CHAPTER 1: INTRODUCTION
Emerging economies are usually concerned about the periodic growth or otherwise in their Gross Domestic Product(GDP). This is because GDP is a strong indicator for measuring economic growth. Two factors; interest rates and investment have been identified as the key determinants of economic growth measured in terms of GDP especially in developing markets. The main aim of this research therefore, is to identify the impact of interest rate on the business investment which directly impact the GDP growth history of the Nigerian economy. Nigeria is the fastest growing economy in Sub-Saharan Africa with a total GDP of about $440bn as at the end of 2021.
Interest rate,as explained by Walter(1995), serves as a veritable tool for financial inter-mediation in any economy, especially with developing markets and industries that depend so much on borrowed funds to finance operations. It affects savings and investment decisions of most economic entities. According to[ CITATION Abb12 l 1033 ],it dictates the flow of funds between the surplus and deficit units of the financial family, and ultimately, it drives the direction of the economic growth measured by the GDP of any nation, especially, the developing nations. That is, the interest rates affect borrowing capacity of business units from the commercial banks. Higher interest rates would mean that business owners may find it difficult to effectively access enough capital necessary to stimulate investments which impacts outputs directly.
The movement of interest rates, to a reasonable degree, influences investment projects and ultimately, the economic growth of any nation. Investment is consequent upon the rate of interest in accessing capital from the providers of funds, while economic growth directly dependent on the level of investment achieved. The economy of Nigeria has at numerous occasions experienced vast interest rate swings in specific sectors of the economy right from the 1970s under the modulated regime. The special interest rates were premised on the argument that, if freely applied, it would neglect some sectors of utmost importance. Thus, leading to the adjustment of the interest rate via the “invisible hand” in order to help stimulate aggregate investment in the various important segments of the economy. These important segments as determined by the authorities includes the agricultural, solid minerals and manufacturing sectors which were given special considerations and deposit money banks were mandated to lend to them at single-digits interest rates in other to encourage the proliferation of Small and Medium Enterprises(SMEs) which is a catalyst for economic development. Udoka, (2000).
The purpose of interest rate strategy in Nigeria include but not limited to the control of inflation, investment and financial savings, reducing pressure in the balance of payments, exchange rate stability and the encouragement of macroeconomic and financial space stability.
Interest rate government has seen two perspectives in Nigeria namely direct and indirect approaches. The direct approach features the administrative accustoming of lending and saving rates, while the indirect approach functions on the interplay of market forces. Both approaches all have tendencies in fostering economic growth. The Central Bank of Nigeria is vested with the sole discretionary powers to intervene in the money market with the primary aim of stabilizing interest rates in favour of the economy.
As far back as 1987,the Nigerian authorities engaged a market–determined interest rate policy which will not allow a direct government intervention in the overall direction of the economy.Nyong,(2007). By January, 1994 there was another policy turnaround, wherein the government had rightly injected some dynamics of regulating interest rate management. It was argued that there were strong disparity and unwarranted high rate under the total deregulation of interest rate regime. Consequently, deposit rates were stepped up to 12% per annum from the 8% while a maximum rate of 2% per annum was fixed for lending. The gap of interest rates adopted in 1994 was retained in 1995 with little tempering for flexibility.
Contrastingly, the economic growth of a nation mirrors its capacity and ability to expand production of goods and services. The commonest definition of economic growth can be said to be the increase in GDP of that country. Nominal GDP would always be adjusted for inflation factor so as to reflect real GDP. Interestingly,Interest rate is one of the macroeconomic growth element and its volatility is approximately related to inflation rates. Its fluctuation affects economic boom thus also influencing economic growth rate. In the business space, it is imperative to accurately project interest rate trends. Some previous researchers have assumed that the time series data is fixated and are oblivious of the fact the opposite scenario thus exists. This study is important because, firstly, it will serve as a reference material in the academic environment, a contribution to the existing literature on factors that actuate growth in the Nigeria’s economy, and most importantly, it will provide workable alternatives for subsequent policy formulations and adjustment of interest rates in Nigeria. Therefore, the reason for this study is to carry out an evaluation of the role of interest rates and its impact on the Gross Domestic Product(GDP)of Nigeria.
1.2 RESEARCH AIM AND OBJECTIVES
The main aim of this research is to identify the impact of interest rate on the business investment which directly impact the GDP growth history of the Nigerian economy.
The specific objectives of this research are:
To examine the relationship between the interest rate and GDP as an indicator of economic growth in Nigeria,
To examine how investment is influenced by interest rates, and
To determine how the GDP of Nigeria is affected by investment post COVID-19
The above objectives will be achieved by answering the following research questions:
Is the effect of interest rate on GDP growth significant?
Is the effect of investment on economic growth significant?
1.2 DISSERTATION STRUCTURE
This study is segmented into five major chapters. Chapter one is the introductory chapter which introduces us to the concept of interest rate,economic growth and necessary background information. The chapter also introduces us to the research questions, how we intend to seek answers to it and its relevance to the academic world and global business community.
Chapter two presents the theoretical and empirical review of relevant literature.Chapter three discusses the research philosophy which includes the data collection methodology and the various techniques used in the data analysis.
Chapter four will report, analyze and discuss the important findings from the data analysis results with the interpretation and finally, chapter five presents a synopsis of the overall aim and objectives of this study. It will also summarize various conclusion reached and finally, state the limitation of the study make recommendations as appropriate.
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