The Challenges and Importance of Saving as a Young Nigerian
The onset of COVID-19 profoundly impacted the world, and its effects are still palpable today. With some regions not having fully bounced back from the spiral effect of the virus, the recovery has been slow. The lockdown affected economic activities, strained our finances, and challenged the government to help people out of their financial misery. Due to the pandemic, the projected global economic growth in advanced economies is expected to slow down to 0.5% in 2023 from 2.5% in 2022, while emerging economies are expected to decline to 2.7% in 2023 from 3.4% in 2022.
Due to this sudden economic downturn and the shockwaves that came with the virus, the relevance of savings and investments to an individual's life has become of keen importance; we don't always get what we want, so how do we go about saving? This concept is ideal for the world’s economy, and therefore, there is a need to take a few steps backward to understand it.
Saving and Investments
Saving and investing are basic finance concepts that affect the economy. According to Investopedia, saving is an excellent way to meet unexpected situations and short-term financial goals. In simple terms, savings are what is left of your disposable income after consumption. Savings have much lower yields and lose value during inflation. During the Great Recession of 2008, savers lost the value of their assets as their real purchasing power was eroded due to inflation. However, researchers claim that the habits of saving among young adults are on the decline because of high trends and lifestyles in both developed and developing countries, whereas investing involves growing your money over time by placing it in financial instruments such as stocks, bonds, and mutual funds. These investments drive up economic activity and ultimately contribute to the nation's GDP.
As the neoclassical economist Solow puts it, “Saving and investment contribute positively to the capital formation of any economy.” This means that the more savings are made, the more financial intermediaries are capable of lending money to firms and individuals for investing (Owusu, Ansong, Koomson, & Addo-Yobo, 2022). A low-saving economy also means an economy with low economic activity. However, despite this revelation on the importance of savings and investment, many developing countries, especially in Africa, have low savings.
Developing countries in Sub-Saharan and West Africa have been examined and found to have low economic activity, and this is no longer news. Some of the major drivers of this have been identified as low investment opportunities, particularly in Nigeria. Investment from both the government in the lives of its citizens, which could drive up economic activities, and from foreign investors (FDI) and individuals is quite low, if not nonexistent. Also, the consistent rise in the cost of living has placed pressure on the finances of individuals, especially young adults in Nigeria, and this has seen the propensity to consume increase in percentage compared to the propensity to save. Quite simply, the average Nigerian is trying to live and get by each day.
Challenges and Importance of Savings
Based on the CBN report, as of May 2023, money outside the banks stood at N2.73 trillion. This shows that about 85% of the currency in circulation is outside the bank’s vault (CBN, 2023), and due to the high cost of living and financial illiteracy level across the country, this figure is still projected to rise. This just means more than half of the population in Nigeria has their money outside the banking system, either due to illiteracy or because they have no money to save. It simply means there are more poor people in the country due to the high cost of living, or the illiterate form a larger portion of the population in Nigeria. The major drivers are explained as follows:
High cost of living: The consistent rise in the standard of living has been a major concern for businesses, salary earners, and foreign investors. GSK, one of Nigeria's largest pharmaceutical companies, closed its operations in Nigeria. The speculation is that this was due to the economic challenges and the rise in the cost of operations. Businesses can hardly make a profit because the cost of operations keeps rising, and companies can’t increase selling prices due to the high unemployment rate in Nigeria. The projected unemployment rate by KPMG as of April 2023 was set to hit 40.6% (Nairametrics, 2023), which means over 41% of young adults in Nigeria either have little or no income to save due to the lack of jobs available. This means the average youth in Nigeria just has money for transactional purposes, and therefore, disposable income equates to consumption. Food inflation as of July 2023 hit 26.8% (Premium Times, 2023), and the removal of subsidies has seen the price of PMS rise rapidly. These economic changes have major effects on the propensity to save, as fewer and fewer individuals have the money to save. This has also affected investment opportunities, as the population's consumption levels keep decreasing due to the naira's devaluation; therefore, Nigerians can’t afford the prices of most foreign businesses.
Financial Literacy and Access: Also, due to the high cost of living and the increase in the cost of education, many Nigerians have their money outside the banking system due to a lack of formal education. Based on the current data released by the Ministry of Education, as of September 2022, about 31% of the population remains illiterate. This can be inferred from the fact that 62 million adults have their money saved outside the banking system. Despite the improvement of this data, many individuals still fall outside the financial system due to illiteracy.
In summary, the challenges surrounding saving among young Nigerians are complex and rooted in economic difficulties, high living costs, unemployment rates, and limited financial literacy. These challenges have led to a significant portion of the population keeping their money outside the formal banking system. Despite these hurdles, recognizing the importance of savings and investments in fueling economic growth is essential. To address these issues, there is a pressing need for concerted efforts to improve financial education and create employment opportunities, especially for the youth. Addressing these challenges is not only vital for individual financial stability but also for the broader economic prosperity of Nigeria.
Works Cited
Emefiele I., (2022). Press Remarks on the issuance of new naira bank notes: CBN report. Press Remarks on New Naira BanknotesOct2022 Final.pdf (cbn.gov.ng)
Izuaka, (2023). UPDATED: Nigeria’s inflation hits 24.08% as food prices rise. Premium times. UPDATED: Nigeria’s inflation hits 24.08% as food prices rise (premiumtimesng.com)
KPMG report (2023). Nigeria’s unemployment rate estimated at 40.6%. Nairametrics. Nigeria’s unemployment rate estimated at 40.6% - KPMG report - Nairametrics
Owusu Y., Ansong R., T.A., Koomson & Addo-Yobo, (2022). Savings and Investment behavior of young adults: the role of financial literacy and parental financial behavior. (PDF) Savings and investment behaviour of young adults: he role of financial literacy and parental financial behaviour (researchgate.net)
