ABSTRACT
The study analyzed the effect of private sector credit and investment on economic growth in Nigeria (1986-2018). It specifically examines the effect of private sector credit; Nigeria lending interest rate, foreign direct investment and foreign portfolio investment on gross domestic product (GDP). Secondary data wereourced from CBN bulletin and national bureau of statistics 2018. A linear relationship is established between economic growth proxied by GDP the dependent variable and the independent variables of the study which include foreign portfolio investment, foreign direct iTnvestment, Nigerian lending interest rate and private sector credit. Data generated were analyzed with econometric statistical package of E-View 10. Test statistics used were Augmented Dickey Fuller (ADF) unit root test, and Autoregressive Distributed Lag (ARDL) model. ADF unit root test showed that variables in the relationship model were integrated at order one, 1(1) and 1(0). The unit root result necessitated the model for ARDL econometric analysis. Findings from the long and short run regression estimate of the ARDL model showed that probability of T- statistics of the Private Sector credit is significant while that of Foreign Direct Investment, Foreign Private Investment and Nigerian Lending Interest rate were insignificant. This led to the conclusion that Private Sector Credit significantly increases GDP, while Foreign Direct Investment, Foreign Portfolio Investment and Nigerian Lending Interest Rate does not. The bound test for Co-integration showed that the relationship is sustained in the long run and therefore its result led to rejection of null hypothesis of no level relationship in the model. The Error Correction Coefficient (ECM) CointEq(-1), is -0.47048, it showed that the model corrects its previous periods disequilibrium at a speed of 47% estimated annually. The study therefore recommend that the Nigerian government needs to formulate policies that; would encourage private sector investment, enhance saving, stabilize interest rate to improve the confidence of the foreign investors in the economy, as this might lead to sustainable economic growth in Nigeria among others.
TABLE OF CONTENTS
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Abstract vi
Table of Contents vii
CHAPTER
1: INTRODUCTION
1.1 Background of the Study 1
1.2 Statement of the Problem 5
1.3 objectives of the Study 6
1.4 Research Question 7
1.5 Research Hypotheses 7
1.6 Scope of the Study 8
1.7 Significance of the study 8
1.8 Operational Definition of Terms 9
1.9 Limitation of the Study 10
CHAPTER
2: REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework; 11
2.1.1 Concept of investment 11
2.1.2
Private sector investment 17
2.1.3
Issues on private sector investments in
Nigeria. 18
2.1.4
Determinants of private sector
investment in Nigeria. 22
2.1.5 Concept of
Economic Growth 33
2.1.6 Concept of
foreign direct investment and foreign
portfolio investment 35
2.1.7 Private sector credit and economic growth 37
2.2 Theoretical
Framework 39
2.2.1 The Neo-classical theory of investment-growth nexus 39
2.2.2 The Theory of privatization. 39
2.2.3 Financial intermediation theory 40
2.3 Review of Empirical Studies 40
2.4 Research Gap 45
CHAPTER 3: METHODOLOGY
3.1 Research Design 47
3.2
Sources of Data 47
3.3 Model Specification 47
3.4 Method of Data Analysis 48
3.5. Unit Root Test 48
3.6. Decision Rule: 49
3.7. ARDL
Bounds Tests for Co integration 49
3.8. Long Run and Short Run Estimation of the
ARDL Model 50
3.9. The coefficient of determination or
adjusted R2. 50
3.10. The T-statistics.
50
3.11. The Joint Test: 50
3.12. The Error Correction Term 51
CHAPTER 4: DATA PRESENTATION, ANALYSIS AND DISCUSSION
OF FINDINGS
4.1
Data Presentation 52
4.2 Descriptive Statistics 55
4.3 Graphical Trend of the LOGGDP, LOGPSC,
LOGFDI, LOGFPI
And LODINT for the
period 1986-2018. 56
4.4 Stationary Test 57
4.5
Autoregressive Distributed Lag (ARDL) Bounds
Test for
Co-integration 58
4.6.
ARDL Error Correction Model. 59
4.7
ARDL Short Run Regression 60
4.8 F-Statistics (Joint Test) 60
4.9
ARDL Long Run Regression 62
4.10
Test of Significance and Evaluation of the four Hypotheses. 63
4.11
Discussion of Findings. 65
CHAPTER
5: SUMMARY OF FINDINGS, CONCLUSIONS AND
RECOMMENDATIONS
5.1 Summary
of Findings 70
5.2 Conclusion 70
5.3 Recommendations 71
5.4 Suggestion
for Further Research 71
5.5 Contribution
to Knowledge 72
References 73
Appendices 80
CHAPTER1
INTRODUCTION
1.1
BACKGROUND TO THE STUDY
Economic growth and development
depends essentially on a country’s ability to invest and make efficient and
productive use of its resources. In
fact, there cannot be growth without investment of sufficient amount and quality.
