EVALUATION OF INTEREST RATE ON SURVIVABILITY OF MANUFACTURING SECTOR OF NIGERIA

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EVALUATION OF INTEREST RATE ON SURVIVABILITY OF MANUFACTURING SECTOR OF NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF STUDY

Industrialization has been accepted as the major driving force of the modern economy. In most modern economies, the industrial sector serves as the vehicle for the production of goods and services, the generation of employment and the enhancement of incomes. Hence Kayode (1989) describes the industry and in particular the manufacturing sub-sector as the heart of the economy.

The concept ‘industrialization’ overtly expresses extensive technological development of the production system of an economy and in turn, huge financial implications from the part of manufacturers in actualizing their ideas, the government in creating an enabling environment to aid production, down to the financial institutions in providing liquidity for the purpose of production.

Malik, Teal, and Baptist (2004) posit that manufacturing activity can only flourish in a good investment climate with the following features in place: physical infrastructure, financial markets and creation of the enabling environment for investment as well as opportunities for firms to invest productively, create and expand business. There is no doubt that access to funds in the financial institutions will create investment opportunities that will develop the manufacturing sector. But in the same vein, access to credit stands as one of the plausible constrains to the development of the manufacturing industry. The results of the empirical studies carried out by Malik, Teal and Baptist (2004) reveal that large majority of firms in Nigeria witnessed cash flow problems in 2003. Only a minority of firms sought leans from formal financial institutions and these appeared to be firms that had promising chances of their loan applications being accepted. A majority of firms (31%) were deterred from applying for bank loans due to high interest rates. The study revealed the following on why manufacturing firms were not applying for bank loans.

Interest rate too high 31%

Already heavily indebted 1%

Inadequate collateral 16%

Don’t want to incur debt 22%

Didn’t need one 11%

Process too difficult 11%

Didn’t think I would get one 8%

To this effect, the study aims at evaluating the impact of interest rate on manufacturing output in Nigeria.

1.2 STATEMENT OF THE PROBLEM

The negative trends in the performance of the manufacturing sub-sector indicates falling productivity, as its share of about 6% of Nigeria’s Gross Domestic Product as at 2013 is also poor when compared with between 20% and 40% in many industrialized and industrializing nations. Growth rate in the sub-sector was relatively high in the period of 1966 – 1975 at an annual average of 12.9% and increased to 18.5% in the period if 1976 – 1985, following the import substitution industrialization strategy of the first national development plan from (1962 – 1968).

The official position was that interest rate liberalization among other things should enhance the provision of sufficient funds for investors especially manufacturers. But since the deregulation, it is overt that the lack of access to credit and resultant sky high costs of production are signs that interest rates whether high or unstable have deprived the manufacturing sector of its funds to grow. Despite the moves taken by the government to make funds available in order to ameliorate the performance of the sector, it’s observed stunted growth and poor contribution to the Gross Domestic Product has been maintained.

Hence, the study seeks to assess the impact of interest rate on the manufacturing performance of the Nigerian economy.

1.3 OBJECTIVES OF THE STUDY

The broad objective of this study is to examine the impact of interest rate on the manufacturing performance of the Nigerian economy.

The specific objectives are:

To determine the effect of interest rate on manufacturing output in Nigeria.
To determine the effect of real exchange rate on the manufacturing output of the Nigerian economy.

1.4 RESEARCH QUESTIONS

For the purposes of the study, the following research questions were stated:

What relationship does interest rate have with the output of the manufacturing sub-sector in Nigeria?
What relationship does real exchange rate have with the output of the manufacturing sub-sector in Nigeria?

1.5 RESEARCH HYPOTHESIS

In pursuance of the objectives of the study stated above, the following hypotheses were formulated:

HYPOTHESIS I

H₀: Interest rate has no significant impact on the output of the manufacturing sub-sector on Nigeria.

H₁: Interest rate has a significant impact on the output of the manufacturing sub-sector on Nigeria.

HYPOTHESIS II

H₀: Real exchange rate has no significant contribution to the output of the manufacturing sub-sector on Nigeria.

H₁: Real exchange rate has a significant contribution to the output of the manufacturing sub-sector on Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

The study is deemed to be significant in the following ways;

The findings and subsequent recommendations if implemented will assist the policy makers towards developing the right policies that will enhance the growth and development of the Nigerian economy. Several policies and strategies applied in enhancing and improving investment through the manufacturing sector will act as a guide to policies makers towards making the right policies in solving other economic problems.

The findings if implemented will be of great benefit to the citizens as a whole. Increase in manufacturing output will lead to an improvement in the standard of living as the quality of goods will be improved and there will be added variety of domestic goods. Also increased investment in manufacturing will lead to employment generation as large number of the people within the working population will gain employment.

The government will be soundly advantaged from implementing the findings of this study through the generation of tax revenue. There will be increase in tax revenue as a large number of industries will be spring up and operate favourably as a result of healthy and conducive environment for investment in production.

Lending institutions and agencies will also benefit if the findings is implemented. Increase in the number of operating industries will likely lead to increase in investment. As a result of this, the investors will be willing to borrow from the lending institutions and agencies to transact their businesses. This will yield profit to lenders as the investors will pay back with interest on their loan.

It is important to note firmly, that the study will be beneficial to researchers, academicians, statisticians among others, as it will fill the gap of literature by adding to the existing ones.

1.7 SCOPE OF THE STUDY

The study will cover the time period 1980-2013 (a period of 34 years). This is to ensure updated information and to follow the trend. The period was chosen based on the availability of data and to have adequate observation for a meaningful analysis.

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