The prospect of financial deepening model in Nigeria has created worries for researchers, having seen a lot of studies on financial deepening and economic growth. The conception of this study is that financial deepening should be an end, owing to the desirability of it from policy-makers and the academics. For a developing country like Nigeria, where the gap of finance for growth has been emphasized, it is only within logical reason to hold private sector credit high in this regard. That is why the study relied on modelling financial deepening with CPSR. The interest rate level has been thought of to be disincentive to private sector credit. A benchmark rate of over 12% in recent time, couple with rising inflation rates, is enough to ignite study interest in this area. Hence, this study investigates the impacts of interest rates on financial deepening in Nigeria through the application of the ARDL and ECM for the period, 1981 to 2020. The ARDL results showed that there was cointegration between financial deepening and interest rate variables: real interest rate, lending rate, monetary policy rate, interest rate spread and ratio of broad money supply. The related ECM was negative and significant, confirming that long-run relationship exists in the model.
One implication of this study is that Nigeria can increase the level of financial depth through increased credit allocation to private sector by the financial institutions. All the impediments of domestic private sector credits, such as government borrowing from banks and high rising lending rate, should be given priority attention. Furthermore, this means reducing crowding out of private sector in credit market is quite positive to private sector credit. Monetary policy is required to play an important function here. The Central Bank of Nigeria (CBN)’s Monetary Policy Rate (MPR) is a significant framework for lending rate levels in Nigeria. As much as money supply is important in controlling the national inflation rate, naira exchange rate depreciation continue to make this policy direction of the CBN a fruitless control. Regarding financial depth, the conclusion we have is that financial deepening in aggregate terms should not just be appreciated without critically understudying the structure of interest rates that has far reaching implications on savings and credit supply.
References
Aftab, N., Jebran, K., Ullah, I. & Awais, M. (2016). Impact of Interest Rate on Private Sector Credit; Evidence from Pakistan. Jinnah Business Review, 4(1), 47-52.
Akpan, D.B. (2008). Financial liberalization and endogenous growth in Nigeria.
Economicand Financial Review, 46 (2), 1-27.
Akpansung, A.O., Waziri, S.E. (2018), Has financial liberalization promoted economic growth in Nigeria? Evidence from autoregressive distributed lag (ARDL) approach.Asian Economic and Financial Review, 8(2), 172-188.
Igbinedion University Journal of Economics and Development Studies (IUJEDS), Vol 1 Issue 2, January 2022
78
Asamoah, G.N. (2008), The impact of the financial sector reforms on savings, investment andgrowth of gross domestic product (GDP) in Ghana. International Business and Economic Research Journal, 7(10), 73-84.
Banam, K. C. (2010). Impact of financial liberalization on economic growth in Iran: An empirical investigation. Middle Eastern Finance and Economics, 2010;7(3):6-37.
Egbetunde, T., Ayinde, O. & Balogun, A.A. (2017). Interest rate liberalization, financial development and economic growth in Sub Saharan African economies. African Journal of Economic Review, 5(2), 20-30.
Eichengreen, B. J. (2001). Capital account liberalization: What do the cross-country studiestell us? World Bank Economic Review, 15, 341- 366.
Eke, F. A., Eke, I. C. & Inyang, I. G. (2015). Interest rate and commercial banks’ lending operations in Nigeria: A Structural Break Analysis using Chow Test. Global Journalof Social Sciences, 14 (1), 9-22.
Ekpo, H.A. (2016), Addressing Stagflation with Sound Macroeconomic Policies. A Paper Presented at the Monetary Policy Technical Committee (MPTC) and Monetary PolicyImplementation Committee (MPIC). Maitama, Abuja: Workshop/
Retreat, CBN ITI,November 25.
Ekpo, H.A. (2017), The Nigerian Economy: Current Recession and Beyond. Kano:
Convocation Lecture Delivered at Bayero University, March 17.
