INTERNATIONAL JOURNAL OF RESEARCH AND INNOVATION IN SOCIAL SCIENCE (IJRISS)  
ISSN No. 2454-6186 | DOI: 10.47772/IJRISS | Volume IX Issue XI November 2025  
Monetary Tightening and Its Impact on Development Finance Flows:  
Evidence from Nigeria  
Simeon Oamen Obode and Gini Kiyentei Benneth  
Department of Economics, University of Port Harcourt, Rivers State, Nigeria  
DOI: https://dx.doi.org/10.47772/IJRISS.2025.91100338  
Received: 01 December 2025; Accepted: 06 December 2025; Published: 10 December 2025  
ABSTRACT  
This study adopted two long run regression models to assess the effect of monetary tightening on development  
finance flows in Nigeria from 1990 to 2023, using the fully modified ordinary least squares (FMOLS) technique.  
The study specifically assessed the long run effects of money supply, exchange rate, monetary policy rate, the  
U.S. Federal Reserve rate and inflation rate on official development assistance and foreign direct investment,  
which serve as measures of development finance flows. The regression estimates for the ODA model indicate  
that the exchange rate has a positive significant effect on ODA, while the monetary policy rate has a negative  
significant effect, signifying that domestic monetary tightening reduces official development assistance inflows.  
For the FDI model, the findings show that increases in the U.S. Federal Reserve rate considerably reduce FDI in  
Nigeria as investors redirect funds toward safe and high yielding assets in advanced economies. On the other  
hand, the domestic monetary policy rate (MPR) has a positive significant effect on FDI, indicating that increases  
in MPR can attract foreign investors seeking high returns especially portfolio and short run investments. Based  
on these findings, the study recommends that government adopt a fair approach to monetary management and  
avoid undue tightening that may discourage donor support. Additionally, policies should be implemented to  
stabilize the exchange rate and diversify external finance sources that are critical for sustaining development  
finance flows.  
INTRODUCTION  
Monetary policy plays an important role in maintaining macroeconomic stability, investment flows and credit  
conditions in developing countries. As a result of the impact of covid-19 pandemic and rising inflation, most  
central banks in the world have adopted monetary tightening to stabilize exchange rate volatility and maintain  
low inflation. However, such monetary tightening policies have some negative impacts on development finance  
flows such as foreign direct investment (FDI), official development assistance (ODA), concessional loans and  
other forms of donor funding that support infrastructure, poverty reduction and social services. Mishkin F.S.  
(2007) and Olayemi, A. (2020) describe monetary tightening as a contractionary monetary policy measure of  
increasing interest rate or reducing the growth of money supply in order to lower inflation rate. While these  
monetary policy measures are targeted at macroeconomic stability, they can also create constraints on the  
availability and affordability of development finance. For example, tight monetary policy in developed countries  
like the US and Euro zone can lead to capital flight from less developed nations, while domestic tightening can  
increase the cost of borrowing and reduce investor confidence (Calvo G.A.et al 1993). Development finance  
involves mobilization of capital for development purposes. Development finance flows consist of official  
development assistance (ODA), concessional finance, commercial loans, foreign direct investment and diverse  
finance instruments (World Bank 2017). According to the united nations conference on trade and development  
(UNCTAD, 2014), development finance flows include net resource transfers to developing countries such as  
official flows (ODA and other government backed transfers), private flows (FDI and portfolio equity and  
remittances) and nontraditional flows (climate finance and philanthropic funding).  
Given that most development finance to Nigeria comes from multilateral institutions, bilateral donors and foreign  
investors, foreign monetary tightening measures by the U.S. Federal reserve and the European central banks  
have direct impact on these inflows. The volume and timing of development finance are sensitive to international  
interest rate adjustment. When central banks in advanced economies adjust interest rates to control inflation,  
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Nigeria and other Africa nations usually face several adverse effects. First, there is an increase in the cost of  
external loan especially for sovereign Eurobonds and commercial loans. A nation like Nigeria and other  
emerging economies that rely on foreign loan to finance budgetary deficit and development projects usually face  
increase cost of funds or reduced market access. For instance, Nigeria’s 2.2 billion dollar Eurobond comprising  
$700 million at 9.625% and $1.5 billion at 10.375% was issued at an average borrowing cost of about10%  
compared to previous issuances at 8.35%. The yields on the bond further rose to 11.7% signifying increased  
investor risk aversion towards Nigeria and effect of global monetary tightening measures, (IMF, 2023). Second,  
foreign monetary tightening contributes to exchange rate volatility in the local economies. The associated capital  
outflows and increased demand for the U.S. dollar often lead to currency depreciation, which not only increases  
the cost of external debt servicing but also reduces resources allocated for developmental purpose (Panizza,U.  
