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The study examines the impact of interest rate on manufacturing sector performance in Nigeria,
1981-2019. The objectives of the study are to examine the impact of interest rate on
manufacturing sector performance in Nigeria and to investigate the existence of a long run
relationship between interest rate and manufacturing sector performance in Nigeria. Secondary
data was used for the study covering a period of 38 years. The data is sourced from World
Development Indicators. The data were analyzed using Auto Regressive Distributed Lag method
(ARDL). It was found that lending interest rate has a negative significant impact on
manufacturing sector performance in Nigeria; consumer price index has a negative insignificant
impact on manufacturing sector performance. Also, there exist a long run relationship between
interest rate and manufacturing sector performance in Nigeria. Therefore the study recommends
that there should be an effective economic policy in place to ensure that inflation rate is kept at
minimum level. Also, government should begin to embark on interest rate reforms which can
reduce the wide interest rate spread between lending and deposit rate in Nigeria.
1.0 INTRODUCTION
Interest rate is a major economic indicator used to boost investment as it has been known to be
higher in Africa, Latin America and the Caribbean countries than in the Organisation of
European Countries Development (Chirwa et al, 2004). Thus, most advanced and developing
economies have over the years taken steps to liberalize their interest rates as part of the reform of
the entire financial institution. Mishkin (1995) alleged that interest rate is a key tool of monetary
policy. In October 2001, the European Central Bank stated that it had not changed interest rates
because it considered current rates “consistent with the maintenance of price stability over the
medium term”. The behavior of interest rates, to a large extent, determines the investment
activities and hence economic growth of a country. Investment depends upon the rate of interest
which is involved in getting funds from the market, while economic growth to a large extent
depends on the level of investment (Obute, et al 2012). According to Jhingan (2003), if interest
rate is high, investment is at low level and when interest rate falls, investment will rise. There is
therefore a need to promote an interest rate regime that will ensure “inexpensive” spending for
Investment in manufacturing sub-sector depends upon the rate of interest involved in getting
fund from the financial institutions. Interest rates play an important role in our economic lives as
it is the cost of borrowing for those who need resources and reward for lending to those with
savings. Lower interest rates tend to induce the growth of credit, which can make it easier for
manufacturers to get financing and for individuals to find and keep jobs. Yet, as important as
interest rates are, a major concern of the monetary authority is their tendency to exhibit erratic
and other macroeconomic factors like the instability in the Nigeria currency, even the increased
sub-national government spending and government high expenditure. For instance, interest rate
is too high and when you compare the lending rates with rates of fixed deposits, you find that the
disparity is just too much. When you want to borrow from banks, they give you as much as 24%.
But when you place funds with them, the highest you can get is about 7.5%. As such, no country
flourishes with high level of lending interest rates because it discourages investments.
It is against this background that it becomes imperative to examine the impact of interest rate on
manufacturing sector performance in Nigeria and also investigate if there is a long run
relationship between interest rate and manufacturing sector performance in Nigeria. The rest of
the paper is concerned with the literature review, methodology, empirical findings, conclusion
and recommendations.
Nigeria has been known to operate two-interest rate regime starting from 1960s to mid-1980s
with the administration of low interest rates which was intended to encourage investment.
