IMPACT OF REMITTANCES ON ECONOMIC GROWTH IN NIGERIA

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ABSTRACT


This study seeks to examine the impact of remittances on economic growth in Nigeria, the study made use of the following theories like solow neoclassical theory of economic growth, Solow’s theory of economic growth provides a useful framework for analyzing growth drivers.  The study conducts a unit root test and co-integration test to ascertain the level of integration of the variable and whether or not they are co-integrated. The result from the test guided the researcher on the appropriate modifications on the model to avoid spurious regression. The study was conducted other pre-tests and posttests such as the normality test, the unit root test, serial autocorrelation using the Breusch- Godfrey serial correlation LM test, heteroscedasticity using Breusch-Pagan-Godfrey heteroscedasticity and stability test using CUSUM test. The study explores the aggregate impact of remittances on economic growth using Autoregressive Distributive Lag (ARDL). Alsothe study also covers a period of 38 years (1981-2019) and the data was sourced from the CBN statistical bulletin and World Bank world development indicators. E-view 10 statistical package will be used for the analysis. The following findings was made that there is an increase in remittance inflow will lead to an increase in economic growth in the period under review, that school enrolment was found to have a positive and statistically significant impact on economic growth in the period under review, the model indicate that there is an inverse and statistically significant relationship between economic growth and remittances and gross fixed capital formation was found to have a negative and insignificant impact on economic growth at lags zero and one. Based on the above findings the following recommendations were made that government should promote policies that favor remittance inflow into the country through official channels for proper documentation, that government have to put in place well-articulated  policies that encourage remittance inflow through the formal financial institutions by blocking leakages in the financial system and that remittance inflows must be invested in the productive sector so as to positively impact on economic growth.




TABLE OF CONTENTS

Title Page                                                                                                                                i

Declaration                                                                                                                             ii

Certification                                                                                                                            iii

Dedication                                                                                                                              iv

Acknowledgements                                                                                                                v

Table of Contents                                                                                                                   vi

List of Tables                                                                                                                          x

List of Figure                                                                                                                          xi

Abstract                                                                                                                                  xii

 

CHAPTER 1

INTRODUCTION

1.1       Background to the Study                                                                                            1

1.2       Statement of the Problem                                                                                           5

1.3       Research Questions                                                                                                    8

1.4       Objectives of the Research                                                                                         8

1.5       Research Hypotheses                                                                                                  8

1.7       Significance of the Study                                                                                           9

1.8       Scope and delimitation of the Study                                                                           9

 

CHAPTER 2

REVIEW OF RELATED LITERATURE

2.1       Conceptual Issues                                                                                                       11

2.1.1    Remittances                                                                                                                11

2.1.2    Migration                                                                                                                    13

2.1.3    Economic growth                                                                                                        14

2.1.4    Determinants of migration and remittance                                                                15

2.1.5    An overview of remittances and economic growth                                                    17

2.1.6    Remittances and economic growth in Nigeria                                                           19

2.2       Theoretical Literature Review                                                                                    21

2.2.1    Classical theory of remittances and economic growth                                               22

2.2.2    Neoclassical growth model                                                                                        22

2.2.3    The solow-swan model                                                                                               23

2.2.4    Structural or dependence theory                                                                                 23

2.2.5    Neo-marxist theory                                                                                                     24

2.2.6    Optimistic and pessimistic theory                                                                              24

2.2.7    New economics of migration theory                                                                          25

2.2.8    Push-pull theory of migration                                                                                    26

2.2.9    New economics of labor migration (NELM) theory                                                  27

2.2.10  Labor market or segmented labor theory of migration                                              28

2.2.11  Pure altruism theory                                                                                                   29

2.2.12  Pure self-interest theory                                                                                             30

2.3       Empirical Review                                                                                                       31

2.4       Summary of Empirical Review                                                                                  45

2.5       Identified Gaps in the Empirical Review                                                                   47

 

CHAPTER 3

RESEARCH METHODOLOGY

3.1       Theoretical Framework                                                                                              49

3.1.1    Solow neoclassical theory of economic growth                                                         49

3.2       Model Specification                                                                                                   50

3.2.1    Model Specifications for objective one                                                                      50

3.2.2    Model for objective two                                                                                             51

3.3       Estimation Techniques                                                                                               53

3.4       Estimation Steps in ARDL                                                                                         54

3.5       Other Test                                                                                                                   54

3.6       Model Justification                                                                                                     55

3.7       Sources of Data and Econometric Software                                                               56

3.8       Description of Data                                                                                                    56