Hence, Bayraktar (2003) noted that investment is the result and cause of
economic growth. The role of the private
sector is important in both contribution to quantity of gross domestic
investment and its ability to allocate and employ resources efficiently.
Private sector investment has been
the engine of employment and income creation, provision of infrastructure as
well as social services. The
international organizations have equally acknowledged the role of the private
sector in enhancing economic growth of developing countries. Notably, European Commission (EU) (2014) said
that the private sector has the potential for generating inclusive and
sustainable growth in developing countries. International
Finance Corporations (IFC) (2011)
equally asserted that
the private sector
is a critical component in addressing the development
challenges of the developing
countries through its
contributions in many areas, including growth, employment, poverty reduction,
service delivery, food security, climate
change mitigation, environmental
sustainability, and contributions
to taxes. This means that the presence of the private sector can at
least spur economic growth and poverty reduction. This is why the Central Bank
of Nigeria (CBN) recognizes that for the economy to function efficiently given
structural rigidities, and for the private sector to develop and flourish,
businesses need to have access to credit.
In view of the paucity of credit,
coupled with the problems of inadequate infrastructure, huge skill gaps, and
very large informal sector, the CBN and other development partners such as the
Bank of Industry (BOI), the Bank of Agriculture, among others embarked on
significant credit injections to support the critical sectors of the economy.
So therefore, the volume of and access to bank credit available for private
sector investors directly influences private sector investment activities. Also
among other factors determining private investment is interest rates. Interest
rate affects savings, volume of credits from financial institutions and the
ability of private sector to borrow for investment purposes.
In the world today, developed countries
crave for more development while developing and under-developed ones work
towards development. Thus the attainment of economic growth has over time being
the macro-economic goal of economies, which of course will lead to economic
development irrespective of size and status.
However, despite the indices used to measure the level of economic
growth in either a developed or developing country which of course is gross
domestic product, the bottom line is that economic growth is an indicator of
societal progress. According to Kalu and Mgbemena (2005) societal progress is
directly and or indirectly associated with investment expenditure; and
investment is a propellant of economic growth and development. Growth and
development of economies stems from investment in such economies. Thus as
postulated by the classical economists, increased investment expenditure is a
key to promoting long economic growth which leads to economic development.
Therefore, there is no gainsaying the fact that any nation that needs to meet
her objectives of economic growth needs investment. As an essential component
of aggregate demand, investment contributes meaningfully to economic
development and its role in this regard cannot be overemphasized.
Economic growth is viewed as an
increase in the net national product in a given period of time (Dewett, 2005).
The main characteristics of economic growth are increasing rate of growth of
per capita income or output,
increasing rate of
productivity, increasing rate
of structural transformation, international flows
of labour, goods
and capital (Ochejele, 2007). According to Paul (1994),
“Productivity isn’t everything, but in the long run it is almost everything”.
Over the longer term, economic growth will be determined primarily by the
factors which determine productivity. The drivers of economic growth (such as
access to credit facilities, labour, level of technology, etc.) are factors
which either improves the quality of outputs, or the efficiency with which
inputs are transformed into outputs.
Conventionally, economic growth has also been measured in terms of Gross
Domestic Product (GDP); as well as Human Development Index (HDI), which is an
index that measures national growth based on measures of life expectancy at
birth, education attainment, literacy and adjusted real per capita income.
Looking at the above definitions so far, this study posits that economic growth
is a sustained increase in the actual output of goods and services and is
proxied by GDP.
Investment
is that part of savings that is not consumed but spent on capital goods such as
machines, instruments, factories, provision of basic infrastructure or on
increasing the stock of raw material or finished goods. In other words it is
the commitment of resources with the hope of realizing benefits which are expected
to occur over a reasonably long time period of time. It (investment) is majorly
sub-divided into public and private investments in every economy. Public sector
investments are investment by government, its ministries, departments and/or
agencies. This investment comes in form of capital expenditure (which in
Nigeria includes expenditure on administration, economic services, social
community services and transfers). Such investments are not geared towards
making profit but to enhance the well-being of the people.
