FINANCIAL DEVELOPMENT AND SECTORAL PERFORMANCE IN NIGERIA (1981-2020)

The study examined the nexus of financial development and sectoral performance in Nigeria for the period 1981 to 2020. It analysed the trend of financial development alongside the sectoral output performance in Nigeria. The study also examined the direction of causation between financial development and sectoral performance in Nigeria. The study further examined the effect of financial development on the outputs of agricultural, manufacturing and services sectors in Nigeria. This study observed the relationship between financial development and the performance of the key sectors in Nigeria for the period of 1981 to 2020.

Annual secondary time series data for the period 1981-2020 were adopted in this study. Data on the agricultural output, manufacturing output, services output, money supply, domestic credit to the private sector, capital, and inflation for the study period were sourced from World Development Indicators (WDIs, 2021) published by the World Bank, and Central Bank of Nigeria (CBN) Statistical Bulletin. The study used descriptive statistics in the form of tables and graphs, while the autoregressive distributed lag (ARDL) error correction mechanism model was adopted for the short-run effect analysis, while the fully modified Ordinary Least Squares (FMOLS) was adopted for long-run effect analysis. Furthermore, the Toda-Yamamoto technique was adopted for the causality tests. 

The results of the study established that in the short run, financial development variables had different and opposing effects on agricultural output. Domestic credit to the private sector was found to have a significantly positive impact on agricultural output (t = 4.0133, p < 0.0102), while money supply has significantly negative effects on agricultural output 0.043 per cent (t=3.2649, p < 0.05). In contrast to the results obtained for the agricultural sector, domestic credit to the private sector was found to have negative effects on the manufacturing sector (t = -12.6333, p < 0.01) in the short run, while money supply exerted positive impacts on manufacturing output (t = 8.6607, p < 0.01). The short-run analysis was concluded by the money supply having a significantly negative effect on the services sector output, whereas, the domestic credit was too insignificant to affect the services sector output. Meanwhile, the long-run results showed that the performance of the agricultural and services sectors would be positively impacted by financial development [(t = 1.7622, p < 0.10), and (t = 2.0137, p < 0.05), respectively], while the performance of manufacturing sector will not be impacted by the financial development variables. Concerning the direction of causation, unidirectional causality running from domestic credit to agricultural output was observed, while bidirectional causality was identified between money supply and agricultural output. Conversely, unidirectional causality was affirmed between financial development variables and the manufacturing sector. Unlike the agricultural and manufacturing sector, however, unidirectional causality running from the services sector to financial development was observed. 

The research concluded that financial development is an important factor in enhancing the performance of the sectors of the Nigerian economy because domestic credit to the private sector and money supply have demonstrated the ability to enhance the sectoral output performance if the right policies are put in place.

Keywords: Domestic credit, Financial development, Money supply, Output performance, Sectoral output

Word count: 500

CHAPTER TWO: LITERATURE REVIEW 

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS 

 

A phenomenon that is common to all economies around the world is the pursuit of economic growth. Regardless of their global ranking or classification, all economies desire growth. In furtherance of their desire for growth, they strive towards full utilisation of resources, reduction of unemployment, achieving price stability, and positioning their economy for upward progression. Notably, aggregate economic output, which is often compared among related countries, is usually the summation of all the respective outputs of all economic sectors, and is aggregated as the national output. Most economies around the world, especially the developing and the underdeveloped ones focus more on the aggregate economic performance with less consideration on sectoral performance. On the flip side, the literature asserts that it is erroneous for policymakers to only focus on the aggregate economic output without counterchecking with sectoral contributions to national output (Nzotta & Okereke, 2009). This is because such aggregation could lead to the fallacy of decomposition. By this, the proponents of this view further explained that though the aggregate economic output may look good on the whole, the strengths, weaknesses, opportunities and threats of the individual sectors will most likely be discarded erroneously. 