However, the advent of the Structural Adjustment Programme (SAP) in the third quarter of 1986
ushered in an era when fixed and low interest rates were gradually replaced by a dynamic interest
rate regime, where rates were more influenced by market forces. Hence, the pursuit of the two
interest rate regime in Nigeria provided a case study of the Keynesian interest-rates-investment
relationship. The gradual deregulation of the Nigerian economy between 1986 and 1992 affected
these key economic variables: interest rate and investment. In the Nigerian context, interest rates
were extensively regulated prior to the adoption of SAP in 1986. But the economic rationale
behind this control of interest rates administered by CBN and other elements of financial markets
has been motivated by a variety of factors including the desire to influence the flow of credit to
preferred sectors of the economy especially manufacturing and agriculture, to obtain socially
optimum resource allocation and the concern that market determined interest rate could result in
In the quest to absorb the early 1980s financial repression, the Nigeria government took steps to
liberalize interest rates in the entire financial institution which began with the deregulation of
interest rates which will enhance the provision of sufficient funds for investors in manufacturing
policy reversal, some measure of regulations into the interest rates management was introduced
owing to the fact that SAP era was responsible for investment contraction. It was claimed that
there were “wide variations and unnecessarily high rates” under the complete deregulation of
interest rates. Immediately, deposit rates were once again set at 12% to15% per annum while a
It may be a fact to state that since the 1986 deregulation of interest rate up to this present time,
there may not have been any meaningful impact on the sector. Even the scarcely available bank
loan to the private sector may not have been channeled to the manufacturing sector due to lack of
administrative competence, importation of inferior goods, multiple taxes and levies, dumping
and smuggling. Rather, investors prefer to invest in quick and high yielding importation
activities, stock market, that will earn enough profit to offset the high interest charges of the
banks. Due to the ongoing process of economic reforms along with the liberalization measures,
Nigerian economy has been facing challenges in terms of both external shocks and internal
issues. Also, in the face of these reforms, manufacturing sector is still in a state of dismay with
growth rate of 10% in 2004 and 9.12% in 2005 respectively compare to 18.3% in 2004 and
18.5% in 2005. In South Africa capacity utilization is at 84% and 78% in 2008 and 2009
respectively, while that of Nigeria still continue to hovered around 53.9% and 47% for the same
period (CBN, 2010). The deregulation exercises has been met with mixed feelings in Nigeria,
while some believe it would enhance economic performance in Nigeria, others have contrary
Abiodun (1988) as cited in Adofu et al (2010) on the other hand holds that deregulation of
interest rate is like a double-edged sword, which will either stimulate or mar the economy. He
asserted that the deregulation of interest rate will lead to an increase interest rate, which will
increase savings. However, he opined that high cost of borrowing might bring about cost-push
inflation, as borrowers of funds will pass the high cost of borrowing to the customers by pushing
up prices.
Nigerian Industries are highly concentrated in light consumer goods; there is hardly any
production of capital and intermediate goods. Another feature of the manufacturing sector is its
over-dependence on imports for the supply of raw materials and spare parts. There is no single
industrial product in which the country is entirely self-sufficient with its import bill dominated
by the cost of raw materials and spare parts for industries. Many factories as a result of this
reduced their scale of operations completely and even some had to close down completely with
increase in our unemployment rates which hovered between 2.8 and 3.5 percent between 1996
and 1998. From 1999 till date the unemployment rate has not gone below 11.0 percent, achieving
its highest peak in 2011 with percentage of 23.9. (Obadan 1997, CBN, 2011).
So many literatures revealed the insignificant nature of the Nigerian manufacturing industries in
terms of its contribution to economic development. Akinlo (1996) also confirmed this by
stressing that the industrial sector of the Nigerian economy was relatively insignificant even
starting from independence in terms of its contribution to the gross domestic product (GDP)
which ranges from 4.8% in 1960 to 8.3% in 1980 and decline to 8.2% in 1990 and 6.88% in
1995, 6.2 % in 1998 respectively (CBN, 2003). Olukoshi (1991) pointed out that the pre-owned
post-colonial production policy occasioned distortions in the sector, which was as a result of
neglecting research and an excessive reliance on foreign input. The manufacturing subsector is
According to the 2010 Annual report of the Manufacturing Association of Nigeria (MAN)
presented during the 39th Annual General Meeting of the Association, the Nigerian
manufacturing sector only contributed 4.1 percent to the 2010 GDP, compared to 4.21 in 2009.
The decline also manifested in the capacity utilization of industries in the country. According to
the report, average manufacturing capacity utilization dropped from 47 percent in 2009 to 45
percent in 2010. Production output declined from N183.8 billion in the first half of 2009 to
N165.7 billion in the same period of 2010. Investment profile in the first half of 2010 had a sharp
decline from N1 trillion in the first half of 2009 to N360 billion in the corresponding period of
2010. Employment figures in the first half of 2010 dropped from 998,086 in January-June 2009
to 996,395 in the corresponding period of 2010. Business unplanned inventory increased from
N5.15 billion in the first half of 2009 to N11.4 billion in the same period of 2010.
2.2 Keynesian Investment Theory
The linkage between interest rate and manufacturing sector in this study can be traced to the
Keynesian investment theory (1936). The Keynesian theory postulates that low interest rate as a
component of cost administered is detrimental to increase savings and hence investment demand.
Keynesian theory emphasize that the rate of interest is a purely monetary phenomenon as distinct
from the real theory of the classics. Keynes theory places emphasis on the relevance of interest
rates in investment decisions. Changes in interest rates should have an effect on the level of
planned investment undertaken by private sector businesses in the economy. A fall in interest
rates should decrease the cost of investment relative to the potential yield and as result planned
Nwokoro (2017) carried out a study on the relationship between interest rates, foreign exchange
and manufacturing sector output in Nigeria. He employed the ordinary least square (OLS),
stationary, cointegration, together with error correction model. The results showed a negative but
significant relationship between interest rate, foreign exchange and manufacturing output in
Nigeria.
