Academic journal article Journal of Emerging Trends in Economics and Management Sciences

The Micro Economic Implication of Interest Rate Policy on Private-Domestic Investment in Nigeria: 1980-2010

Academic journal article Journal of Emerging Trends in Economics and Management Sciences

The Micro Economic Implication of Interest Rate Policy on Private-Domestic Investment in Nigeria: 1980-2010

Article excerpt

Abstract

Nigeria's macroeconomic indicators reflect poor performances of private domestic investment in Nigeria between 1986 and 2005. The question that arises is: do Nigeria's interest rate policies actually have any effect on private domestic investiment? Arising from this problem; this study however examined empirically the economic implication of interest rate policy on private domestic investment in Nigeria using time series data which spanned 1980 to 2010. The study which used an error correction mechanism precipitated results which are in tandem with the findings of existing literature that private investment has a stronger and more favourable effect on growth than public investment. This trend is suggestive of the general believe that private investment tend to be more efficient and less prone and susceptible to corruption. The significant role played by governance in explaining the long-term pattern of domestic investment in Nigeria constitutes the distinctive feature of the study.The study revealed that within a long-run framework; a well structured and stable socio- economic environment could boost domestic investment. The findings of this study support the need for the government to reduce the interest rate within the economy so as to give a boost to private sector participation in domestic investment.

Keywords: interest rate, private domestic investment, private sector, public investment, corruption.

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

In virtually all economies of the world, monetary regulatory authorities adopt policies that are aimed at achieving certain macro economic stability such as sound balance of payment position, controlling inflation with the resultant price stability thus ultimately guaranteeing a stable external value of the country's currency. A strong monetary tool often used to accomplish these is the interest rate. Whether from the perspective of economic theories of investment or relevant empirical studies and literature, it is an incontrovertible assertion that investment is fundamental to the economic growth of a nation. Foreign Direct Investment (FDI) has been found to be influenced largely by the level of Domestic Investment (DI) in any economy. Private Domestic Investment being an integral part of the Domestic investment is to a large extent dependent on the prevailing interest rate or rather the prime lending rate. Interest rate or the prime lending rate is the ultimate cost of funds to borrowers of money.

It has been found that the economies of most developed nations are private sector driven. Igweike (2006) found that 80% of the workforce of the United States of America is employed by the private sector. The reverse is the case in Nigeria where government remains the largest employer of labour with unemployment figure soaring on yearly basis. The seemingly non significant contribution of the private sector in Nigeria in the early 1980s actually culminated in the 1986 introduction of the Structural Adjustment Programme (SAP) which employed interest rate policy as a tool to ensure trade liberalisation and openess in domestic investment. With SAP, the economy got deregulated as the Minimum Rediscounting Rate (MRR) which has the capacity to influence other rates was under the perpectual grip of the Central Bank of Nigeria. The Minimum Rediscounting Rate which was 15% in August 1987 was reduced to 12.75% in December of the same year to structure investment and economic growth.

To date Nigeria has pursued two interest rate regimes. In the 1960s to the mid 1980s with the administration of low interest rate which was intended to encourage investment. The fixed and low interest rates were gradually phased out by the introduction of a dynamic interest rate regime under the auspices of the Structural Adjustment Programme (SAP) in the third quarter of 1986 which ensured that rates were more influenced by market forces.

OBJECTIVES OF THE STUDY

Given the period before 1986 when the regulated interest rate was in vogue and the deregulated interest rate regime which was precipitated by the introduction of SAP, it was expected that the policy shift would allign the Nigerian economy along the path of economic recovery and development susteneity. …

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