Financial sector and manufacturing sector performance: evidence from Nigeria

Abiola John Asaleye,Joseph Olufemi Ogunjobi,Joseph Ibrahim Adama

doi:10.21511/imfi.15(3).2018.03

Abiola John Asaleye, Joseph Olufemi Ogunjobi + Show 1 more

Open Access

https://doi.org/10.21511/imfi.15(3).2018.03

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Abstract

Nigerian economy depends on oil as the major source of revenue, failure to diversify the revenue base has raised questions about its sustainability and implication on the economy. This study uses market capitalization, broad money stock, credit to private sector, prime interest rate and deposit liability as proxies for the financial sector, while output in the manufacturing sector and manufacturing employment are used as proxies for manufacturing performance. The study examines the causal effects, shock effect and long-run impact using Granger Non-Causality, Vector Error Correction Model, and Dynamic Ordinary Least Square method, respectively. The results showed unidirectional causality, confirming the hypothesis of the ‘supply-leading view’ and ‘demand-following view’ except for market capitalization and output in the manufacturing sector, where independence was observed. The variance decomposition shows that the forecast error shock of credit to private sector and prime interest rate show more variations in manufacturing sector performance than other financial indicators. The long-run result using output in manufacturing sector as dependent variable shows a positive significant relationship with other financial sector indicators, except for broad money stock and deposit liability. This study recommended credit channel for transmission of monetary policy using interest rate to improve the performance of manufacturing sector, among others.

Highlights

Nigerian economy depends on the oil sector, and failure to diversify the revenue base and foreign exchange in the economy led the country to the recent recession in the second quarter of 2016 (The Economic Recovery and Growth Plan ERGP, 2017)
This study uses market capitalization, broad money stock, credit to private sector, prime interest rate and deposit liability as proxies for the financial sector, while output in the manufacturing sector and manufacturing employment are used as proxies for manufacturing performance
Verspagen (2015) re-examined the capacity of the fect and long-run impact of the financial sector manufacturing sector to drive economic growth for on manufacturing performance in Nigeria using a sample of 88 developed and developing economies Vector Error Correction Model, Granger Nonusing panel data sourced for the period 1950–2005

Summary

INTRODUCTION

Nigerian economy depends on the oil sector, and failure to diversify the revenue base and foreign exchange in the economy led the country to the recent recession in the second quarter of 2016 (The Economic Recovery and Growth Plan ERGP, 2017). Studies have shown that the financial sector has promoted economic performance across African countries (Allen et al, 2016; Green, 2013; Levine, 1997; Park & Mercado, 2015; Senbet & Otchere, 2010). The manufacturing process is resource intensive by its nature with the majority of the inputs from agricultural products Given this scenario, manufacturing sector can improve the sustainability of output sector to drive profitability and growth. This study examines shock effects, causal relationship and long-run impact between financial development indicators and manufacturing performance in Nigeria using Vector Error Correction Model (VECM), Granger Non-Causality and Dynamic Ordinary least Square method (DOLS), respectively.

LITERATURE REVIEW

PRESENTATION OF RESULT

Data sources and description of variables

Findings

CONCLUSION