2022). Also, foreign aid and investment may be delayed or reduced due to exchange rate volatility. Global  
monetary tightening usually leads to reduction in donor funding and private philanthropic flows as developed  
countries like the US and Euro zone shift budget priorities. This reduction in foreign assistance can reduce  
development in critical sectors such as healthcare, education and climate resilience initiatives that rely heavily  
on foreign grants.  
Empirical evidence shows that, in 2023 when there was upward adjustment in the U.S. interest rate, emerging  
economies witnessed capital outflows, currency depreciation and tighter foreign financing conditions. In Nigeria,  
these measures by the US monetary authorities exerted pressure on external reserves, increased debt servicing  
costs and reduced foreign investment for infrastructure and energy. Camara S.and Ramirez V.S. (2022)  
examined the transmission of US monetary policy shocks concludes that higher yields in developed markets are  
responsible for diversion of global capital from less developed economies, thereby reducing the pool of private  
investment available for critical developmental sectors like infrastructure, manufacturing and education. In  
response to these international dynamics, the domestic monetary authorities including central bank of Nigeria  
have adopted similar monetary tightening measures of upward adjustment of the monetary policy rate (MPR) to  
control inflation and maintain exchange rate stability. The CBN adjusted the MPR from 16.77% in 2021 to  
18.75% in 2023 and further to 27.5 % in 2025 (CBN statistical bulletin 2025). While this may attract short term  
capital inflows from foreign portfolio investors, it will also increase cost of funds within the local economy.  
Development finance flows that require counterpart funding are highly sensitive to such conditions. Increased  
borrowing costs can delay project implementation or reduce the scale of domestic contributions, weaken the  
nation’s ability to absorb and utilize external finance effectively (Mishkin F.S.2007). Moreover, monetary  
tightening usually has negative impacts on domestic private sectors which are critical partners in the delivery of  
development finance especially in infrastructure, agriculture and energy sectors. High interest rates reduce access  
to credit, reduce domestic investment and weaken the ability of local firms to participate in public-private  
partnerships thereby undermining the institutional and financial base needed to leverage external funding  
(Ezeabasili,V.N. et al 2012). Finally, although a tighter monetary policy measure may offer short term exchange  
rate stability, sustained monetary tightening can undermine investor confidence and increases exchange rate  
volatility. Since most development finance flows such as concessional loans and FDI are denominated in foreign  
currencies, exchange rate instability increases currency risk and discourages long term investment. Donors and  
development finance institutions usually consider such risks when making decisions about disbursement  
schedules and portfolio allocations (Reinhart C. M. and Rogoff K. S. (2009). The combine impact of external  
and domestic monetary tightening on development finance remains a challenge to the global economy. For  
instance, an increase in international interest rate has negative effect on development finance by making capital  
more expensive and redirecting it to safer assets in developed markets. At the same time, domestic tightening  
reduces demand by increasing cost of funds and reducing local investment capacity. Among the monetary  
measures adopted by the CBN to address the impact of the local and global monetary tightening on development  
flows in Nigeria is the reformation of the foreign exchange (FX) market by allowing market forces to determine  
exchange rates and the continual adjustment of the monetary policy rate and cash reserve ratio to reduce liquidity  
in the financial system. To achieve price stability the central bank of Nigeria increased the monetary policy rate  
from 16.8% in 2021 to 27.5% in 2025, and cash reserve ratio from 32.5% to 45.0% (CBN monetary policy  
reports 2023–2025). Since development finance flows are sensitive to both local and international monetary  
policies, recognizing their interdependence are important in formulating strategies that safeguard a country’s  
developmental objectives. Therefore, this study examines the impact of monetary tightening on development  
finance flows in Nigeria from 1990 to 2023.  
