The study investigated the effect of capital formation on economic growth in Nigeria. The data were collected from Central Bank of Nigeria Statistical Bulletin (2015). To examine the impact of capital formation, interest rate, inflationary rate and stock market capitalization on economic growth in Nigeria, the study employed ordinary least square method. The test for the properties of time series, Philip-perron test was used to determine the stationarity of the variables and it was discovered that gross fixed capital formation and economic growth are integrated of order zero (I(0), Johasen test was used to determine the order of integration while error correction model was employed to determine the acceleration of adjustment to equilibrium. The empirical findings suggest that capital formation has a negative and insignificant effect on economic growth in Nigeria for the period under investigation. Both Stock market capitalization and interest rate showed a positive effect on economic growth in Nigeria for the period under review, while inflationary rate shows a negative impact on economic growth in Nigeria. The result further showed a long run sustainable relationship between interest rate and capital formation on economic growth in Nigerian. Therefore, emphasis should be made on increasing the rate of interest as this will enhance growth and development in Nigerian economy. The Nigeria stock market should be deepened in more to enhance their contribution to the growth of the domestic economy.
1.1 Background of the Study
The burning issue confronting developing countries such as Nigeria is capital scarcity and there is neither danger of excessive saving or gap between consumption and income. A country which is economically advanced or backward is usually judged from the standpoint of the available capital per head; those considered as poor ones are of necessity faced with an important problem of capital scarcity. With low per capita, economic activity is carried out without the assistance of large quantities of the capital assets such as machinery and equipment which are common place in wealthier and advanced countries. Nigeria overall economic performance since independence in 1960 has been unimpressive. Despite the availability and expenditure colossal amount of foreign exchange derive mainly from its oil and gas resources, economic growth has been weak and the incidence of poverty has increased. The objective of every sovereign nation like Nigeria is to improve the standard of living of its citizenry and promote economic growth and development of the country. Due to vicious circle of poverty, the scarcity of resources and the law of comparative advantage, countries depend on each other for foster economic growth and achieve sustainable economic development.
Economic growth is a fundamental requisite to economic development. A nation that needs to meet her objective of economic development needs a capital formation (physical capital stock) or capital accumulation. According to Bakare (2011), Capital formation refers to the proportion of present income saved and invested in order to augment future output and income. The accumulated capital enables the acquisition of few factories alongside with machinery, equipment and all productive capital goods. (Shuaib and Dania, 2015). Capital formation is a component of Gross Domestic product by income together withconsumption and net exports and services as an indicator of the level of investment in the economy. The concept means that society does not apply the whole of its current production activity to the needs and immediate desire of consumption but directs some part of it to the creation of capital goods (Jhingan, 2005).
The rate of growth in Nigeria economy cannot be fully analyzed without a closer look at the contribution of capital formation to Nigeria’s economic growth. This is with the understanding that capital formation has been recognized as an important factor that determines the growth of Nigerian economy. However, economic development may be measured through building of capital equipment on a sufficient scale to increase productivity in agriculture, mining, plantations and/or industry on one hand. While on the other, capital is required to construct schools, hospitals, roads, railways, standards of living, research and development (R & D), etc. (Jhingan,2016; Ainabor, Shuaib&Kadiri, 2014).
Capital formation is analogous (or prerequisite) to an increase in physical capital stock of a nation with investment in social and economic infrastructures.
Recently, the percentage of domestic investment and/or public investment has reduced drastically, which resulting from macroeconomic variables disequilibria-such as, inflation rate, exchange rate fluctuations; balance of payment problems; High external debt ratio; increase in population, corruption, etc. it was worsened when most recently there was a significant drop of crude oil prices in OPEC. This has had inverse relationship with countries that depended on crude oil or agriculture (mono-economy) – such as Nigeria. In other words, in Nigeria growth rate has dropped from 7 percent to 4.2 percent. This has led to devaluation of currencies and/or other stringent fiscal and monetary policies – such as reduction in taxes and deliberate attempt to make a mismatching of the unit of domestic currency and another currency (most especially American dollar as the commonest currency for exchange for goods and services) (Anibor, et. al, 2014).
1.2 Statement of Problem
The general implication of a low level of capital is a low level of output which in turnresults in a low level of national income. With a low level of income the propensity to consume is so high that little is saved and left over for investment. Yet without large additions to the stock of capital available for production, the consumption of the people must be low, not only because of the quantity produced is small, but also the quality of output is lower than of wealthier societies.
Nigeria is a developing country that requires steady increase in capital stock to achieve her development plans, over the years Nigeria government recognized the important of capital formation and embarked on structural, institutional and policy reforms to enhance the smooth functioning of the economy that will enhance capital formation, for instance, the liberalizing of the economy in the last quarter of 1986, financial sector reforms such as the internationalization of Nigeria capital market and the recapitalization of the financial institutions, other macroeconomic reforms such as overheads in the business environments. During Structural Adjustment Programme (SAP) of 1989, the government of Nigeria considered the need for improvement in capital formation and pursued an economic reform that shifted emphasis on private sector. The public sector reforms were expected to ensure that interest rate was reduced (or positive) in real terms and/or to encourage savings, thereby ensuring that investible funds would be readily available to the real sectors. It would be oversimplification to regard economic development as a matter of capital formation alone ignoring political, social, cultural, technological, and entrepreneurial factors (Jhingan, 2006).
The extents to which these have affected the growth of capital formation remain a matter of concern to scholars. An examination of CBN Reports shows that Nigerian Gross fixed capital formation was 11.63%, 10.23%, 8.15%, 10.48% and 11.02% of Gross Domestic Product between 2010-2015, compared with 43% in Mauritania in 2014, 32% in India, and 58% in Bhutan. This means that, poor capital formation is one reason that led to the failure in achieving the various Nigeria development plans.
1.3 Objectives of the Study
The broad objective is to determine the impact of capital formation on economic growth in Nigeria. The specific objectives are as follows:
- i) To ascertain the effect of capital formation on economic growth in Nigeria.
- ii) To ascertain if there is a sustainable long run relationship between capital formation and economic growth.
1.4 Research Hypothesis
This study will be guided by the following research hypotheses:
h0: Capital formation does not have any effect on economic growth in Nigeria.
h1: Capital formation has effect on economic growth in Nigeria.
h0: There is no sustainable long run relationship between capital formation and economic growth in Nigeria.
h1: There is sustainable long run relationship between capital formation and economic growth in Nigeria.
1.5 Scope of Study
This study is limited only to Nigeria and the period of this investigation is also delineated, from 1980-2015 a period of 36 (thirty -six) years.