Emenuga, C. (2005). The outcome of financial sector reforms in West Africa.
International Development Research Centre (IDRC), retrieved from http://www.idrc.ca/en/ev-56356-201-1-DO_TOPIC.htm
Fry, M. J., (1978). Money and capital or financial deepening in economic development?
Journal of Money, Credit and Banking, 10, 464-475.
Gbenga, O., James, S. O., & Adeyinka, A. J. (2019). Determinant of Private Sector Credit and Its Implication on Economic Growth in Nigeria: 2000-2017. American Economic& Social Review, 5(1), 10-20.
Hermes, N. & Lensink, R. (2000). Does financial liberalization influence savings, investmentand economic growth? Evidence from 25 emerging market economies, 1973-1996. Centre of International Banking, Insurance and Finance (CIBIF) University ofGroningen, Netherlands.
Hye, Q. M. A. & Wizarat, S. (2013). Impact of Financial Liberalization on Economic Growth: A Case Study of Pakistan. Asian Economic and Financial Review, 3(2):270-282 Levine, R. & Renelt, D. (1992). A sensitivity analysis of cross-country growth regressions.The American Economic Review, 82(4), 942-963.
Majed, B., Ahmed, I.M. (2010), The impact of interest rate on investment in Jordan: A Cointegration analysis. JKAU: Economic and Administration, 24(1), 199-209.
Igbinedion University Journal of Economics and Development Studies (IUJEDS), Vol 1 Issue 2, January 2022
79
Mckinnon, R.I. (1973). Money, Capital and Banking in Economic Development, BrooklynInstitution, Washington D.C.
Nnanna, J. O., Okafor, C. M. & Odoko, F. O. (2004). Proceedings of the Thirteenth Annual Conference of the Regional Rsearch Units: Theme: Enhancing Private Sector-Led Growth in Nigeria.
Nwafor, J. U., Ferdinand, I. & Effiong, C. E. (2017). Financial Liberalization and Domestic Savings in Nigeria: An Empirical Analysis. International Journal of Development and Economic Sustainability, 5(6), 84-97.
Nwanna, I. O. & Chinwudu, C. F. (2016). The Effect of Financial Deepening on Economic Growth in Nigeria (1985 -2014). Journal of Economics and Finance, 7(4), 11-28.
Nzotta, S.M. & Okereke, E.J. (2009). Financial Deepening and Economic Development inNigeria: An Empirical Investigation.African Journal of Accounting, Economics, Finance and Banking Research, 5(5), 52-66.
Obamuyi, T.M. (2009), An investigation of the relationship between interest rates and economic growth in Nigeria, (1970-2006). Journal of Economic and International Finance, 1(4), 93-98.
Obamuyi, T. M. & Demehin, J. A. (2012). Interest Rate Reforms and Financial Deepening in Nigeria. The International Journal of Business and Finance Research, 6(2), 81-90
Obinna, O. (2020). Impact of Interest Rate Deregulation on Investment Growth in Nigeria.International Journal of Economics and Financial Issues, 10(2), 170-180.
Odhiambo, N. M. (2009). Interest Rate Reforms, Financial Deepening and Economic Growth in Kenya: An Empirical Investigation. The Journal of Developing Areas, 43(1), 295-313.
Odhiambo, N. M. (2010). Interest Rate Deregulation, Bank Development And Economic Growth In South Africa: An Empirical Investigation. International Business &
Economics Research Journal, 9(11), 131-142.
Ogwumike, F.O. & Ofoegbu, D.I. (2012).Financial liberalization and domestic savings inNigeria. The Social Sciences, 7(4), 632-646.
Ojeaga, P. & Odejimi, O. (2014). The Impact of Interest Rate on Bank Deposit: Evidence from the Nigerian Banking Sector. Mediterranean Journal of Social Sciences, 5(16),232-238.
