Anaysis of Interest Rate Spread, Financial Development and Foreign Capital Inflow Nexus in Nigeria

Abstract

ABSTRACT: The world has gone through various economic crises in the past century, and their effects have had varying implications on the economies of countries all over the world. In a bid to help stabilise economies all over the world, various measures have been put in place. Some of these measures include regulations and policies by the Bretton Woods institutions (World Bank and International Monetary Fund) and their agencies. The idea behind these measures is to ensure sustainable growth and development among member states and other countries of the world. Some of these policies include the privatization and liberalization policies of the Bretton Woods institutions as well as other policies bordering on such economic and social benefits for people all over the world. The Nigerian economy in our contemporary time can be described as passing through a rather 'volatile' phase with respect to interest rate, financial development and foreign capital inflow. Thus, this study investigated the impact of interest rate spread and financial development on foreign capital inflow in Nigeria. Several studies have been carried out using different methodologies, such as; co-integration equation, multivariate vector auto regressive (VAR) model and vector error correction technique. Each methodology used was in line with the objective of the research in question. However, to achieve its objective, this paper adopted the Classical Linear Regression Model. The results of the study showed that financial development has a positive impact on foreign capital inflow, while interest rate spread on the other hand, was also found to have a positive impact on foreign capital inflow. Other control variables such as market capitalization and treasury bills rate were also found to positively affect foreign capital inflow, while the all share index had a negative impact on foreign capital inflow. Some economists have opined that the Nigerian economy is currently going through a phase of recession. In order for large scale investments to be made within the country, there is a need for foreign participants to be attracted to the Nigerian economy and pull their resources, both financial and non-financial into the country (but, not without regulation). However, for these investors to have confidence to make investments in the Nigerian economy, there has to be a high degree of economic stability in the country. This can be supported by enacting and implementing policies that can enhance the quality of interest rates spread and financial development within the country. The policy implication here involves enhancing financial development through sound policies and adopting competitive interest rates, could increase the rate of foreign inflow into the economy. In view of this, it is also recommended that government policies should target interest rate competitiveness, financial and economic development as well as sustainability.