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Statement of problem  
Monetary tightening is a contractionary policy measures that involve increase in interest rates and reduction in  
money supply aimed at controlling inflation and stabilizing exchange volatility. In less developed countries like  
Nigeria which depends on foreign finance to fund budget deficits, poverty reduction and critical infrastructures,  
such policy measures can have negative effects on development finance flows. These flows include foreign direct  
investment, official development assistance and concessional loans. Tighter monetary conditions, both local and  
global have contributed to increase in borrowing costs and reduce capital inflows. Recent studies stress these  
concerns. For example, IMF (2024) noted that Nigerian monetary tightening policies intended to control inflation  
and stabilize the exchange rate have negative significant effect on development finance flows. Similarly,  
Egbetunde T. and Abayomi M. A. (2024) found that monetary tightening has negative significant effect on  
foreign direct investment as a result of high cost of borrowed fund. In spite of the CBN policy interventions, the  
degree to which monetary tightening affects Nigeria’s access to development finance remains doubtful, thereby  
creating a gap that this study seeks to address.  
Conceptual Framework  
The conceptual framework of this study portrays how domestic and external monetary tightening affect interest  
rates, exchange rates and capital flows, which in turn affect development finance flows such as FDI and ODA.  
Official development assistance  
Official development assistance (ODA) refers to financial flows from official agencies such as bilateral and  
multilateral institutions designed to promote economic development and welfare mainly for less developed  
countries like Nigeria, (OECD, 2023). These flows frequently include grants, low interest loans, technical  
assistance and support for capacity building and poverty reduction. ODA has played a significant role in Nigeria  
by bridging financial gap across major sectors of the economy including education, healthcare, infrastructure  
and agriculture. Ugwuoke J. C. (2024), in a study on the relationship between foreign aid and economic  
development in Nigeria concludes that foreign aid plays a significant role in the nation’s development. Nigeria’s  
net ODA attains a record high of 11.9 billion USD in 2006; mainly due to debt relief and international financial  
support. Between 2010 and 2019, ODA inflows ranged from 2.1 billion USD to USD3.57 billion. Total ODA  
inflows fell to a record low of USD 0.4 billion in 2022, representing a 0.87% decrease in real terms compared  
to 2021, (CBN, statistical bulletin, 2024). The decrease was as a result of external monetary tightening in 2022  
which limit donor budget and alongside a shift in aid priorities toward domestic needs and responses to the  
Russia/Ukraine war crisis.  
Foreign direct investment  
Foreign direct investment is a major source of foreign finance for Nigeria. It provides capital inflows, technology  
transfer and technical know-how that are fundamental for economic growth and diversification. Some of the  
major determinants of FDI in Nigeria include macroeconomic stability, institutional and regulatory environment  
as well as infrastructure and security. Dogara E. J et al (2025) investigated the link between monetary policy and  
FDI in Nigeria and conclude that monetary tightening has negative impacts on FDI. This finding supports the  
view that tight monetary policies often discourage capital inflows in less developed economies. The nation’s net  
FDI attains a record high of 8.84 billion USD in 2011 as a result of increase in investment in the energy sector.  
FDI inflows range between 5.0.1 billion USD to USD 7.07 billion from 2012 to 2017, (CBN, statistical bulletin,  
2022). Total FDI inflows fell to a record low of USD 0.7 billion in 2018 due to weak infrastructure and external  
crises.  
Money Supply (M2)  
Money supply plays a vital role in maintaining price stability and investment flows in Nigeria. Broad money  
(M2) is generally used as a measure of liquidity in the economy, reflecting the availability of cash and demand  
deposits as well as quasi-money in the economy. Monetary tightening involves critical action by the CBN to  
reduce the growth of money supply in order to control inflation and maintain stable exchange rate. Such measures  
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by the CBN usuallyhave negative effects on development finance flows such as foreign direct investment and  
official development assistance. Mohammed I. D et al (2024) concludes in their study that money supply (M2)  
and monetary policy rate (MPR) have a long run relationship with investment in Nigeria. Money supply (M2)  
in Nigeria attains a record high of N20.91 trillion in 2016 due to increase in oil revenue. It ranges between N10  
trillion to N15 trillion from 2008 to 2015, (CBN, statistical bulletin, 2022). It attained a record low of N1.04  
trillion in 2000 as a result of tight monetary policy adopted by the CBN.  