Okoli, M. N. (2012). Evaluating the Nexus between Financial Deepening and Stock Marketin Nigeria. European Scientific Journal July edition, 8(15), 18-29.
Igbinedion University Journal of Economics and Development Studies (IUJEDS), Vol 1 Issue 2, January 2022
80
Okwuchukwu, O., Ariwa, F.O. (2017), Financial system liberalization, savings, investmentand economic growth in Nigeria. International Journal of Economics and Business Management, 3(5), 1-10.
Orji, A., Ogbuabor, J. E. & Anthony-Orji, O. I. (2015). Financial Liberalization and Economic Growth in Nigeria: An Empirical Evidence. International Journal of Economics and Financial Issues, 5(3), 663-672.
Otalu, J.A., Aladesanmi, K.A. & Mary, B.O. (2014). Monetary policy and commercial banks performance in Nigeria: An assessment of credit creation role. The InternationalJournal of Business and Management, 2(7), 45-51.
Owumere, J.U.J., Okore, A.O., Imo, G.I. (2012), The Impact of interest rate liberalization onsavings and investment: Evidence from Nigeria. Research Journal of Financial andAccounting, 3(10), 130-136.
Raza, H., Hena, S. & Saeed, A. (2017). The Effects of Interest Rate, on Savings and Depositsin Pakistan. International Journal of Business and General Management, 6(6), 67-74.
Shaw, E. (1973), Financial Deepening in Economic Development, Oxford University Press,New York.
Sheriff, I. M. & Amoako, G. K. (2014). Macroeconomic Determinants of Interest rate Spreadin Ghana: Evidence from ARDL Modelling Approach. Journal of Finance and BankManagement, 2(2), 115-132.
Ubesie, M. (2016). The effect of financial liberalization on economic growth in Nigeria.
International Journal of Finance and Accounting, 5(40), 193-201.
Igbinedion University Journal of Economics and Development Studies (IUJEDS), Vol 1 Issue 2, January 2022
81
DETEMINANTS OF DOMESTIC PRIVATE INVESTMENT: EMPIRICAL EVIDENCE FROM NIGERIA’S DOMESTIC MACROECONOMIC
VARIABLES
Enabulu, Okoduwa Godfrey
(Ambrose Ali University, Ekpoma, Edo State, Nigeria) Tel: 08058501744
E-mail: [email protected] And
Epor, Simon Okaja
(PhD Scholar, Nnamdi Azikiwe University, Awka, Nigeria) Tel: 08063090903
E-mail: [email protected] Abstract:
Domestic private investment is a great driver of sustaining the capital stock and productive capacity of serious economies. Nigeria for instance has relied on it resolve her macroeconomic problems, particularly those concerning growth, welfare and development. For this purpose, this study set to determine the influence of domestic macroeconomic factors on domestic private investment for Nigeria from 1981 to 2020.
The ARDL methodology was utilized to estimate the study’s parameters. The related ECM was negative and significant, confirming that long-run relationship exists in the model. Economic growth and private sector credits were negatively related to domestic private investment, while inflation, lending and savings rates were not significant in causing domestic private investment. This study recommends less public borrowing from banks in order not to crowd out the private sector and reduce the pressure on lending, as well as strengthen institutional framework to control credit diversion for investment purposes and also inflationary pressures on future values of investment decisions.
Keywords: Private Investment; Domestic Macro economy, Flexible Accelerator Model, ARDL
JEL classification: E22; E600
1.0 Introduction
Investment is a significant and important unit of aggregate demand and an important resource for economic growth as it helps to increase the productivity of the economy.
How domestic investment promotes economic growth was discussed in the study of Ayeni (2016).He stressed the importance of macroeconomic factors in boosting private investment in Nigeria. The fundamental challenge that developing countries have being facing is the way to increase investment rates domestically (Agidew, 2014). That means the questions of what policies to formulate are significant in affecting the domestic private sector given the limited amount of FDI in the developing regions. When policies are established, they are expected to create conducive encouragement to domestic investors (Ghura& Goodwin 2000).
