Interest Rate and Domestic Private Investment in Nigeria

International Journal of Research and Innovation in Social Science (IJRISS) | Volume II, Issue X, October 2018 | ISSN 2454–6186

Interest Rate and Domestic Private Investment in Nigeria

INIMINO, Edet Etim¹, ABUO, Michael Abang², BOSCO, Itoro Ekpenyong³

^1&2Department of Economics, University of Uyo, Nigeria, ³Department of Economics, University of Port Harcourt, Nigeria

Abstract- The study examined interest rate and domestic private investment in Nigeria from 1980 to 2015. The Augmented Dickey-Fuller test and Autoregressive Distributed Lag model were used as the main analytical tools. The ADF unit test result revealed stationarity of the variables at order zero and one, which satisfied the requirement to employ the ARDL Bounds testing approach. The ARDL Bounds test revealed the existence of a long run relationship among the variables. Moreover, the result revealed that monetary policy rate has negative and significant effects on domestic private investment both in the short and long run. Maximum lending rate has a positive effect on domestic private investment both in the short and long run and was significant in the short run. Prime lending rate has negative and insignificant effects on domestic private investment both in the short and long run. However, the gross domestic product has a negative and insignificant effect on domestic private investment in both the long run and the short run. Based on these findings, the study recommended amongst others that: The monetary authorities should ensure that the relevant macroeconomic fundamentals including growth, lending rates, inflation, etc. move in the right direction. This would enable potential and domestic investors to plan and weigh costs and benefits of investing in the country. Government must play an active role to ensure peace and stability. If there is instability in the country then it becomes rather difficult to attract investors. Thus, peace and stability must be guaranteed in order to attract investment. Government should invest in hard infrastructure particularly power, roads, railways and housing to help the various sectors of the economy to function very well thereby making the business environment friendly which will in turn enhance the growth and development of the country.

Key Words: Interest Rate, Investment, MPR, ARDL and Nigeria.

I. INTRODUCTION

Interest rate is the cost of borrowing. Thus, it is generally regarded as the major determinant of investment. According to Gbosi (2005), interest rates are regarded as the rental payments for the use of credit by borrowers and return for parting with liquidity by lenders. In a way interest rates are like other prices. This is because they perform a rationing function which serves to collect a limited supply of credit among the competing demands for it. The view by economists is that investment and interest rate have a negative relationship. The higher the rate of interest the more costly it is to borrow, and as borrowing becomes more costly firms are likely to reduce their borrowing. In this way, investment falls as the rate of interest rises. On the other hand, the lower the rate of interest the cheaper it is to borrow, and the more investment spending firms are likely to make.

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