A quick look at Nigeria’s economic positions, both at the aggregate and the sectoral levels, revealed that while the economy of Nigeria is highly rated on a global scale, the contributions of each sector of the economy to national output have been poor and almost insignificant in some instances. This portends a challenge to policymakers in that, while they are planning resource allocation, they are likely to provide equal resource levels to all the sectors without any knowledge of sectoral needs. The result of this sort of misallocation of resources in the economy of Nigeria is obvious in the differential sectoral output. As it most likely happens, the sector that is doing well may receive the same resource allocation as those that are struggling to thrive. One of the economic resources that have been widely distributed across all sectors and the informal sectors is the financial resource. 

An economy can grow, when the key players in the economy and the productive sectors have unhindered access to growth-enabling resources/capabilities. One of the growth-enabling capabilities identified in the economic literature is financial development (Mayor, 2019). Financial development describes a situation in which financial intermediaries, the stock market, the non-banking sector, and other relevant finance stakeholders create an acceptable liquidity position by way of money supply and credit facilities within an economy to facilitate economic activities (Vadde, 2020). Samuel-Hope et al. (2020) buttressing the views also opined that the standard of living and welfare of citizens in a country can improve tremendously when the financial system supplies financial inputs that enable the production of goods and services. 

As observed in the literature, financial development is one of the most discussed and researched topics across the globe in recent time. The global economic challenges faced by the world at large have birthed the need for an all-out solution to the problem of recurring economic recessions. On account of the effects of the Covid-19 global pandemic, the Russia-Ukrainian war, global inflationary trend and other economic problems, various economies of the world have started to look for ways of revamping their economies. One of the identified ways of stimulating economic stability and growth is financial development. As observed from the economics and finance literature, financial development has been synonymously used as financial deepening, and financial depth across economies in the world (Eke et al., 2020; Okere et al., 2020; Sennuga et al., 2021; Udoh et al., 2021). 

The linkage between financial development and the performance of an economy has been observed by numerous studies both locally and internationally to suggest appropriate policy guidance to economic drivers (Levine, 1993; Rousseau, 2003; Estrada et al., 2015). This linkage has identified financial development as a channel by which physical and human capital stocks can be accumulated for development purposes. From the theoretical standpoint, an appropriate mix of capital and labour is viewed by neoclassical economists as a catalyst for spurring the growth of an economy usually at an unprecedented rate. In particular, Solow’s (1957) model of economic growth strongly asserted that the growth of an economy is a function of capital accumulation and aided by an enhanced labour force. Solow (1957) emphasised the role of capital in aiding economic activities. However, as important as capital accumulation is in aiding economic activities and growth, its realisation is largely dependent on many factors, which have been identified in the literature as saving rates, investments, consumption patterns, financial development and technological capability. 

As observed in the literature, investments, which aid the acquisition of physical capital are strongly connected to saving rate. On the other hand, the saving rate also depends on consumption patterns, which itself are connected to household income. Meanwhile, the income earned by households depends on the availability of opportunities, such as access to credit facilities and the volume of money in the society that is available for productive activities, among others, which are classified as financial depth. As opined by Goldsmith (1969), a weak financial depth coupled with poor financial intermediation may affect businesses, the economy and its financial climate. Corroborating this view, Udoh et al. (2021) observed that financial development could have strong impacts on economic activities. From the data published by the Central Bank of Nigeria (CBN) in the Statistical Bulletin for 2021, it was observed that the performance of the Nigerian economy on an aggregate level has continually demonstrated an upward trend over the years which could be tantamount to its responsiveness to series of financial development strategies deployed by policymakers over the years.   

Samuel-Hope et al. (2020) asserted that with various policy measures on financial development in Nigeria, the country’s financial sector has witnessed tremendous growth with visible pieces of evidence through increased money and capital markets activities, rapid expansion of banking operations, and development of various financial networks in form of Automated Teller Machines (ATMs), Point of Sale (POS) devices, digitised/electronic funds transfer, among others. With the growth of the financial system in Nigeria, a steady but slow growth has been witnessed in the performance of the Nigerian economy. In contrast, with robust aggregate economic output in the pre-and post-financial development eras in Nigeria, available evidence reveals that the performance of the sectors in terms of their contributions to GDP is not encouraging. This raises concern about why the aggregate economy of Nigeria will respond favourably to financial developments, whereas the disaggregated sectors are hardly impacted by it.  