Exchange rate  
The exchange rate stability is critical to Nigeria’s economic growth and development, given the country’s  
reliance on oil exports and imports of essential goods. Fluctuations in the exchange rate have direct impact on  
price stability and foreign direct investment flows as well as economic growth. Exchange rate management has  
been a continual policy challenge in Nigeria, largely because external shocks such as fluctuations in international  
crude oil prices and capital outflows frequently weaken the local currency (naira). The core objective of CBN  
monetary tightening polices is to stabilize exchange rate volatility and control inflation. Adenigbagbe, I. A. et al  
(2024) explored the impact of monetary policy on exchange rate stability in Nigeria concludes that high interest  
rates and tight money supply have direct impact on exchange rate stabilization.  
As a result of the global financial crisis of 2008 and the oil price shock of 2015, the naira witnessed significant  
depreciation. It depreciated from N117/USD in 2008 to N149/USD in 2009 and from N155/USD in 2014 to  
N305/USD in 2016 respectively. In response, the CBN adopted a tight monetary policy of increasing monetary  
policy rate to 14% in 2016 to curtain inflation and maintain price stability, (CBN statistical bulletin 2020). While  
this measure produce minimal inflation in the short run, it had negative effect on potential investment and  
development finance inflows such as foreign direct investment and official development assistance.  
Monetary policy rate (MPR)  
The Monetary Policy Rate (MPR) constitutes one of the monetary policy instruments through which the CBN  
implements monetary policy measures. It serves as the benchmark interest rate and it is an important instrument  
for controlling inflation, liquidity and stabilizing the exchange rate. Most monetary tightening policies of the  
CBN such as increase in MPR are majorly designed to increase the cost of borrowing, reduce the growth of  
money supply and control inflation. Paschal, U. O et al (2022) asserted that interest rate has an inverse  
relationship with inflation in Nigeria, underscoring the importance of using rising MPR to control inflation.  
Since the introduction of MPR in 2006, it has played a critical role in maintain price stability and inflation  
control. For instance, in response to worldwide inflation pressure emanating from the Covid-19 pandemic and  
Russia-Ukraine war, the CBN implemented series of monetary tightening measure by adjusting the MPR from  
12.0% in 2020 to 18.75% in 2023 to curb inflation and stabilize the exchange rate,(CBN, statistical bulletin,  
2024). MPR has been the basis of CBN monetary policy tightening effort. While, it has been successful in  
maintain minimal inflation but its continual upward adjustment often constrain domestic investment and weaken  
finance flow like FDI and concessional loans that are sensitive to interest rate.  
Inflation rate  
Monetary policies are majorly designed to control inflation and ensure price stability. Inflation has remained a  
persistent challenge in Nigeria. The nation’s inflation is mainly driven by structural factors such as supply side  
bottlenecks and fiscal imbalance. CBN has often adopted monetary tightening as a policy measure to address  
these inflationary pressures. This involves upward adjustment of the monetary policy rate and restricting the  
growth of money supply to reduce demand, curb excess liquidity and stabilize prices. However, the effectiveness  
of monetary tightening in Nigeria has faced significant challenges. While, higher interest rate has been able to  
control demand pull inflation, the persistent of cost push factors and structural rigidity such as rising energy  
prices, poor infrastructure, exchange rate depreciation and supply chain disruptions have continued to limit the  
full impact of these measures. Empirical studies, including Sakanko, M. A.et al (2025) and Adenigbagbe, I. A.  
et al (2024) conclude that inflation in Nigeria is highly sensitive to structural rigidities which frequently weaken  
the effectiveness of tight monetary policy transmission.  