CHAPTER 4

RESULTS AND DISCUSSION

4.1       Results                                                                                                                        58

4.2       Unit Root Test                                                                                                            58

4.3       Model Estimation for Objective One                                                                         59

4.3.1    Bounds testing                                                                                                            59

4.4       The ARDL Model                                                                                                      61

4.5       Model Estimation for Objective Two                                                                         64

4.5.1    Bound testing                                                                                                              64

4.6       ARDL Model for Objective Two                                                                               65

4.7       Hypothesis Testing                                                                                                     68

4.8       Diagnostic Test for Model One                                                                                  69

4.8.1    Test for autocorrelation                                                                                              69

4.9       Test for Heteroscedasticity                                                                                         69

4.10     Diagnostic Test for Model Two                                                                                 71

4.10.1  Test for autocorrelation                                                                                              71

4.11     Test for Heteroscedasticity                                                                                         71

4.12     Policy Implication of Results                                                                                     72

 

CHAPTER 5

SUMMARY, CONCLUSION AND RECOMENDATIONS

5.1       Summary of Findings                                                                                                 74

5.2       Conclusion                                                                                                                  75

5.3       Recommendations                                                                                                      76

REFERENCES                                                                                                         77

APPENDIX                                                                                                               85








 

LIST OF TABLES


2.4       Summary of Empirical Literature                                                                              46

4.1.1    Descriptive statistics                                                                                                   58

4.2.1    ADF Unit root test                                                                                                      59

4.3.1    ARDL bound tests                                                                                                      60

4.4.1    Short run error correction model                                                                                61

4.4.2    Long run model                                                                                                          63

4.6.1    Dynamic short run error correction model                                                                 65

4.6.2    Static long run model                                                                                                 67

4.6.3    Breusch-Godfrey serial correlation LM Test                                                             69

4.6.4    Heteroskedasticity Test: Breusch-Pagan-Godfrey                                                     69







 

LIST OF FIGURES


1          Top Remittance Receivers in Africa (2018), US$ Million                                        2

2          Nigeria's Remittance Flows as a % of GDP                                                               4

3          Remittances, FDI, private debt & portfolio equity and ODA Source:

World Bank Development Indicators and World Bank Development

Prospects Group                                                                                                        7

 

4.9.1    Cusum test for model stability                                                                                   70

 

4.11.1  Cusum test for model stability                                                                                   72


 






 

CHAPTER 1

INTRODUCTION


            1.1           BACKGROUND TO THE STUDY

Economists are policy makers, the world over are keenly interested in understanding the impact of remittances on economic growth in developing countries of the world. This is because Remittances which is a major lifeline for many households have over time grown to become a major source of investment and much needed foreign exchange in many developing countries like Nigeria.

 

Remittances have been severally defined by various scholars tailored according to the mode, uses and nature of the transfer Tewold (2005), Alessandra and Ivo (2006). However, a more general definition conceptualizes. Remittances as part of the migrants income from those resident in another country sent home to their families or households resident in the original country, in the case of international remittances, or from one region (usually urban areas) to another region (usually rural areas). They are usually in the form of cash or goods but nevertheless form a significant portion of the recipients' income.

 

The importance of remittances is the role they play in economies. They help poorer recipients meet basic needs, fund cash and non-cash investments, finance education, foster new businesses, service debt and essentially, drive economic growth. Empirical studies show that the primary benefits of remittances to recipient households is the improvement in their general welfare. According to analysts, 70% of remittances are used for consumption purposes, while 30% of remittance funds go to investment related uses.

The World Bank estimated that global remittances grew by 10% to $689 billion in 2017 and $633 billion in 2018, with developing countries receiving 77% or $528 billion of the total inflows. India, China, Mexico, the Philippines and Egypt are among the largest remittance recipients globally, collectively accounting for approximately 36% of total inflows.

 

Nigeria is a major recipient of remittances in Sub-Saharan Africa.  According to data from IMF Statistical bulletin 2018, Nigeria’s remittance inflow in 2017 stood at about 22.3 billion dollars representing about 38% of the total remittance inflow into Sub-Saharan Africa.  This figure is expected to increase as flows are anticipated to keep expanding as a result of two factors: projected strong regional economic growth in 2019 and large intra-regional migration flows from the SSA region. It is therefore imperative that countries in the region, especially Nigeria, take advantage of this trend in the course of strategic economic decision making.


