ABSTRACT
This research work aimed at determining the econometric study of relationship between interest rate and economic growth in Nigeria; the objective of the study was to empirically investigate extent at which interest rate has impacted on economic growth in Nigeria, to determine if there is any observed long-run relationship between interest rate and economic growth in Nigeria using modern econometric techniques; the data used source from secondary sources. It was hypothesized that there is no significant impact of interest rate on economic growth in Nigeria; the research used time series data, sourced mainly from Central Bank of Nigeria (CBN) bulletin; three models were estimated to capture the relationship between interest rate and economic growth (Model 1) Real Gross Domestic Product (RGDP) as the dependent variable (Model 2) Interest Rate (INT) (Model 3) Commercial Bank Credit to Private Sector (CPS) for both independent variables; the entire regression plane was statistically significant; this means that the joint influence of the explanatory variables (CPS and INT) on the dependent variable (GDP) is statistically significant; the cointegration test revealed the existence of long-run relationship between interest rate and economic growth in Nigeria; the study further recommends that there is need for government authorities to carry out far reaching reforms that would enhance the role of money market in funds mobilization and disbursement for investment purposes also government intervention in the economy is unavoidable; however, the government should know where, when and how to intervene.
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ECONOMETRIC STUDY OF RELATIONSHIP BETWEEN INTEREST RATE AND ECONOMIC GROWTH IN NIGERIA
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BY
ONUOHA HAPPINESS AHUNNA
MOUAU/13/26819
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A PROJECT WORK WRITTEN IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF BACHELOR OF SCIENCE (B.Sc) DEGREE IN ECONOMICS
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DEPARTMENT OF ECONOMICS
COLLEGE OF MANAGEMENT SCIENCES
MICHAEL OKPARA UNIVERSITY OF AGRICULTURE, UMUDIKE
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AUGUST, 2017
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CHAPTER ONE
INTRODUCTION
1.1Â Â Â Â Â Â Background of the Study
The interest rate policy in Nigeria as it affects private sector investment is perhaps one of the most controversial of all financial policies. The reason for this may not be farfetched because interest rate policy has direct bearing on many other economic variables such as investment decision. Interest rates play a crucial role in the efficient allocation of resources aimed at facilitating growth and development of an economy and as a demand management technique for achieving both internal and external balance.
For many years now, Nigeria’s Central Bank of Nigeria Monetary Policy Rate (MPR), otherwise known as the benchmark interest rate has been at double digit. In 2012 it was largely at 12%. By the time deposit money banks charge their own lending rates to prospective customers wanting to loan money, it’s usually between 15 – 20% and more. This has made no effort of government stimulating the real sector of the economy. Even the aviation, textile and entertainment intervention funds set aside by government to revitalize these ailing sectors have been difficult to access by the target beneficiaries. Banks, apart from charging high interest rates on loans, also add all manner of administrative or miscellaneous charges which make the burden of borrowing unbearable. What obtain in many other developing countries are low interest rates of between 5-8% with a moratorium. What cheap loans do for entrepreneurs is that it makes take off and expansion of business relatively easy for the investors. With that, the cost of doing business is reduced and they in turn will be able to provide cheaper services and goods. Invariably the consumers get a better deal from the producers.
However, with the high interest rate, the mortality of small and medium enterprises (SMEs) becomes high as lack of cheap loans to grow their business interests will lead to high cost of production, low capacity utilization, staff rationalization (right-sizing and down-sizing), low sales as consumers may not be able to afford the goods and services, default in loan repayment, and ultimately, business collapse.
According to Uchendu (1993), interest rate policy is among the emerging issues in current economic policy in Nigeria in view of the role it is expected to play in the deregulated economy in inducing savings which can be channel to investment and thereby increasing employment, output and efficient financial resource utilization.
Also, interest rates can have a substantial influence on the rate and pattern of economic growth by influencing the volume and disposition of saving as well as the volume and productivity of investment in the private sector, thereby enhancing economic growth (Leahy, 1993).
Apart from high interest rate on loans and non-payment for contracts duly executed on behalf of different tiers of government and their agencies, the World Bank in its Investment Climate Assessment Report for the 2011 fiscal period chronicled other constraints that entrepreneurs face in doing business in Nigeria. The account observed among many other things that Nigerian business environment, in spite of the series of reforms being carried out by the current administration to attract Foreign Direct Investment into the country, remained hostile. The 202-page report said that investors were losing 10% of their revenue to the hostile investment climate in the country. It stated that the areas that account for the 10% loss include poor quality infrastructure, crime, insecurity, and corruption. The assessment reviewed the experiences of over 3,000 surveyed business owners in 26 states of Nigeria about the aspects of the business climate that affected their businesses.