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Federal Reserve rate  
The U.S. Federal Reserve rate (Fed rate) plays a critical role in regulating international capital flows, exchange  
rates and financial stability. Changes in the Fed rate affect international liquidity and the volume of foreign  
capital that flows into less developed countries including Nigeria. An increase in fed rate often draws funds away  
from emerging markets towards advanced economies offering high returns and low risk. For Nigeria and many  
African countries, this usually results to reduced foreign direct investment, portfolio outflows and pressures on  
the local currency such as the naira. To lessen these effects, the CBN often adopts monetary tightening actions  
such as upward review of MPR and reduction in money supply to stabilize the exchange rate and control  
inflation. For instance, during the fed tightening series of 2015 to 2018 and 2022 to 2023, Nigeria witnessed  
high exchange rate fluctuations and capital outflows. In response, the CBN adjusted the MPR upward to stabilize  
the exchange rate and curtail inflation, though this resulted to increase in cost of fund and reduction in  
concessional finance and private investment critical for economic growth. Lastauskas, P and Nguyen A. (2024),  
investigated the spillover effects of US monetary policy tightening on emerging markets amidst uncertainty  
concludes that U.S. interest rate hikes significantly reduce economic output in emerging economies.  
THEORETICAL LITERATURE  
This section examines the monetary transmission mechanism theory and the capital flow and interest rate  
differentials theory.  
Monetary transmission mechanism  
The monetary transmission mechanism theory popularized by Keynes J. M. (1936) and further advanced by  
Friedman M. and Schwartz, A. J. (1963) explains how changes in monetary policy instruments such as the  
monetary policy rate or reserve requirements are transmitted through the financial system to regulate output,  
inflation and employment. Under monetary tightening, an upward review of the MPR increases the cost of loan,  
reduces credit creation by financial institutions and ultimately lowers aggregate demand. In Nigeria, CBN often  
relies on this channel to control inflation, though its effectiveness is sometimes undermined by structural  
bottlenecks such as weak financial intermediation and supply-side constraints. Obafemi, F. and Ifere, E. (2015),  
analyzed the monetary transmission mechanism in Nigeria and found that the interest rate and credit channels  
are the strongest channels for transmitting monetary policy .  
Capital flow and interest rate differentials theory  
The capital flow and interest rate differentials theory propounded by Keynes J. M. (1923) explains the  
relationship between domestic interest rates, international capital flows and exchange rate stability. The  
relationship between interest rates and capital flows is a vital concept in macroeconomics, especially in the area  
of international finance and investment. When a central banks increase domestic interest rates, it usually offers  
higher returns on investments denominated in local currency, thereby attracting foreign capital from investors  
seeking higher yields. But, when the U.S. Federal Reserve or other advanced economies review their interest  
rate upward, funds often flow out of emerging markets like Nigeria toward advanced economies offering high  
yield and low risk. This usually exerts pressure on the local currency such as the naira and often compels the  
CBN to adopt monetary tightening measures to stabilize the currency and attract capital inflows. Emefiele, G.  
O. and Udo O. (2021), explored the effect of interest rate differentials on capital flows and found that increase  
in U.S. Fed rate tend to lead to capital outflows from Nigeria thereby weakening the local currency (naira).  
Empirical Review  
Monetary tightening and its impact on development finance flows have been widely studied, but the empirical  
results remain at variance. For instance, using ARDL and NARDL techniques, Dogara E. et al (2025), explored  
the link between monetary policy and foreign direct investment in Nigeria and found that increases in monetary  
policy rate by the CBN negatively affect foreign direct investment inflows. Similarly, Adenigbagbe et al. (2024)  
investigated the impact of monetary policy on exchange rate stability in Nigeria. The finding indicates that  
though higher MPR controls inflation, it also reduces FDI inflows. likewise, Olonila, A.et al (2023) analyzed the  
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impact of monetary policy on credit and investment in Nigeria and concludes that short run monetary tightening  
reduces private sector credit and investment, Okonkwo, J. and Eze, O. (2023) further argue that continual  
tightening in Nigeria has negative effect on concessional finance and reduce access to low cost funding for  
infrastructure projects thereby weakening development outcomes. In contrast, Aizenman, J et al (2022), affirmed  
that higher domestic interest rates in emerging economies can attract short-term portfolio inflows as investors  
are attracted by higher returns. Alongside this, Camara S. and Ramirez S. (2022) examined the transmission of  
the US monetary policy shock to emerging markets and conclude that tightening rates in the U.S. significantly  
reduce aggregate investment in emerging economies especially among highly indebted countries. Finally,  
Oyadeyi (2022) assessed monetary policy shocks in Nigeria and concluded that structural rigidities such as weak  
financial intermediation and exchange rate volatility distort the monetary transmission mechanism, herby  
limiting the effectiveness of monetary policy tightening.  