Table 1.1: Share of Sectoral Contributions to GDP from 1981 to 2020

Source: CBN Statistical Bulletin, 2021

A review of Nigeria’s GDP, sectoral contributions to GDP, and Domestic Credit to the Private Sector by Bank (DCPSbB), which represents financial development and Gross Domestic Savings between 1981 and 2020 shows that Nigeria’s sectoral growth showed high volatility with financial development variables. For instance, in 1981-1985, which represents the era of no deliberate financial development (that is, pre-Structural Adjustment Programme (SAP) era), Nigeria’s GDP was N158.57 billion, while the contributions of agriculture, manufacturing, and services to GDP were: 25.12 per cent, 34.74 per cent, and 49.65 per cent, respectively. As further shown by the data, domestic credit to the private sector by banks is a ratio of GDP and Gross Savings as a percentage of GDP stood at 6.09 and 71.29, respectively. In the following five-year period (1986-1990), which began deliberate financial development strategy in Nigeria (Structural Adjustment Programme, SAP, 1986), a significant increase was witnessed in Nigeria’s GDP from the previous average rate of N158.57 billion to N 330.29billion (CBN Statistical Bulletin, 2021). 

Furthermore, the data revealed that among the agriculture, manufacturing, and services sectors, in the 1986-1990 period, only the agricultural sector showed an improvement in contributions to GDP. The manufacturing and services sectors experienced declines at 2 per cent and 10.03 per cent, respectively, whereas the element of financial development also dropped by 1.14 per cent. Notably, the quotient of domestic credit to the private sector by a bank to GDP experienced a little decline as well. The evidence from the CBN Statistical Bulletin (2021) showed that in the succeeding five-yearly periods between 1991-1995, 1996-2000, 2001-2005, up to 2010, a steady increase in the ratio of domestic credit to the private sector by a bank to GDP corresponds to a steady increase in Nigeria’s national output for the period under review. However, while the agricultural sector demonstrates a corresponding increase in contributions to GDP, both manufacturing and services sectors show a dwindling contribution to GDP despite visible evidence of increased financial development in the economy. This outcome raises another concern about the government’s policy on financial development, the posture of Nigeria’s national output and the responsiveness of the productive sectors to financial developments in Nigeria. It is against this backdrop that the need to examine financial developments in Nigeria vis-à-vis disaggregated sectors’ performance is conducted for policy guidelines.

Stimulating economic performance in the direction of desired growth level is a common phenomenon in all economies, both in advanced and developing countries alike. Understandably, a wealth of studies has been conducted at country-specific and cross-country levels, aiming at providing policy formulation guidelines to policymakers in confronting issues of economic growth. In a bid to provide guidelines for policymakers, researchers have tinkered with and queried economic theories. The efforts of researchers have produced different outcomes for different economies. Meanwhile, from the theoretical standpoint, the neoclassical economic theorists emphasised the role of capital formation alongside a knowledgeable labour force as directly responsible for the optimum performance of an economy, which tends to lead to sustainable growth (Solow & Swan, 1957; Acenmoglu, 2002). As identified in the economics and finance literature, the acquisition of capital plays a critical role, not only in the performance of the aggregate economy but also about the performance of the disaggregated sectors. The complementary role of financial development in explaining the variation in sectoral output performance and the role of domestic savings in spurring investments in capital acquisition deserves an empirical investigation. Until there is an empirical examination of this relationship, the likelihood of policy not being well formulated is almost inevitable. 

