ABSTRACT
In the recent past, remittances have grown rapidly to form a significant component of foreign inflows to Nigeria. This study therefore sought to establish the impact of International remittances and financial deepening on the economic growth of Nigeria (1985-2016). The paper found a positive and statistically significant relationship between remittances and financial deepening in Nigeria. Moreover, the coefficient on the interaction coefficient between remittances and financial sector development was found to be positive and statistically significant. This result suggests that remittances can complement the allocation of capital by credit markets to private investment activities in Nigeria.
Key words: International remittances, Financial deepening, Economic growth
TABLE OF CONTENTS
Title
page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table
of Contents vi
List
of Tables ix
List
of Figures x
Abstract xi
CHAPTER 1:
INTRODUCTION
1.1 Background
to the Study 1
1.2 Statement
of the Problem 9
1.3 Objectives
of the Study 10
1.4 Research
Question 10
1.5 Research
Hypotheses 10
1.6 Significance
of the Study 11
1.7 Delimitation
of the Study 12
CHAPTER
2: REVIEW OF RELATED LITERATURE
2.1 Conceptual
Framework 13
2.1.1 Economic
growth 13
2.1.2 International
remittances 13
2.1.3 Financial
deepening 14
2.2 Theoretical
review 15
2.2.1 Neoclassical
theory 15
2.2.2 Neo-Marxist
theory 15
2.2.3 Theory
of pure altruism 16
2.3 Empirical
review 16
2.4 Gap
in Empirical Review 21
CHAPTER
3: RESEARCH METHODS
3.1 Research
design 23
3.2 Model
specification 23
3.2.1 Objectives 3 modelling the directional
causality between remittances and
financial
Deepening 25
3.3 Estimation
Procedure 26
3.3.1 ARDL
bounds test approach 28
3.3.2 Unit
root and co integration test results 29
3.3.3 Granger
causality test 29
3.4 Sources
of data 29
3.4 Description
of Data 30
CHAPTER
4: DATA ANALYSIS AND DISCUSSION OF RESULTS
4.1 Pre estimation test results 32
4.1.1 ADF/PP
Stationarity tests 32
4.2 Discussion
of result 36
4.2.1 ARDL
bounds testing approach 36
4.3 Granger
Causality Test 40
CHAPTER
5: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
41
5.2 Conclusion 41
5.3 Recommendations 42
REFERENCES 44
Appedices 49
LIST OF TABLES
4.1 ADF/Phillip
Perron Unit root test 32
4.2 Criteria
Table 33
4.2.1 ARDL
Bound Test 36
4.2.2 ARDL
Long and Short Run Test 37
4.2.3 ARDL
Model Diagnostic Test 40
4.3 Pair
wise Causality Test 40
LIST OF FIGURES
1.1
Highest Remittance
receiving Countries 2
1.2
Remittances and Foreign
Development Aid 6
1.3
Remittances Flow to
Developing Countries 7
4.1 Hann
Quinn Criteria 34
4.2 Histogram
Normality Test 35
4.3 Casum
Test 35
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The
correlation that exists between financial deepening, international remittances,
and Nigeria economic growth has long been established with facts both at
theoretical and empirical levels. However, the coming of new theories of
endogenous growth has rekindled interest in the potential role of financial
systems in boosting economic growth and development. The International migrant
remittances are conceivably the cosmic means of exterior funding in emerging economies.
Officially acknowledged, remittance inflows to developing nations overshoot
US$125 billion in 2004, making remittance the second stupendous headspring of
development funding after foreign direct investment.
International
Remittances are unquestionably larger inflow of assistance to developing
countries. As the development community perpetuates the search for adscititious
resources to finance the Millennium Development Goals, remittances—pro-poor and
cyclically stable, juxtaposed to other capital flows—materializes to be a
promising source. International remittances moreover appear to be the least
disputed aspect of the overheated discourse on international migration. Both
remitting and recipient countries are considering the long-term economic
implicative insinuations of these transfers. In record, transmittals to
developing economies are anticipated to rise by 4.8% to $450 billion for year
2017.