The aforementioned constraints are not only responsible for low investment drive in Nigeria but also high level of divestment and business mortality. Today, many once flourishing businesses have either collapsed like a pack of cards or their founders have relocated to saner climes where the cost of doing business is not as astronomic like ours. A case in point are our tyre manufacturing companies like Dunlop and Micheline; pharmaceutical companies; vehicle assembly plants like Steyr, Leyland, Volkswagen and even textile mills to mention but a few. Many warehouses of once productive businesses have been acquired by churches and turned to worship or event centres.
Therefore, there is urgent need for such policies that will stimulate private investment such as tax regime and moratorium; customs duties and goods clearing process, industrial dispute adjudication procedures; labour laws and many others. The entire lending process and procedures set by financial institutions need to be simplified and made investor friendly. We must also combat corruption not by paying lip service but by effectively prosecuting corrupt elements in our society. This among others enhances private investment and leading to economic growth at large.
1.2Â Â Â Â Â Â Statement of the Problem
The financial repression (measures by which governments channel funds to themselves as a form of debt reduction), largely manifested through indiscriminate distortions of financial prices including interest rates, has tended to reduce the real rate of growth and the real size of financial system. More importantly, financial repression has (retarded) delay development process as envisage by Shaw (1973). This led to insufficient availability of investible funds, which is regarded as a necessary starting point for all investment in an economy.
Declining investment ratio and level are problems; first of all, because investment matters for growth and low investment increases vulnerably in the economy (Niambon and Oshikoya, 2000). The main challenge that Nigeria is facing is to make policies that will help revive and raise investment in the country in order to stimulate and sustain economic growth.
However recent theoretical and empirical studies tend to suggest that reviving private investment may proof difficult unless efforts are made towards restoring consistency and stability in macroeconomic policy environment of business (see Noko, 2015). Fluctuations in private sector investment in Nigeria have been a serious concern because in spite of the measures adopted by the Nigerian government, private sector investment trends remained low which tend to impede economic growth in the country. It has however been found that a major problem is that the government is so much concerned about policies to boost private investment without much knowledge or investigations into the main determinants of private investment in Nigeria like the interest rate policy manipulation and the likes.
It’s of great importance to mention here, that relationship between   interest rate on economic growth of Nigeria loosing focus on how the combination of the two policies can influence the economic growth of Nigeria. The main purpose of this study is to try to identify the impact of interest rate on economic growth. The economy continued to deal with issues as interest rates and import substitution, interest rates might considerably move downwards with the price stability at the fore front of the new leadership at the CBN, it meant that exchange rate stability was an initiative that would be sustained (Agbaje; 2014). Interest rate is expected to have either a positive or negative impact on the economic growth. Thus decreasing the interest rate due to expansionary monetary policy may stimulate the economy because of increased economic activities. On the other hand, slow economic growth which may be due to a tight monetary policy via a relatively high interest rate regime can lead to a fall in the economic growth (Foozor;2009).
The researcher assessed the macroeconomic variable such as investment whereby the study aims to look on the impact due to the interest rate fluctuation over a period of time in relation to the macroeconomic variable mentioned above. Measuring the economic growth of a country aims to assess whether the growth can cope with the growing demands of the society.
1.3Â Â Â Â Â Â Objectives of the Study
The major objective of this study is to investigate the impact of interest rate on Nigeria economic. The specific objectives are:
- to empirically investigate extent at which interest rate has impacted on economic growth in Nigeria and
- to determine if there is any observed long run relationship between interest rate and economic growth in Nigeria using modern econometric techniques.
1.4Â Â Â Â Â Â Research Questions
In order to address the aforementioned problems as identified in the statement of problem the following researchable questions will guide the researcher:
- to what extent has interest rate impacted on economic growth in Nigeria?
- is there any observed long run relationship between interest rate and economic growth in Nigeria?
1.5Â Â Â Â Â Â Hypothesis
Ho1:Â Â Â Â Â Â There is no significant impact of interest rate on economic growth in Nigeria.
Ho2:Â Â Â Â Â There is no long-run relationship between interest rate and economic growth in Nigeria.
1.6Â Â Â Â Â Â Justification of Study
This study aims at investigating the impact of interest rate on economic growth in Nigeria. The study will be of great importance to policy makers, government and its agencies, private individuals and firms at large. The study will be also of great importance to student s of economics and other researchers who may have interest in interest impact on Nigeria economy .Finally, the findings of this study would add to the stock of econometric literature of Nigeria.
1.7Â Â Â Scope and Coverage
This research will analyse the impact of interest rate on economic growth within Nigeria, taking a good analysis on various ways and means put by the government of Nigeria to develop interest rate policy(1970-2016).
1.8Â Â Organization of Study
This project tries to view the econometric relationship between interest rate and economic growth in Nigeria. Chapter one talks about the introduction while chapter two views the interest rate in Nigeria. Chapter three looks at literature review and theoretical framework while chapter four presents research methodology. Chapter five performs the regression analysis while Chapter six concludes and summarize the research work.