Several studies have examined the nexus of financial development and economic performance in advanced and developing countries including Nigeria (Okafor et al., 2016; Nwakobi et al., 2019; Samuel-Hope et al., 2020; Udoh et al., 2021; Schumpeter, 1911; Goldsmith, 1969; McKinnon, 1973; Shaw, 1973; King & Levine, 1993; Merton & Bodie, 1995; Vipin et al., 2015). These studies have placed direct emphasis on the role that financial liquidity, market capitalisation and financial intermediaries play in economic stimulation. All these studies have focused on the nexus of financial development as a tool for achieving economic growth only at the aggregate level. Interestingly, they have generated varying outcomes on the role of financial development in stimulating economic growth. 

However, few studies have been conducted in Nigeria on the relationship between financial development and sectoral performance. One of the few studies is by Mesagan et al., (2018), who observed the relationship between financial development and the performance of the manufacturing sector in Nigeria. The study found a positive but insignificant impact of financial development variables on manufacturing output. However, it further revealed that financial development negatively affected manufacturing value added in the period of the study. Similarly, Raifu and Aminu (2019) examined the nexus of financial development and agricultural sector performance in Nigeria. Their study found that although financial development has a positive impact on agricultural sector activities, such impact was waned by institutional factors. As observed from the literature, much work is yet to be done regarding the empirical relation of financial development to sectoral performance in Nigeria. This portends a serious challenge for policymakers.

Moreover, the issue of causality between financial development and economic performance is yet to be rested in the literature. While some studies conclude that financial development causes economic growth, other studies opine that it is economic growth that brings about financial development. However, few inconclusive studies yet exist on the issues of causality between financial development variables and the disaggregated sectors of the Nigerian economy. The examination of such causal nexus could serve as a good policy formulation tool by gauging the responsiveness of each sector of the economy to the variables of financial development. This study, for effective policy recommendation purposes, adopted the Autoregressive Distributed Lag (ARDL) technique to analyse the short-run relationship between the variables of financial development and the sectoral performance of the Nigerian economy, while the long-run relationship was examined using Fully Modified Ordinary Least Squares (FMOLS) technique, which is suitable as it autocorrects the problems associated with the traditional OLS technique. 

The broad objective was to examine the relationship between financial developments and disaggregated sectoral performance in the Nigerian economy. The specific objectives were to:

The questions arising from the statement of the research problem, which were answered in this study are:

This study on the relationship between financial development and the disaggregated sectors in Nigeria is very important for policy making. Among other things, it would inform and update policymakers in formulating policies on how financial development would aid the performance of the key sectors of the economy. This can be done through the enhancement of the contribution of and finding ways through which financial development can be made more effective and efficient by understanding the sensitive relation between variables of financial development and sectoral performance. This is because the specific impact of the variables of financial development on each sector of the economy will provide guide for policy formulation. 

The study will help formulate policies capable of enhancing the development of the financial sector as the financial sector is the conduit through which financial development can enhance economic performance. Similarly, individuals or groups who want to study the effect of financial development on disaggregated sectors will find this work very useful in that the findings of this result will be valuable material for literature review and assist them in also situating their study in the body of knowledge. Furthermore, it adds to the already existing empirical literature. This study will help the financial institution operators to understand the dynamics in financial policies thereby equipping them to participate more sustainably in the financial system. The financial institutions are the channels through which financial development is implemented to foster economic growth - both on the aggregate and sectorally.

This study focused on the role of financial development in stimulating the sectoral performance for the period 1981 – 2020. This period was chosen because it covers both the pre- and post-financial development eras in Nigeria. As such it covered various policy frameworks of government, especially the bank and non-banking sectors capitalisation and recapitalisation, the introduction of the National Economic Empowerment and Development Strategy (NEEDS), and the introduction of cashless and cash-lite economies in Nigeria, among others. The period represents a good coverage of various government activities in boosting the performance of the economy at the disaggregated level, especially the aggressive foreign borrowings to keep the economy liquid and to boost infrastructural developments across the country. As such, the effect of the expansionary policies of the government and the monetary regulatory roles of the Central Bank of Nigeria on financial development were adequately captured within the period and such effects were also fully examined on the sectoral performance of the Nigerian economy.