Figure 1.1: Top Remittance Receivers in Africa (2018), US$ Million

Considering the enormous contribution of remittance to the economy, policy makers are interested in the impact of remittances on Economic growth .According to the available report obtained from the National Bureau of Statistics (NBS), a remittance from Nigerians in Diaspora is approximately $25.08 billion in 2018, representing 6.1% of GDP. This also represents 14% year-on-year growth from the $22 billion receipt in 2017. The 2018 figure translates to 83% of the Federal Government budget in 2018 and 11 times the FDI flows in the same period. Nigeria's remittance inflows was also 7 times larger than the net official development assistance (foreign aid) received in 2017 (US$3.4 billion.) Specifically, in 2013, Nigeria’s remittance was put at 4.31% to Nigeria’s GDP, while in 2018 it stood at 6.1%. It means Nigeria’s Diaspora remittances rose by 126% in 6 years (2013-2018).

 

Since remittances affects household income and investment, economist are also interested in impact on economic growth. Generally, it is assumed that the growth in the amount of goods and services is a signal of the level of improvement in the overall wellbeing of the people.  Consequently, policymakers are always on the loo out for ways of improving economic growth. Economic growth is an increase in aggregate outputs of any economy.  It captures the growth in the value of goods and services produced by an economy at any given time.

 

The World Bank has predicted increase in remittances inflow into Nigeria. The Central Bank of Nigeria (CBN) officially started recording remittance transfers in the nation's current account balance of payment account books in 2002 (Olowa, Awoyemi, Shittu and Olowa, 2013).According to the available report obtained from the National Bureau of Statistics (NBS), a remittance from Nigerians in Diaspora is approximately $25.08 billion in 2018, representing 6.1% of GDP. This also represents 14% year-on-year growth from the $22 billion receipt in 2017. The 2018 figure translates to 83% of the Federal Government budget in 2018 and 11 times the FDI flows in the same period. Nigeria's remittance inflows was also 7 times larger than the net official development assistance (foreign aid) received in 2017 (US$3.4 billion.) Specifically, in 2013, Nigeria’s remittance was put at 4.31% to Nigeria’s GDP, while in 2018 it stood at 6.1%. It means Nigeria’s Diaspora remittances rose by 126% in 6 years (2013-2018).

 

Figure 2: Nigeria's Remittance Flows as a % of GDP

 

The consequences of international migration for growth and development in countries of origin remains hotly debated and poorly understood (Nwajiuba, 2005). However, the role of migrant remittances is one of much interest within the current discourse on international migration and development. It is significant particularly for countries which are still developing (Ratha et al., 2008) and Nigeria is no exception to these trends. This study is an attempt to help make contributions to the global debate in this direction. Empirical investigation into the impact of remittances on economic growth and the macroeconomic determinants of remittances in Nigeria given the volume of remittances inflow into the country and the increasing role economists now place on remittances as an alternative source of development finance.

 

1.2       STATEMENT OF THE PROBLEM

The impact of remittances on economic growth in Nigeria has continued to receive attention from policy makers and researchers because of its implication on macroeconomic stability. This is because Nigeria has remained outstanding in terms of inflows of remittances at both regional and global levels but has not utilized it as a major source of foreign capital flows and consequently economic growth.

 

Nigeria is the highest recipient of remittances in the sub-Saharan Africa as the country accounts for approximately 65 % of the officially remitted funds in the region and 2% at the global level (Hernandez-Coss and Bun (2006)). Iheke (2012) remarked that Nigeria received nearly USD 2.26 billion in remittances in 2004. According to the World Bank (2008), about twenty million Nigerians in the Diasporas remitted about USD 7 billion in 2008. Report obtained from the National Bureau of Statistics (NBS), remittances from Nigerians in Diaspora is approximately $25.08 billion in 2018.

 

Despite these huge inflows of remittance into the Nigeria economy, there is, however, a wide margin between domestic savings and investment in Nigeria. Though savings has risen increasingly in real terms from N2,776,675.1 in 1996 to N7,763,511.2 in 2014 (CBN Statistical Bulletin, 2015), domestic savings still fall short of investments which stood at N9,284,945.38 in 2014 (CBN Statistical Bulletin, 2015). Also, lack of capital for financing developmental policies and investment has been a major problem plaguing the country and has forestalled projected growth in Nigeria (Ihimodu, 2005). Furthermore, the inability of the government in Nigeria to generate sufficient foreign exchange due to heavy reliance on a mono-product export which is prone to negative price shock in the case of oil at the international market has led to several years of volatility in government generated revenue and as a result served as checks on import demand and a constraint to effective implementation of national development plans (Adewuyi and Adeoye 2003).