Onakoya, Ogundajo and Johnson (2017) investigated monetary policy and the sustainability of
the manufacturing sector in Nigeria. The findings established a positive relationship between
Ebere and lorember (2016) examined the effect of commercial bank credit on the manufacturing
sector output in Nigeria from 1980 to 2015 using Cochrane-orcutt method. The study revealed
that inflation rate and interest rate have negative effect on manufacturing sector output while
ways and advance and broad money supply have positive effect on manufacturing sector
performance in Nigeria.
Erinma (2016) examined the impact of rising interest rate on the performance of the Nigeria
manufacturing sector. Annual time services data used for the study span thirty five (35) years
covering 1981 to 2015. The models were analyzed using the ordinary least square techniques.
Findings from the study shows rising interest rate in Nigeria has a negative effect on the
contribution of the manufacturing sector to GDP as well as on the average capacity utilization of
the Nigeria manufacturing sector. Given the findings, the study recommends that aside from
trying to manage interest rate for enhanced economic growth, the Nigeria government should
strive to provide infrastructural facilities particularly power and transportation to reduce high
cost of production.
Loto (2012) further analyzed the position of the Manufacturing sector in the Nigerian economy
both descriptively and empirically before the global meltdown and during the period of the
global meltdown. The significance of the study is that the manufacturing sector of the Nigerian
economy will be able to know its competitive strengths and weaknesses during and after the
global meltdown, and if possible take advantage of it. Descriptively, the two years before the
meltdown and two years into the meltdown were analyzed in quarterly time series (i.e. 2005Q1 –
2006Q4 and 2007Q1 to 2008Q4) and also empirically Pooled data for the two periods were also
used in order to have reasonable observations (16). Descriptively, the performance of the
Nigerian manufacturing sector was analyzed using the indices of performance such as (index of
manufacturing production, manufacturing export, import, capacity utilization and share in total
GDP). It was discovered that before the meltdown, all indicators of performance used shows a
downward trend. The period during the meltdown shows some little insignificant improvement
in some of the performance indicators such as manufacturing GDP, capacity utilization. The
results of the empirical analysis from the pooled data from 2005Q1 to 2008Q4 do not really give
a better result as compared to the descriptive analysis. Variables such as capacity utilization
(CU), Inflation rate (INF), Lending rate (LR) both show a positive but insignificant shock on the
manufacturing performance. Only direct foreign investment was significant but negative in its
impact on the manufacturing sectors performance. The outcome of the results shows that the
global meltdown has insignificant effect on the manufacturing sector of the Nigerian economy.
3.0 Methodology
This study employed the Auto Regressive Distributed Lag (ARDL) method to examine the
impact of interest rate on manufacturing sector performance in Nigeria. This study used annual
time series data sourced from World Development Indicators (2019) covering a period of 1981 to
2019.
The model that will be used for the purpose of this study is drawn from the work of Okwori et al
(2014) with little modification to the dependent variable, which assessed the effect of interest
rate on manufacturing sector performance in Nigeria, 1986 to 2012 using capacity utilization as
the dependent variable, while lending interest rate, consumer price index amongst others were
Where,
Ut = Error term
The signs in the parenthesis represent apriori expectations of each of the independent variables
● Manufacturing, value added (% of GDP): This can be defined as the total contribution
product. This variable is used to measure the performance of the manufacturing sector as
● Lending interest rate: It is defined as the proportion of an amount loaned which a lender
charges as interest to the borrower. Interest rate is very crucial to the performance of the
● Consumer price index: It measures changes in the price level of a weighted average
This section presents the results, analyzes the findings and discusses the empirical findings of
this study.
To examine the time properties of the data, this is done in order to avoid spurious regression. The
orders of integration of the variables are examined using the Augmented Dickey-Fuller (ADF)
test statistics. The result presented in table 1 shows that all variables achieved stationarity at level
Table 1: Result of Unit Root Test Based On Augmented Dickey Fuller (ADF)
Variable PP adjusted stat 5% critical value (**) Order of integration
The result of the unit root test for the Augmented Dickey Fuller test shows that all the variables
used for this study were stationary at level and first difference order of integration at 5% critical
value as shown in the table. This expression satisfies our choice of carrying out an Auto
The ARDL long run coefficient is carried out to examine the impact of interest rate on
Coeffici
Variable ent Std. Error t-Statistic Prob.