RESEARCH METHODOLOGY  
The Economic Models and Estimation Technique  
This study adopted two different multivariate cointegrating regression equations, with official development  
assistance (ODA) and foreign direct investment (FDI) serving as the dependent variables. Monetary variables  
such as exchange rate, inflation rate, monetary policy rate, US Federal Reserve rate and money supply were  
utilized as independent variables. The official development assistance equation is based on the study by Oketah  
F.O et al (2025) who assessed the impact of official development assistance on Government capital expenditure  
in Nigeria. While the FDI equation is designed using the empirical approach of Amade M. and Oyigebe P.  
(2024), who analyzed the impact of foreign direct investment on the Nigeria economy.  
The functional forms of the ODA and FDI models are specified as:  
ODA = f (MS, EXR, FER, MPR, IFR)  
FDI = f (MS, EXR, FER, MPR, IFR)  
(3.1)  
(3.2)  
The linear econometric configuration of the functional relationship between the underlying economic time series  
is expressed as follows:  
ODAt =a0 +a1MSt +a2EXRt +a3FERt +a4MPRt +a5IFRt +e1t  
(3.3)  
(3.4)  
FDIt =b0 +b1MSt +b2EXRt +b3FERt +b4MPRt +b5IFRt +e2t  
Where: ODA is official development assistance; FDI is foreign direct investment; MS is money supply; EXR is  
exchange rate; FER is fed rate; MPR is monetary policy rate; 푎0 and 푏0 are constant terms; 푎1-푎5 and 푏1-푏5 are  
the coefficients of the explanatory variables: 푒1푡 and 푒2푡 refer to random error terms.  
Estimation Technique  
The study employed the fully modified least squares (FM-OLS) technique proposed by Phillips and Hansen  
(1990) to estimate the cointegrating regression models. This technique is suitable for this study since FMOLS  
primarily assists to address the core limitation of the ordinary least squares as it accounts for serial correlation  
effects in the regression.  
RESULTS AND DISCUSSION  
Unit Root Test  
The study adopted the Augmented Dickey-Fuller unit root technique developed by Dickey and Fuller in 1981 to  
examine the stationarity of the economic time series. The results are presented in Table 4.1  
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Table 4.1: Summary of ADF unit root test results  
ADF Unit root test results  
Variable  
Levels test results  
First Difference test results  
t-stat.  
5% critical value  
-3.553  
t-stat.  
-3.621  
-4.746  
-8.048  
-3.723  
NC  
5% critical value  
Order of integration  
EX.RATE  
FED RATE  
INF. RATE  
MS  
-3.301  
-3.232  
-2.061  
-3.375  
-3.914  
-1.715  
-3.292  
-3.553  
-3.553  
-3.553  
-3.553  
NC  
I(1)  
I(1)  
I(1)  
I(1)  
I(0)  
I(1)  
I(1)  
-3.553  
-3.553  
-3.553  
MPR  
-3.553  
FDI  
-3.553  
-4.273  
-4.697  
-3.553  
-3.553  
ODA  
-3.553  
Source: Author’s computation from E-views 12  
NB: NC denotes not computed  
Table 4.1 shown the results of the ADFunit root test both at level and first difference. The results indicate that  
the variables are mixed integrated .  
Cointegration Test  
The study adopted the Johansen and Juselius (1990) cointegration test approach.  