Igbinedion University Journal of Economics and Development Studies (IUJEDS), Vol 1 Issue 2, January 2022
82
According to Oyedokun and Ajose (2018) posits that real domestic investment implies increased expenditure on capital stock in the economy, through the acquisition of income-generating and capital-producing assets within the domestic economy. Other proponents of domestic investment like Uremadu (2006) and Adegbike and Owulabi (2007) have advocated that developing countries rely more on domestic investment instead foreign direct investment (FDI). This does not undermine the significance of FDI as they are seen to benefit host countries in the speed up of economic growth and development (Oyedokun & Ajose, 2018). The preference for domestic investment over foreign direct investment includes that foreign loans are not ideal strategies for growth because of their adverse effects on the balance of payment of domestic economies, from loan servicing with domestic resources as well as the exposures to foreign exchange risk (Oyedokun & Ajose, 2018). Subsequently, for the geometric acceleration of growth and development of developing economies, domestic investment is not just important but an essential condition for the provision of domestic resources to fund domestic investment.
On the part of the Nigerian government, a lot of policy interests have being made to promote private investment (Ekpo, 2016). To begin with, the First National Development Plan of 1964 was a response to generally correct the non-performance of the domestic private sector and reduce the reliance on foreign capital inflows; the Second National Development plan of 1970-74 similarly sought to reinvigorate the abilities of private sector to drive development through financial and entrepreneurial skills; and the Structural Adjustment Programmes (SAP) that was to enhance the growth of the private sector by way of reducing the dominance of unproductive public sector investments (Ekpo, 2016). In same vein, successive governments have proposed and implemented many economic reform policies, all targeting framework to boost private-sector-driven economic development.
Despite all these policy initiatives, domestic investment rate is not still impressive in Nigeria. Hence, this study set out to examine the influence of domestic macroeconomic on domestic private investments, as it relates to Nigeria. This study employed the autoregressive distributed lag (ARDL) model on time series data collected from 1981 to 2020. The domestic macroeconomic variables covered include inflation, lending rate, growth of gross domestic product, savings rate and private sector credit rate.
It is no more secret that private investments are needed to address the challenges of sustainable economic growth in developing countries because public investments alone are insufficient. Private investments are necessary to complement public investment. As pointed out by policymakers, private investment is an essential element of pro-poor sustainable economic growth (Combey, 2016). In addition, the African Development Bank has advocated that African countries that are facing economic challenges must have domestic investment make up at least 35 percent of Gross Domestic Product (GDP), out of which 23 percent must be private investment (Combey, 2016), thus, making private sector development one of its core priorities. African countries have not committed favourably to these requirements, neither have any appreciable drive been recorded.
For instance, Nigeria has continued to struggle to exceed the required threshold of 23 percent domestic private investment. The share of private investment in GDP which was 50.9.6% in 1987 gradually fell to 36.58% in 1996%, 26.17% in 2006 and 19.01% in 2018, before increasing marginally to 24.11% and 28.65% in 2019 and 2020, respectively. It is the believe of this study that domestic macroeconomic factors have far
Igbinedion University Journal of Economics and Development Studies (IUJEDS), Vol 1 Issue 2, January 2022
83
reaching significant impact that has been ignored, especially from academic scholars. For instance, Oshikoya (1994) opined that developing countries have high inflation problem which negatively influence private investment. Inflation can discourage the accumulation of funds that can be used for investment because of its adverse effect on the value of money. Ekpo (2016) also asserted that interest rate can affect the general economy and particularly private investment, through the rate of savings, credit form banks and the ability of borrowing for investment by the private sector. Ekpo (2016) also stressed that both government and high interest rate had affected bank-based private sector credits in Nigeria. Even a situation of high gross domestic product but bearing on low per population income and high unemployment rate in Nigeria is detrimental to private investment development.