Ecumenical
payments, which include movements to high-income nations, are expected to rise
by 3.9% to $596 billion (World Bank 2017). Between prime remittance recipients,
India maintained its top spot, with remittances anticipated to total $65
billion this year, tread on the heels by China – USD 63 billion, then
Philippines – USD 33 billion, Mexico – USD 31 billion, before Nigeria – USD 22
billion (World Bank 2017).
Fig 1: Highest remittances
receiving countries
Source: World Bank Development
indicator (2017)
Remittances
from emigrant workers have fill out appreciably over the last two decades to
become a key source of peregrine inflows in Africa. From a paltry 9.1 billion
dollars in 1990, remittances have gotten larger more than threefold to outreach
in 2010 at the cost of US $40 billion, up from US$ 38 billion in 2009 (Ratha et
al., 2011). This exponential magnification in remittance flows reflects an
incrementation in emigration from Africa as well as incrementing earnings of
migrant African workers progressed by the vigorous amplification experienced in
the third world countries in the run up to the 2008 financial catastrophe. In
2009, International remittance inflows constituted 2.6% of the GDP in Africa;
the inflow was higher compared to remittance inflow to the developing countries,
which typically composed about 1.9 per cent of GDP (Ratha et al., 2011). Remittance
is in a very fast pace taking a centre stage in world research agenda.
Remittances
are indeed coming behind FDI as the second major means of foreign funding for
developing economies (Aggarwal, Demirgue-Kunt and Martinez, 2009). Unlike other
sources of external finance, remittances tend to be more stable making them a
reliable source of financing for developing countries (Biller, 2007).
Remittances are often more effective than growth aid since the recipient does
not receive it directly thus making them less prone to administrative
encumbrances and corruption. Payment inflows into Africa on average are now on
the same level to official development aid. The turning point occurred in 2007
when remittances officially exceeded development aid in Africa on average. In
North Africa, remittances are now larger than official development aid forming
roughly 3.3 percent of GDP and 0.6 percent of GDP, respectively. However, in
sub-Saharan Africa, remittances are somewhat lower than development aid
comprising 2.2 percent and 3.7 percent of GDP, respectively. Only foreign
direct investments are currently larger than remittances as a percent of GDP.
Trend
in international remittances inflow to Nigeria
The beginning of Nigeria seasonal
movement can be traced to Trans- Sahara migration amid Northern Nigeria and
North African countries. However, between 1950 to1970 most Nigerian migrants
went to USA and Europe, notably the United Kingdom and the USA to study. Most
inquisitors argued that a major onslaught of Nigerians, especially the skilled
expatriate that travelled abroad was after the introduction of the Structural
Adjustment Programme (SAP) by President Ibrahim Babangida in 1986. On the SAP
strategy, the country‘s economy experienced recession characterized by
increased movement of technical and lazy labor force.
It is worthy of note that International remittance inflows
are part of the global financial system and can be defined as financial and non-financial
earnings voluntarily sent to migrant households in the home countries. Due to
their tent and consequence on the international economic system, they have
become the vital sources of foreign exchange transfer to local economies of
developing countries like Nigeria. Actuary from diverse international financial
organizations, reveals that remittance incursion have been on the increase
neoteric. World Bank (2014) revealed that the international total payments in
2012 were put to $436 billion dollars while in 2013, inflows contributed about
0.31% to Gross Domestic Product globally.
The egress economies have been
perceived to be major beneficiaries of remittance inflow. It has been estimated
that remittance inflows constitute 27% of the GDP of developing economies,
according to the World Bank. The proliferating migration movement from
developing to developed economies has fascinated the interest of researchers on
the actuation for remittance inflows, kind of remittances, outlay of
remittances, the contribution of remittances in the abatement of poverty and
inequality universally and thereupon the impact of remittance inflows on the
expansion of world economy, inotherwords, the development of the emerging
economies like Nigeria. In 2011 for example, the gross remittance cash flows into
Nigeria was $10.681 billion in contrast to $1.392 billion in 2004 which was
about 767 percent upsurge in a decade. Also in 2011, remittance inflows were
about 5% of the GDP of Nigeria (CBN 2014). External financial influxes to
Nigeria have consummated gain from international trade, especially from goods
consigned to other economies. Similar external financial flows come in form of
workers remittances, foreign direct investment, overseas development
assistance, foreign portfolio investment and foreign subsidy. Nigeria in the
latter-day has witnessed colossal emigration of both skilled and unskilled
workers to advanced economies, a course believed to be associated with
aboriginal corruption in Nigerian economy that has increased hardship on the people
in addition to political impasse.