Table 4.2: Cointegration test results for the ODA model  
Series: ODA EXE RATE FED RATE INF RATE MS MPR  
MAX -EIGEN & TRACE TEST RESULT FOR ODA MODEL  
Trace  
Statistic  
0.05 Critical  
Value  
Max-Eigen  
Statistic  
0.05  
Value  
Critical  
Null Hypothesis  
Null Hypothesis  
r = 0*  
r ≤ 1*  
r ≤ 2*  
r ≤ 3  
165.07  
92.99  
44.32  
21.64  
10.16  
4.11  
95.75  
69.82  
47.86  
29.80  
15.49  
3.84  
r = 0*  
r ≤ 1  
r ≤ 2  
r ≤ 3  
r ≤ 4  
r ≤ 5  
72.08  
48.68  
22.68  
11.48  
6.05  
40.08  
33.88  
27.58  
21.13  
14.26  
3.84  
r ≤ 4  
r ≤ 5  
4.11  
Source: Author’s computation from E-views 12  
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Table 4.3: Cointegration test results for the FDI model  
Series: FDI EXE RATE FED RATE INF RATE MS MPR  
MAX -EIGEN & TRACE TEST RESULT FOR FDI MODEL  
Trace  
Statistic  
0.05 Critical  
Value  
Max-Eigen  
Statistic  
0.05  
Value  
Critical  
Null Hypothesis  
Null Hypothesis  
r = 0*  
r ≤ 1*  
r ≤ 2  
r ≤ 3  
r ≤ 4  
r ≤ 5  
164.21  
86.96  
46.49  
17.37  
7.36  
95.75  
69.82  
47.86  
29.80  
15.49  
3.84  
r = 0*  
r ≤ 1*  
r ≤ 2*  
r ≤ 3  
77.24  
40.48  
29.12  
10.00  
5.90  
40.08  
33.88  
27.58  
21.13  
14.26  
3.84  
r ≤ 4  
1.46  
r ≤ 5  
1.46  
Source: Author’s computation from E-views 12  
The results of Trace and Max-Eigen statistics presented in Table 4.2 and 4.3 show the presence of at least a  
cointegrating equation, indicating that the variables have a long-run relationship.  
Trend of the Variables  
The trend of US fed rate, mpr, fdi and oda are depicted in fig 4.1 and 4.2.  
Fig. 4.1: Residual graph of fed rate, ODA and FDI  
18.00  
16.00  
14.00  
12.00  
10.00  
8.00  
6.00  
4.00  
2.00  
-
(2.00)  
ODA(Billion Naira)  
FDI (Billion Naira)  
FED RATE  
Source: Author’s computation from E-views 12  
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Fig. 4.2: Residual graph of MPR, ODA and FDI  
50.00  
45.00  
40.00  
35.00  
30.00  
25.00  
20.00  
15.00  
10.00  
5.00  
-
MPR  
ODA(Billion Naira)  
FDI (Billion Naira)  
Source: Author’s computation from E-views 12  
Fig 4.1 and 4.2 show the relationship between the US federal rate, the monetary policy rate, foreign direct  
investment and official development assistance. It shows how changes in US fed rate and MPR influence the  
volume of ODA and FDI inflows into the Nigerian economy within the reviewed period.  
Estimation of the Cointegration Model  
The cointegration models that show the long run effect of the variables are estimated using the fully modified  
ordinary least squares (FMOLS). The results are shown in table 4.4 and 4.5.  
Table 4.4: Cointegrating regression results for the ODA model  
Dependent Variable: ODA  
Method: Fully Modified Ordinary Least Squares (FMOLS)  
Variable  
Coefficient  
3.81E+10  
0.011144  
-8.68E+09  
-8.30E+10  
2.20E+08  
0.391921  
0.305053  
Std. Error  
9.56E+09  
0.014545  
5.03E+09  
3.22E+10  
1.72E+09  
t-Statistic  
3.981725  
0.766184  
-1.72485  
-2.57544  
0.127856  
Prob.  
MPR  
0.0004  
0.45  
MONEY_SUPPLY  
INF__RATE  
FED__RATE  
EXE__RATE  
R-squared  
0.0956  
0.0156  
0.8992  
5.36E+11  
4.91E+11  
Mean dependent variance  
S.D. dependent variance  
Adjusted R-squared  
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S.E. of regression  
Long-run variance  
4.09E+11  
1.19E+23  
Sum squared residual  
4.69E+24  
Source: Author’s computation from E-views 12  
Table 4.5: Cointegrating regression results for the FDI model  
Dependent Variable: FDI  
Method: Fully Modified Ordinary Least Squares (FMOLS)  
Variable  
Coefficient  
-6.83E+10  
-0.016406  
4.35E+09  
8.87E+09  
3.59E+09  
0.589581  
0.510655  
3.39E+11  
6.17E+22  
Std. Error  
2.11E+10  
0.010949  
3.94E+09  
2.65E+10  
1.31E+09  
t-Statistic  
-3.23684  
-1.49845  
1.104282  
0.334858  
2.735843  
Prob.  
