International Journal of Research and Innovation in Social Science (IJRISS) | Volume V, Issue VII, July 2021 | ISSN 2454–6186

The Relationship between Interest Rate and Economic Growth in Nigeria: ARDL Approach

Adegoke, Temitope Damilola, Azeez, Bolanle Aminat (Ph.D), Ogiamien, Fidelis Omoruyi, Osasona, Viscker Adedeji
Department of Finance, Ekiti State University, Ado-Ekiti.

Abstract
This study examined the relationship between interest rate and economic growth in Nigeria, using secondary time series data. Data was collected from various issues of the Central Bank of Nigeria Statistical Bulletin and the National Bureau of Statistics. The study made use of the Augmented Dicker-Fuller (ADF) unit root tests and it was discovered that the variables were not in the same order at level, hence, the use of Autoregressive Distribution Lag (ARDL). The GDP was used to proxy economic growth as dependent variable, while Lending Rate (LR), Exchange Rate (EXC) and Treasury bill Rate (TB) were used as independent variables. It was discovered during the findings that there is a very strong long run relationship among the dependent and the independent variables and the speed of adjustment on equilibrium was set at 79.4%. The result also discovered that there is a negative relationship between the lending rate and the GDP though, statistically insignificant, while positive relationship exists between the GDP, Treasury bill rate and Exchange rate. The paper recommended that the Lending rate has some policy implication on economic growth in Nigeria and the monetary authority should handle it with care and the government should find a way of making the Treasury bill rate more attractive to the investing public.

Key words: Lending rate, Treasury bill rate, Exchange rate, Investment and Gross Domestic Product (GDP)

Introduction

Prior to the deregulation of the banking sector or industry in Nigeria, in 1986, interest rates were administratively determined by the Central Bank of Nigeria (CBN), and there were ceilings on both deposits and lending rates. During this period most developing countries like Nigeria intervened substantially in the financial sector by setting interest rates and directing the allocation of credit in the economy, so as to accelerate the most desired development (Lyndon and Peter, 2016).
This was no longer yielding any positive result as some stage as the financial institutions in the country could no longer mobilize loanable funds for investment. Therefore, financial sector reforms were introduced to correct the problem caused by financial repression, and such reforms include interest rate liberation and the removal of ceiling and other controls on credit allocation (Obamuyi and Olorunfemi, 2011). Interest rate directly affect lending and borrowing rate because higher interest rate make servicing of loans more costly. As interest rate drops, consumer spending increases, and this in turn stimulate economic growth.
The researchers’ motivation to study this area of the economy hinges on the fact that interest rate is one of the most essential aspects of Nigerian economic system that influence the cost of borrowing, and borrowing is an imperative source of financing businesses and investment which may lead to economic growth. Moreover, interest rate affects the return on savings. If the interest rate to be paid on savings is encouraging, individuals will be willing to save more which will pave way for loanable funds for investment and ultimately lead to economic growth.