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The Impact Of Interest Rate On Investment Decision In Nigeria. An Econometric Analysis (1981-2010)
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Lesotho (2006) studied “An investigation of the determinants of private
investment “the case of Botwanaâ€. Among his independent variable were
real interest rate, credit to the private investors, public investment
and trade credit to the private investors, real interest rate affect
private investment positively and significantly. Other variable do not
affect private investment level in the short-term as they show
insignificant co-efficient. GDP growth and conform similar finding sin
studies by Oshikoya (1994), Ghura and Godwin (2000) and Malmbo and
Oshikoya (2001).
Aysam et al (2004) in their study “How to Boot
Private Investment in the MENA countries. The role of Economic Reformsâ€.
Among their independent variables were accelerator, real interest rate,
macroeconomic stability, structural reform, external stability,
macroeconomic volatility, physical infrastructure. Their studies ranged
from 1990 to 1990 comprising of panel of 40 developing countries. They
used co-integration technique to determine the existence of a long-term
relationship between private investment and its determinants. They fund
out that almost all the explanatory variables exhibit a significant
impact on private investment, with the exception of macroeconomic
stability and infrastructures. The accelerator variable (ACC) has the
expected positive sign, which implies that the anticipation of economic
growth induce more investment. Similarly, interest rate (r) appears to
exert a negative effect on firm’s investment projects, which is
consistent with the user cost of capital theory.
In the U.S, Evans,
estimated that net investment would rise by anything between 5% and 10%
for a 25% fall in interest rate. These percentage changes were
calculated to occur over a two year period after a one year log.
A
study by Kham and Reinhart (1990) observe that there is a close
connection between the level of investment and economic growth. In other
words, a country with low level of investment would have a low GDP
growth rate. The use of ryid exchange rate and interest rate controls in
Nigeria in low direct investment, the leads to financial impressions in
the early 1980. Fund were inadequate as there was a general lull in
turn leads to the liberalization of the financial system Omole and
Falokun (1999). This may have an adverse effect on investment and
economic growth.
As already discussed so far, it is quite clear that
an understanding of the nature of interest rate behavior is critical and
crucial in designing policies to promote savings, investment and
growth. It is pertinent to note that this research attempts to
investigate and ascertain the impact of interest rate volatility on
investment decisions in Nigeria using time series data covering from
1981-2010.
1.2 Statement of the Problem
The financial systems of
most developing countries (like Nigeria) have came under stress as a
result of the economic shocks of the 1980s. The financial repression,
largely manifested through indiscriminate distortions of financial
prices including interest rates, has tended to reduce the real rate of
growth and
the real size of financial system, more importantly,
financial repression has (retarded) delay development process as
envisage by Shaw (1973). This led to insufficient availability of
investible funds, which is regarded as a necessary starting point for
all investment in an economy. This declines in investment as a result of
decline in the external resource transfer since 1982, has been
especially sharp in the highly indepted countries, and has been
accompanied by a slowdown in growth in all LDCs. Both public and private
investment rate have fallen, although the latter more drastically than
the former. If this trend is maintained, it will lead to a slowdown in
medium term growth possibilities in these economies and will reduce the
level of long-term per capital consumption and income, endangering the
sustainability of the adjustment effort. The observed reduction in
investment in LDCS seems to be the result of several factors. First, the
lower availability of foreign savings has not been matched by a
corresponding increase in domestic savings. Secondly, the determinating
of fiscal conditions due to the cut of foreign lending, to the rise in
domestic interest rate, and the acceleration in inflation forced a
contraction in public investment. Thirdly, the increase in macroeconomic
instability associated with external shocks and the difficulties of
domestic government to stabilize the economic has hampered private
investment.
Finally, the debt overhand has discourage investment,
through its implied credit constraints in international capital markets
Luis Serven and Falokun (1989).
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ABSRACT - [ Total Page(s): 1 ]The focus of this research work is based on the impact of interest rate on investment decision in Nigeria. An econometric analysis between the periods of 1981-2010. Secondary data obtained from the central bank of Nigeria (CBN) statistical bulletin (volume 21) DEC 2010. Date was collected and empirical analysis made. To achieve these objective multiple regression was used in analyzing the data that the impact of interest rate on Nigeria prior to interest rate regulation in 1.986 and serve as gui ... Continue reading---