MPR  
0.0033  
MONEY_SUPPLY  
INF__RATE  
FED__RATE  
EXE__RATE  
R-squared  
0.1461  
0.2796  
0.7404  
0.0111  
Mean dependent variance  
S.D. dependent variance  
Sum squared residual  
3.91E+11  
4.84E+11  
2.98E+24  
Adjusted R-squared  
S.E. of regression  
Long-run variance  
Source: Author’s computation from E-views 12  
RESULT DISCUSSION, CONCLUSION AND RECOMMENDATIONS  
Empirical Result Discussion  
The FMOLS regression results presented in Table 4.3 reveal that exchange rate has a positive significant effect  
on official development assistance (ODA). In other words, depreciation of the local currency (naira) is connected  
with increased aid inflows indicating that donors tend to increase support to ease external financing pressures  
during periods of currency weakness. This finding is consistent with Pallage, S. and Robe M. A. (2001), who  
argue that ODA often increases when economic conditions deteriorate, including during period of currency  
depreciation. In contrast, the monetary policy rate (MPR) has a negative significant effect on ODA, signifying  
that domestic monetary policy tightening reduces development assistance flows, which may reflect higher  
borrowing costs and reduced donor confidence in the economy’s absorptive capacity.  
The results in depicted in table 4.5 show that the U.S. Federal Reserve rate has a negative and significant effect  
on foreign direct investment (FDI) in Nigeria. This finding shows that an increase in the U.S. interest rate often  
redirects investors’ fund toward safe and high-yielding assets in advanced economies, thereby reducing the pool  
of capital available for emerging markets. For Nigeria, such capital reallocation limits inflow of FDI which is a  
vital component of development finance for infrastructure, energy and manufacturing projects. In contrast, the  
domestic monetary policy rate (MPR) has a positive and significant effect on FDI. This implies that upward  
review of MPR can attract foreign investors seeking high returns, especially portfolio and short run investments.  
However, while high interest rates are frequently targeted at achieving price stability and enhance capital  
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inflows, they often increase borrowing costs for local firms. This may limit the ability of domestic partners to  
complement foreign investments  
Conclusion  
The study finds that monetary tightening has significant implications for development finance flows in Nigeria  
through both domestic and global channels. Exchange rate depreciation tends to increase official development  
assistance, as depreciated currency makes it cheaper for donors to provide assistance to ease external financing  
pressures, while upward review of domestic monetary policy rates reduce such inflows due to increased  
borrowing costs and concerns about nation’s absorptive capacity. In contrast, foreign direct investment reacted  
differently. Increase in the U.S. Federal Reserve rate redirect FDI inflows from Nigeria toward safe and high-  
yielding assets in advanced economies, while upward review of domestic monetary policy rates enhance FDI by  
offering more competitive returns. These findings highlight the dual challenges faced by Nigeria and other  
emerging economies in balancing external shocks with domestic policy measures to maintain stable inflows of  
development finance.  
Recommendations  
The following are recommended for policy actions:  
1. The finding indicates that currency depreciation increases official development assistance, indicating the need  
for exchange rate stabilization policies that reduce excessive volatility while supportive external financing.  
2. The negative effect of high monetary policy rates on ODA calls for a more balanced approach to monetary  
tightening, as persistent upward adjustments of the MPR may discourage donor flows and increase borrowing  
costs for local businesses.  
3. While high monetary policy rates tends to attract FDI by offering greater returns, they also increase borrowing  
costs for local businesses, showing the need to complement monetary policy with reforms that lower non-interest  
costs of doing business, improve infrastructure and enhance absorptive capacity to retain and maximize FDI.  
4. Given the negative impact of U.S. Federal Reserve rate hikes on FDI inflows, the government need to diversify  
sources of development finance, deepen regional investment partnerships and strengthen foreign reserves.  
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