Nigeria has also witnessed the trend
of experts and skilled personnel to advanced economies in search of better
life. A chronological account of Beine, Docquier and Rapoport (2008) has it
that most foreign migration started in Europe till 1950s and since then, the
international migration flow has pass through a dire change, with the less
developed countries surfacing as major fountain of international migrations.
The increase in migration to developed nations which resulted to the increases
in international remittance inflows to the developing economies can be linked
to many factors, such as the result of excessive liability or debt perplexity
of developing economies in Africa, Latin America and Asian in the 1990’s.
In addition, the collapse of the structural
adjustment programme advocated by the International Monetary Fund being
conditions for accessing the international development loans contributed to a
very large extent upsurge to foreign land coupled with the Political
instability in the land (IOM, 2009). The Nigeria’s skilled and unskilled
emigrants working in different parts of the world have become the leading
source of enormous workers remittance inflows into the Nigerian economy. World
Bank (2014), Nigeria received about 65% of the official recorded remittance
inflow to Africa and about 20% of the global remittance inflows. It is
projected that remittance inflows into the Nigerian economy have outgrown official
development assistance (ODA), foreign direct investment (FDI), and other
financial inflows into the country. World Bank index reports that Nigeria has
the highest migrant skilled workers in the United States (USA), Saudi Arabia
and United Kingdom (UK).
Fig 2: Remittance and foreign development aid
Source: World Bank Development indicator (2016)
Fig 3: Remittances flow to developing countries
Source: World Bank development indicator (2017)
Financial deepening is a term used by economists to address the rising provision of financial services. Individuals' and societies' condition
economic-wise can be affected by financial deepening. One of the characteristics of financial deepening is that it fast tracks
economic growth through the expansion of access to those who do not have
adequate funding.
International
transmittals and financial deepening in Nigeria
The question of
whether remittances promote financial sector’s development in Nigeria or not has
been given little of no attention (Shahbaz et al., 2007). However, this
important matter is predicated because financial system performs key economic
functions and their development has been shown to enhance growth and alleviate poverty
(King and Levine, 1993; Beck, Deirgue-Kunt and Levine, 2004; and Giuliano and
Ruiz-Arranz, 2005). Also Hinojosa-Ojeda, (2003) argues that banking remittances
recipients will aid in reproducing the developmental effect of remittance flow
(see also Terry and Wilson, (2005); and World Bank, (2006). Study by Guiliano and Ruiz-Arranz (2005) shows
that the impact of payments on development hangs on the pedestal of development
of the finance sector in a country.
However, the study
concludes that remittances help to endorse growth in less financially emerging
countries, arguing that agents reward for the inadequacy of development for
local financial markets using remittals to mitigate liquidity challenges and to
channel financial resources towards efficient and productive uses that will enhance
economic growth (Levine, 2005). This interrelationship results in a reverse
causality. Increased financial development is likely going to lead to huge
measured remittances as argued by scholars either due to the assistance of
financial remittals flows or a huge proportion of remittal are ascertained when
those remittances are routed through financial institutions formally. Additionally,
financial enhancement may reduce the price of conveying payments, this will in
turn lead to a rise in such flows (Aggarwal et al., 2011). The major role of remittances
can thus be used to further financial inclusion in at least four ways;
1.
Use of wider range
of financial instruments to expanding payment networks
2.
Ensuring payment
networks are cost efficient;
3.
Ensuring that remittance recipients are able to mobilize the savings
they accrue into accessible, open and regulated institutions;
4.