 

The problem of insufficient capital for development financing has led the government into colossal deficit financing through borrowing, both domestic and external debt, with domestic debt on increase, rising from N12.12 trillion in 2015 to N14.02 trillion in 2016 alone, National Bureau of Statistic (NBS) (2017) and external debt also rising from 28,729,820,000 USD in 2015 to 30,688,110,000 USD in 2016 and continued on increase from 39,770,160,000, 46,237,680,000 in 2017 and 2018 respectively. According to word bank international Debt statistics, (2018), over the past 48 years, the value for this indicator has fluctuated between, 46,237,680,000 USD in 2018 and 836,680,600 in 1970.

 

Also, since 1990 total Overseas Development Assistance (ODA) has decreased by more than half (Sims & Lake, 2010) and foreign direct investments are declining. Given the above scenarios, greater importance is now being placed on alternative sources of finance such as remittances inflow for national development (ECOSOC (2000); Ratha, (2003). World Bank (2013) reported that foreign remittances constituted the single largest source of external fund, surpassing export earnings, foreign direct investments (FDI) and other types of private capital flows.


Figure 3:        Remittances, FDI, private debt & portfolio equity and ODA Source: World Bank Development Indicators and World Bank Development Prospects Group.

 

The assertion by Nightingale (2003) indicates that a well-articulated remittance management regime will aid economic growth and development as other sources of foreign exchange earnings and as a source of liquidity and soothing for balance of payment deficit. While migrant remittances have been acknowledged to be increasingly important to developing countries, little incentives seem to have been put in place to strengthen them. The lack of policies to channel or encourage remittances through official channels and to the investment sectors of the economy over time has probably impacted on the overall contribution of remittances to economic growth in Nigeria.

 

Unarguably, the macroeconomic impacts of international remittance inflows together with other key and important variables like balance of trade, oversee development assistance, exchange rate etc, are mostly captured through economic growth and socio-economic indicators. Whilst these macroeconomic impacts of remittances have received considerable attention in other countries, Tewodros Mekonnen. (2011) analyzed the Impact of Remittance on the Ethiopian Economy. Although, numerous reports and empirical evidence indicate that Nigeria surpasses other countries in Africa in terms of inflows of remittances, hence, there is the need to investigate the impacts and drivers of remittance into the Nigeria economy. This is still a gap in the literature that is yet to be properly investigated, and most especially as it affects the developing countries and Nigeria. It is in light of the following background information that this study seeks to examine the impact of remittances on economic growth in Nigeria.

 

1.3       RESEARCH QUESTIONS 

The Study addresses the Following Research Questions

      i.         What are the impacts of remittances inflow on economic growth in Nigeria?

     ii.         What are the macroeconomic determinants of remittances inflow in Nigeria?

 

1.4       OBJECTIVES OF THE RESEARCH

The main objective of this study is to examine the impact of remittances inflows on Economic growth in Nigeria. Specifically, the study aims at:

      i.         To determine the impact of remittance inflows on economic growth in Nigeria.

     ii.          To investigate the macroeconomic determinants of remittances inflow in   Nigeria.


1.5       RESEARCH HYPOTHESES

The following hypotheses are formulated to further guide the study:

H01: There are no significant impacts of remittances inflows on economic growth in Nigeria

H02:  Macroeconomic determinants of remittances do not have significant impact on remittances inflow in Nigeria.

 

1.6       SIGNIFICANCE OF THE STUDY

This study provides information, which will benefit Nigerians and help them to make use of migrant workers’ remittances. It will also help in some developmental goals such as spending remittances on education, health services, shelter, community projects and proper developments. To policy makers in the National Planning Commission, it will help in antipoverty policies, since remittances can help to reduce poverty. It will also help in the initiation of policies to encourage the transfer of remitter’s funds through the new micro-credit banks, thus facilitating the access of the poor to finance. Due to this study, policies may come up to enhance remittances, which will help to facilitate access to long term finance made available by remitters especially through their investment in the capital market. Also, to researchers, it will have a meaningful contribution to the existing literature.

 

1.7       SCOPE AND DELIMITATION OF THE STUDY

The main focus of this study is to make the investigation on the impacts of remittances on economic growth in Nigeria over the period of 1980-2019.

On the delimitations of the study was lack of funds which makes the study to rely on the secondary data, as the collection of primary data needs more money and time. In reviewing literature, this research faced the problem of accessing journals with relevant materials as some web site could not be accessed as they were secured.

The data in this study were collected from different sources including the Central Bank of Nigeria (CBN) Statistical Bulletin and World Bank development data were very useful in overcoming these challenges. The data estimations were carried out using Econometrics view (E-view) 10.0 for better results and policy inference.

 


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