invested.
Investment on the other hand is the purchase of a financial product or other items of value with an expectation of favourable returns in the anticipated future,” economist and head of research and investment advisory, SCM Capital Markets Limited, Sewa Wusu, noted.
Behind the rot
Most pundits said savings and investments reflect the macroeconomic environment and the deliberate policies of the government. AG Leventis (Nigeria) Plc Chairman, Mr. Ahmed Mantey, said a poor national economic performance would negatively impact savings and investments as households grapple to meet personal needs.
“Worsening rates of unemployment and underemployment mean reduced household income and this puts a strain on disposable income to pay for goods and services,” Mantey noted on the reasons for the decline in consumer demand last year.
Analysts at FSDH Merchant Bank also agreed on the macroeconomic influence on savings and investments. “The current high unemployment level in the country coupled with a drop in disposable income and the erosion of the purchasing power of Nigerians, have all contributed to low personal savings,” FSDH stated.
FSDH noted that corporate wealth creation, which oils the wheels of personal savings and investments, has also been adversely affected by the harsh business environment that resulted from weak infrastructure, inadequate foreign exchange and rising cost of production, which have led to increased cost of running business in Nigeria and reduction in business profitability and retained earnings.
Wusu stressed the importance of capital formation to national development. “Countries that had made sustained accumulation of capital investments as a result of savings have been able to achieve higher level of sustained economic growth. Nigeria has not been able to achieve that feat due to absence of laudable national savings policy. We are practically a consumption driven economy. This explains why we have failed in terms of developments in all spheres of critical infrastructure including education and health. The accumulation of fixed capital can only be possible through sufficient savings. We are constrained as a country by inadequate savings and investments,” Wusu said.
According to him, savings create capital formation, which leads to technical innovation and progress to accelerate productivity, thereby increasing national output or economic growth.
He added that savings would help to solve the problems of unemployment and balance of payment and eventually make the economy free from the burden of foreign debts.
“The vicious circles of poverty in our country can be broken through sufficient savings, our slow rate of development as a country is attributed to the low levels of national savings that constraint our capacity to invest in capital formation,” Wusu pointed out.
Ambitious targets
The ERGP however expects Nigeria’s average savings to double within the next four years. The economic blueprint projects that GNI will rise steadily from 11.29 per cent in 2016 to 12.71 per cent in 2017 and consecutively to 15.53 per cent, 18.19 per cent and 21.31 per cent in 2018, 2019 and 2020.
This projection also runs alongside that the economic growth would more than triple over the period. Real GDP growth is expected to recover from a contraction of -1.54 per cent in 2016 to a growth of 2.19 per cent in 2017 and subsequently to 4.80 per cent, 4.50 per cent and 7.00 per cent in 2018, 2019 and 2020.
Private investment is also expected to grow steadily over the period. Private investment is projected to dip slightly from 10.42 per cent in 2016 to 10.20 per cent in 2017 but thereafter rise consecutively to 11.19 per cent in 2018, 12.68 per cent in 2019 and 14.58 per cent in 2020.
Most pundits said while the targets are achievable much depend on government’s policies and coordination of the macroeconomic forces.
“I think the government has a vital role to play in boosting private or national saving through crafting the required policies that raise people out of poverty. The level of income for the common man who is not educated is still very small to induce any savings. This explains why many people in our country are still under the poverty trap due to weak earnings capacity. So, the bulk of these people cannot save. What they think about is consumption and how to fend for their poor families. I think there is need for government to set out a national agenda or craft a policy on national savings to foster domestic savings that will help to increase the level of economic growth in this country. Our gross national savings at 11.29 per cent is too low compared to other developing countries of the world,” Wusu said.
Securities and Exchange Commission (SEC) Director-General, Mr. Mounir Gwarzo, said the adoption of the National Savings Strategy Scheme, which is part of the Capital Market Master Plan, would boost savings and investments. He noted the need for stakeholders in the financial system to increase campaigns for financial literacy.
Gwarzo pointed out that SEC has been working with other stakeholders to develop early education programmes on capital market for pupils. SEC is leading efforts aimed at developing curriculum for the introduction of capital market studies in the primary and secondary schools in Nigeria in collaboration with the Nigerian Educational Research and Development Council and other stakeholders.
Managing Director, United Capital Plc, Mrs Oluwatoyin Sanni, said lack of adequate knowledge on the workings of the financial system, especially the capital market, is one of the main reasons for loss of investment and poor investors’ confidence.
Chartered Institute of Stockbrokers (CIS) President, Mr Oluwaseyi Abe, said the Federal Government should lead other stakeholders to develop a frontal purpose-driven domestic savings and investment policy that will encourage Nigerians to save and invest domestically as part of long-term plan for sustainable national development.
He noted that a large domestic investors’ base would enhance the development of the nation’s capital market and reduce the extreme volatility usually driven by inflow and outflow of the dominant foreign investors by instituting policies aimed at encouraging the participation of Nigerians in the nation’s capital market.
According to him, while the capital market would continue to depend on the interplay of foreign portfolio funds and domestic funds, it is only the presence of a large domestic investors’ base that can mitigate the volatility of the capital market.
“At the heart of the capital market is the issue of participation of local investors. Expectedly, it is the local investors who ultimately will bring stability to the equity market. The critical issue now is that the Federal Government and other stakeholders must be prepared to address the need to encourage our local investors to return to the market,” Abe said.
Fund Managers Association of Nigeria (FMAN) President, Dr. Ore Sofekun, said increased savings will accelerate economic growth.
“If we really want to develop our country, we have to save for long term. In United Kingdom, average investors save their money for six to seven years. The day a child is born, parents begin to save for his or her university education as both primary and secondary school education is free,” Sokefun, who is also the Managing Director of Investment One Venture Capital, noted.
FSDH emphasised that careful coordination and consistency of fiscal and monetary policies are important to stimulate and sustain savings and investments. According to the investment banker, to stimulate personal savings, the savers must be assured that the real value of their savings will be preserved in the medium to long-run while there must also be safe investments to attract savings by ensuring that the returns earned preserve real value for the savers.
“An environment of high inflation rate discourages savings and promotes current consumption. To stimulate business savings, the business environment must be competitive to enable businesses operate in a profitable manner. As businesses can fund future expansion from business savings or retained earnings, it thus increases their ability to raise future savings. In addition, government and its agencies must be disciplined in creating institutions and structures that will promote government savings. This can happen through careful planning at the central and state levels,” FSDH stated. FSDH added that government can also provide fiscal incentives such as removal of taxes on certain classes of investment schemes that encourage savings.
There is no gainsaying the importance of savings and investments to national development. A deeply entrenched savings and investment culture can also serve as antidote to the seeming obsession for immediate wealth that continue to erode national values and fuel stinking national corruption. As government begins the implementation of its economic blueprint, stakeholders are unanimous on the need to prioritise key initiatives and programmes to drive savings and investments.
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