On the other hand, private sector
investments are investments made by corporate entities and individuals other
than government. Private investment is profit oriented and motivated. Such can
be in form of real investment (private domestic investment and foreign private
investment). However,
foreign private investment comprised foreign direct investment and foreign
portfolio investment. Foreign direct investment (FDI) is a direct investment
into production or business in a country by an individual or company of another
country, either by buying a company in the target country or by expanding
operations of an existing business in that country. Foreign direct investment
is in contrast to portfolio investment which is a passive investment in the
securities of another country such as stocks and bonds. World Bank (1996)
conceptualized Foreign Direct Investment (FDI) as investment that is made to
acquire a lasting management interest (usually 10% of voting stock) in an
enterprise operating in a country other than that of the investors. Such
investment may take the form of either “Greenfield” investment (also called
mortar and brick investment) or merger and acquisition (M&A), which entails
the acquisition of existing interest rather than new investment. In corporate
governance, ownership of at least 10% of the ordinary shares of voting stock is
the criterion for
the existence of a
direct investment relationship. Ownership of less than 10% is
recorded as portfolio investment (Suhendra and Anwar, 2014).
Thus, Imoisi, et al. (2015) noted that investment in the sectors of the economy
can rapidly transform the numerous economic challenges. It comes with a lot of
benefits such as job creation, increase in per capita income, reduction in the
level of poverty, increase in standard of living etc. However, Nigeria as one of the
developing countries still has room to improve her private investment
performance. This would be better done when the effect of private sector credit
and investment on economic growth of the country is understood. It has been acknowledged that reaching the
high level of economic development and high growth rates is one of the most
important goals of developing economies like Nigeria. The role of private sector in bringing about
economic growth has equally been noted, yet it appears that no study in Nigeria
has shown the direction of the relationship between both variables. Lack of knowledge on the causal relation
between private sector investment and economic growth may result in ineffective
economic policies on the private sector activities. The fluctuations in private
sector investment in Nigeria have been a serious concern. In spite of the measures
adopted by the Nigerian government,
private sector investment over the years remained low
which tend to impede economic
growth in the country. It is against this background that the researcher
intends to investigate the effect of private
sector credit and investment on economic growth in Nigeria.
1.2 STATEMENT
OF THE PROBLEM
In Nigeria, despite all efforts made to
boost private sector investments, economic growth is still at its lowest ebb.
The low level of economic growth and development is a major source of worry to
all and sundry, who are concerned about the growth of the economy of Nigeria.
Considering the high level of unemployment, poverty rate, low standard of
living, decrease in per capita income, decrease in Gross Domestic growth rate
among others inherent in the economy of the country, there are doubts regarding
the impact of private sector investment on the general state of Nigeria.
Despite rising private sector investment,
the economy rather than develop, stagnates/keeps deteriorating every now and
then as reflected in the indices earlier mentioned, thus signifying backwardness
in economic growth. According to CBN (2015), rising public and private
investments has not translated to meaningful development, as Nigeria ranks
among the poorest countries in the world. In addition, many Nigerians have
continued to wallow in abject poverty, while more than 50 % of the populace
lives on less than US$ 2 per day (AL-Yousuf, 2000). Coupled with this, is
dilapidated infrastructure (especially roads and power supply) that has led to
the collapse of many industries, including high level of unemployment.
Moreover, macroeconomic indicators like
balance of payments, import obligations, inflation rate, exchange rate, and
national savings reveal that Nigeria has not fared well in the last three
decades (CBN, 2014). 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 on the factors that could influenced the effect of the
private credit and investment on economic growth in Nigeria. Private investors
will flourish only in a
supportive environment of
cost reductions, with
reasonable level of economic stability. Among other things,
Ibenta (2005) noted that foreign investors are exposed to currency risk and it
is this risk that is making many foreign investors to divest from Nigeria
economic scene since the introduction of the foreign exchange market.
However,
high private sector investment is key to economic growth, and the strength of
most private businesses relies on the availability of finance provided within
the economy by financial institutions to facilitate transactions, likewise the
rate of interest given for access to credits by these financial institutions.
It is on this premise that this research tend to assess the
effect of private sector credit and investment on economic growth in Nigeria.