Enabling tools that motivate (pull) recipients to access and use a
range of financial products needed to increase assets
1.2 STATEMENT OF THE PROBLEM
For some time now,
there has been a heated argument on how the often a large number of migrant’s
remittances are utilized and to what extent they assist to the growth of the
migrant's country of origin {Obaseki (1991), Obadan (2004), Tomori and Adebiyi (2007), Ratha (2003); Pernia (2006), World
Bank (2008), ; Eke and Ubi (2008) , Hanson and Woodruff, (2003), Cox-Edwards
and Ureta, (2003); and Russell 1986; 1992 and 1995).
The increasing rate in foreign
remittals inflows is wadding the vacuum of foreign exchange leakages in Nigeria
and other third world countries. More so, most researchers argued that increase
in the international remittance inflows contribute to brain drain in the
developing countries. Although researchers have embarked on empirical work
to find the magnitude and to what extent International remittances have impacted
on economic development of countries of origin (Sayan 2004).
There are no visible strategic
actions taken by the Nigerian government regarding efficient utilization of
international remittance inflows.
Yet, as shown by a considerable number studies in the literature, the decision to
remit is a compound one involving other factor than the incitement to help
finance current consumption spending of family members and relatives in the
origin country (Russell 1986). The rapid growth of remittances in Nigeria
raises the question of whether these monies are used towards development and
investment and thus expanding the level of production. This work as a way bridging
the gap created will empirically examine the extent to which remittances and financial
deepening contributed to the economic growth.
1.3 OBJECTIVES OF THE STUDY
The primary aim of
this study is to evaluate how the rapid growth in remittances and financial
deepening in the recent past has affected the economy of Nigeria as well as to
examine the role played by financial sector development in facilitating the
contribution of remittances towards increasing production base in Nigeria. The
specific objectives of the study are as follows:
1.
Determine
the impact of remittances on economic growth in Nigeria.
2.
Examine
the impact of financial deepening on economic growth in Nigeria.
3.
Evaluate how
international remittances has enhanced financial deepening in Nigeria.
1.4 RESEARCH
QUESTIONS
1.
Does
remittances impact on economic growth in Nigeria?
2.
To what
extent does financial deepening on economic growth in Nigeria?
3.
Has
International Remittances enhanced financial deepening in Nigeria?
1.5 RESEARCH
HYPOTHESES
The below hypotheses was designed for the study:
H01: Remittances
did not contribute significantly to growth of Nigeria’s economy.
H02: Financial deepening did not contribute
significantly to the growth of Nigeria economy.
H03: International remittances do not significantly enhance
financial deepening in Nigeria.
1.6 SIGNIFICANCE
OF THE STUDY
Over the past few
years, there has been a significant increase in the number of studies analyzing
the impacts of remittances in Nigeria and Africa at large. Most of these work
focused on the influence of remittances on economic growth and welfare (Adam and
Page, 2005 and Kiiru, 2010). Very limited work has been done on the impact of
remittances on production pattern in Africa and specifically in Nigeria. This
study will therefore contribute to the existing body of knowledge on the
subject in Africa and Nigeria in particular.
Depending on the
findings, the study will make recommendations to policy makers on how
remittances could be harnessed effectively to facilitate Nigeria economic
growth. All stakeholders of the public sector will find the work very valuable
as it will help re-orientate the public sector the impact of remittances and
financial development to the economic growth of a nation. Individuals and the
general public will find this work very useful as it will create the needed
awareness and sensitization on the importance of financial development to
helping increase the production base of a country. Students, academicians and
other scholars who wish to undertake further research on Remittances and
financial deepening will find the literature arising from this study to be of
great value, as it will be added to the existing literature.
1.7 DELIMITATION OF THE STUDY
The study covered
the period 1985-2016 on a quarterly data analysis. The variables chose for the analysis is
limited to GDP, Money Supply, International Remittances, Trade Openness, Credit
to Private Sector, Real Exchange Rate, Real Interest Rate. It has its scope on Nigeria economy.
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