There is one significant study (Ayeni, 2016) that has dealt with macroeconomic factors on domestic investment in Nigeria. However, this study seeks to make some adjustment to Ayeni (2016)’s study. First, his study never created a dichotomy between domestic and foreign-based macroeconomic factors, hence his inclusion of real exchange rate. For the purpose of policy recommendations, it is better to create a dichotomy between them.
Secondly, while the ARDL modelling technique is comprehensive in handling series that have been confirmed to be cointegrated, Ayeni (2016) still relied on the Johansen Cointegration Test. And finally, this study is an improvement on Ayeni (2016) which was based on data series from 1979 to 2012, while this study takes it beyond to 2020, thereby accommodating new macroeconomic influences. The purpose is to offer a better understanding of the domestic private sector investments in Nigeria.
The organization of this paper is as follows: next section offers an overview of the theoretical and empirical literature. Section three expose the methodological approach and section four presents date, results, discussion, and an analysis of the date. Concluding remarks and policy recommendations are provided in the last section.
2.0 Literature Review
Theoretically, the impact of the domestic macroeconomy on investment depends on various factors. Ghura and Goodwin (2000) stated that empirical literatures on investment modelling from four known approaches: the flexible accelerator model, associated with Keynes (1936); the Jorgenson (1971)’s neoclassical model; Tobin’s Q model traced to Tobin (1969) and the expected profits model with its variants. Investment was described in the Accelerator theory to be responsive changes for increased product demand (Sisay, 2010). In this study, we employed the flexible accelerator model, which is essentially a partial adjustment model and, just like the adaptive expectations model, it is a theoretical justification of the Koyck model.The fundamental idea in flexible accelerator model is that firm’s investment comes from the gap between available capital stock and the capital stock they desire to meet increased demand (Ghura & Goodwin, 2000). Macroeconomic influences are strongly related to the theory of flexible accelerator.
The Accelerator theoryof investment has gone through a few advancementsfrom its inflexible form to its adaptableversion (Sissay, 2010). The theory explains that changes in the demand for produce drive firm’s investment decisions (Song, Liu &
Ping, 2001). This infers that firms’ investment expenditures are dependent on their
Igbinedion University Journal of Economics and Development Studies (IUJEDS), Vol 1 Issue 2, January 2022
84
outputs, which is a function of demand (Sissay, 2010). At the point where output changes, capital stock will likewise change: Kt – Kt-1 = v (Yt – Yt-1)
Nonetheless, the above mathematical expression is straightforward but naive form of the accelerator model. The flexible accelerator theory, or the capital stock adjustment model, was developed to improve on the major shortcomings of the simple accelerator model by introducing the adjusted time lag phenomenon. The development of flexible accelerator theory was attributed to Chenery (1952), Goodwin (1948) and Koyck (1954), but the approach of Koyck (1954) was the most widely accepted. The flexible accelerator framework permits the inclusion of cost of external finance, internal funds as well as outputs to determine the fraction of capital stock needed investment (Chirinko, 1993).
Blejer and Khan (1984) proposed the influences of macroeconomic factors on firms’
investment decisions. For instance, the influences Inflation, interest rates and cost of capital, and exchange rate policies and movements have been identified in literatures (Erden & Holcombe, 2005; Greene & Villanueva, 1991; Chetty, 2004; Lafrance &
Tessier, 2001; Athukorala & Sen, 1995; Pindyck & Solimano, 1993). Macroeconomic variables can reduce or increase the available finance for private sector investment and then affecting the speed of firms moving to their desired investment levels. These macroeconomic variables have been introduced into the flexible accelerator model because of their ability to directly cast uncertainty on investment. Uncertainty about the future may influence firm-level investment decisions. Since domestic macroeconomic variables are within monetary control in Nigeria, we hypothesize that domestic macroeconomic variables should have significant impact on domestic private investment in Nigeria, while holding foreign factors constant.