-
0.62585
LINT 0 0.157969 -3.961842 0.0004
-
0.43057 13.02708
CPI 6 6 -0.033052 0.9738
48.7324
C 05 5.583130 8.728510 0.0411
R2= 0.94, DW= 1.8, Prob (F-stat)= 0.000000
The result of the long run coefficient in table 2 shows a constant value of 48.73. This indicates a
positive and significant relationship between the constant and manufacturing sector performance
(M%GDP). The constant, reflects the value of the manufacturing sector performance (M%GDP)
when all explanatory variables are held constant. The coefficient of multiple determination R 2
shows that 94% of the changes in manufacturing sector performance is collectively explained by
The regression result above shows that lending interest rate has a negative and significant impact
on manufacturing sector performance in Nigeria. This implies that a unit rise in lending interest
rate will lead to a decrease in manufacturing sector performance by 0.62%. This conforms to the
apriori expectation.
Also, consumer price index shows a negative insignificant impact on manufacturing sector
performance. This implies that a unit rise in consumer price index will lead to a fall in
manufacturing sector performance by 0.43%. This also conforms to the apriori expectation.
The ARDL bounds test is carried out to investigate the existence of a long run relationship
The co-integration test was conducted to ascertain the long run relationship among the variables
after the data have been ascertained to be free from unit root. From the result, it can be seen that
the calculated F-statistic value of 6.19 exceeds the upper bound critical value of 3.79 and lower
bound critical value of 4.85 at the 5% level. This means the null hypothesis of no co-integration
among the variables is rejected at the 5% level, hence there exist cointegration (a long run
relationship) between the variables, and this shows that Interest rate and Manufacturing sector
performance (as well as other independent variables in the model) are bound by a long run
relationship. Thus the result is a sufficient condition for fitting the error correction mechanism
model. The presence of a long run relationship between interest rate and Manufacturing sector
performance implies that that the favorable deregulation of interest rate can serve as policy tool
to determine the viability of investment for increased production in the long run.
-
0.17169
D(LINT) 9 0.082177 -2.089386 0.0450
0.12091
D(LINT(-1)) 7 0.077342 1.563414 0.1281
-
0.00224
D(CPI) 3 0.005903 -0.379985 0.7065
-
0.05644
CointEq(-1) 4 0.078586 -0.718246 0.0480
The error correction term CointEq(-1) in the model has the expected sign (i.e negative) and
significant at 5% probability level. The existence of long-run equilibrium among the time series
in the interest rate and manufacturing sector performance equation is validated by this result. The
slope coefficient of the error correction term in absolute terms (0.06) represents the speed of
adjustment and is consistent with the hypothesis of convergence towards the long-run
equilibrium. The value indicates that about 6% of the short run disequilibrium and
inconsistencies are being corrected and adjusted into the long-run equilibrium path.
From the ARDL result, the research shows that lending interest rate has a negative and
significant impact on manufacturing sector performance. This implies that the higher the interest
rate the lesser the investment because of the interest on lending which is been charged by
commercial banks. This will discourage investment and undermine greater and efficient
production possibility by private firms or private producers. However, it is important to note that
funds are borrowed to firms at outrageously high rates coupled with inflationary pressure and
manufacturing sector hardly benefit from this lending interest rate. This means that if lending
interest rate is reduced, productivity will increase, as many manufacturers will like to invest for
Also, the value of consumers’ price index shows consumers’ price index has a negative impact
on manufacturing sector performance. This is also as a result of high lending interest rate. When
the lending interest rate gets high, the cost of capital for manufacturing firms will be high. In
order for the firms to be able to make up for the cost of capital, they will push up the prices of
goods produced, thereby leading to cost push inflation. Now, when the prices of goods get high,
demand reduces given the low income level of most people in the country. This may affect the
inflow of income to the manufacturing sector and invariably also affect its performance
negatively.
The study shows that lending interest rate has a negative impact on manufacturing sector
performance due to high interest rate. Although there is a long run relationship between interest
rate and manufacturing sector performance but the performance of the manufacturing sector is
hampered due to inflationary pressure from high interest rate. The role of the government in
curbing inflationary pressure is important in increasing the manufacturing sector performance for
sustained growth and development in the economy to ensure sustained growth and improved
(1) There should be an effective economic policy in place to ensure that inflation rate is kept at
minimum level.
(2) Government should begin to embark on interest rate reforms which can reduce the wide
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APPENDICES