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Interest Rates and Economic Growth in Nigeria

Shimbura Nuga and Samuel Paabu Adda PhD

Abstract

This study investigated the effect of disaggregated interest rates on economic growth in Nigeria over the years 1990 to 2025. The dependent variable was Gross Domestic Product Growth Rate whereas Deposit Interest Rate , Prime Lending Rate , Maximum Lending Rate , Exchange Rate and Inflation Rate were the explanatory variables. Autoregressive Distributed Lag bounds testing approach was used in the study. The bounds test resulted F = 5.920, higher than the upper critical bound at 5% level (which is 4.250), and the result indicates that there exists a long-run relationship. The results indicated that Economic Growth was negatively and significantly affected by Maximum Lending Rate and Prime Lending Rate in long run and short run respectively were found as −0.624 and −0.412, and −0.351. In contrast, Deposit Interest Rate was found to have a positive and significant long run sign (0.408) suggesting it is positive basis for saving mobilization and growth. Both Exchange rate (−1.283) and Inflation rate (−0.351) had negative and significant impacts. Error correction term was negative and significant, 68.4% of the equilibrium was corrected annually towards the long run. All the models were found to be stable and not affected by any economy’s tricks. It recommends coordinated fiscal and monetary policies with the central bank imposing lower lending rates for citizens to borrow at less expensive interest rates, higher attractive deposit rates to facilitate the flow of funds into the economy from the citizens and maintaining inflation within the single-digit zone for sustainable growth in the economy.

Keywords

Interest RateEconomic GrowthARDLDeposit Interest RateLending RateNigeria

References

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