1.3
OBJECTIVESF THE STUDY
The general objective of this study is to
investigate on the effect of private sector credit and investment on economic
growth in Nigeria. Specifically, the study will assess the;
1. Effect of
Private Sector Credit on GDP in Nigeria
2. Effect of
Nigeria Lending Interest Rate on GDP in Nigeria
3. Effect of
Foreign Direct Investment on GDP in Nigeria
4. Effect of
Foreign Portfolio Investment on GDP in Nigeria
1.4 RESEARCH QUESTIONS
The following research questions were
formulated to guide the study;
1. What is the effect of Private Sector
Credit on GDP in Nigeria?
2. What is the effect of Nigeria Lending Interest
Rate on GDP in Nigeria?
3. What is the effect of Foreign Direct
Investment on GDP in Nigeria?
4. What is the effect of Foreign Portfolio
Investment on GDP in Nigeria?
1.5
RESEARCH HYPOTHESES
In line with the above objectives and
research question, this study is built around the following hypotheses.
1. There is no significant relationship
between Private Sector Credit and Economic Growth (EG) in Nigeria
2. There is no significant relationship
between Nigerian Lending Interest Rate (NLIR) and Economic Growth (EG) in
Nigeria
3. There is no significant relationship
between Foreign Direct Investment (FDI) and economic growth (EG) in Nigeria
4. There is no significant relationship
between Foreign Portfolio Investment (FPI) and economic growth (EG) in Nigeria.
1.6
SCOPE OF THE STUDY
The study centers on private sector credit
and investment on economic growth in Nigeria. In other words it will
investigate the effect of private sector credit and investment on economic
growth in Nigeria between the periods of 1986-2018 a period of 33 years. In
this regard, private sector investment is categorized into credit to private
sector, lending interest rate, foreign direct investment and foreign portfolio
investment. The study focused on Nigeria and its investment activities. Nigeria
is one of the emerging or developing economies in west Africa and amongst the
sub-saharan countries.
1.7
SIGNIFICANCE OF THE STUDY
Private sector investment is one among the
macroeconomic goals Nigeria seeks to achieve as these engender economic growth
and development. Therefore, any study that would be useful in achieving growth
of private sector investments in Nigeria must be well appreciated. This study
will benefit a good number of persons among which are government / regulatory
agencies, investors, unemployed, potential/future researchers, and the
researcher.
Government:
This study would guide the government and her regulatory agencies like Nigeria
Investment Promotion Council (NIPC) in the formulation of policies that may be
designed to boost economic development viz-a-viz private sector investments.
The government would also be encouraged to create for investors, a kind of
environment conducive enough for investment activities.
Investors:
investors will be exposed to the various benefits of private sector investment
with a view to intensifying efforts towards being productive. They will be
exposed to the consequences of neglecting investments as a driver of economic
development in their endeavors.
The
unemployed: addition, they will be better
positioned to see the gains of private sector investments with a view to
supporting government in creating an investment friendly environment. This will
further create more jobs, generate income, improve standard of living, reduce
the unemployment rate and/ or make them investment promoters.
Future
researchers: Also, potential researchers will be
exposed to other related areas that may not have been covered by previous
studies. They will also use the research work as a reference material for
further studies. They will stand to be exposed and benefit immensely from the
research design and statistical analysis that formed part of this the
methodology if necessary.
The
researcher: The
researcher work would help the researcher to add to existing stock of knowledge
in the field of accountancy.
1.8 OPERATIONAL DEFINITION OF TERMS
Economic
growth: This is a quantitative sustained increase
in the country’s per capita
income or output
accompanied by expansion
in its labour force, consumption, capital and volume of
trade. In other words, it is a positive change in the area of industrial
output, human capital development, employment level and lot more.
Investment: this is the commitment of
resources in the production of capital goods or services with the hope of
realizing benefits in the future.
Private sector investment: This is otherwise known as private
investment which includes investment by private individuals other than the Government.
These include private domestic investments, foreign direct investments and
foreign portfolio investments
Private domestic investment: This refers to investments or
investment in real productive activities owned by nationals or citizens of a
country.
Foreign direct investment: This is an investment in real
productive activities in a particular economy or country owned by foreigners.
They are investment in productive ventures geared towards the production of
products by non-nationals for profit making purposes.
Foreign portfolio investments: This is an investment
by foreign-based companies on shares, bonds, securities etc.
Lending interest rate: This is the lending interest rate
adjusted for inflation as measured by the GDP deflator.
Private sector credit: These are loans and other credit
facilities which the private sectors borrow from financial institutions for
investment purposes.
1.9 LIMITATION
OF THE STUDY
Difficulty
to assess data as at when due handicapped the research in several ways.
Is
was not also easy for the researcher in
connecting to internet because of service problems.
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