Economic growth in an oil-dominant economy of Nigeria: The role of financial system development

Abstract

This paper examines the effect of financial system development on oil-dominant economy of Nigeria using Zivot-Andrews unit root test and Autoregressive Distributed Lag (ARDL) model over the period 1981 to 2015. The motivation of this paper is that the study distinguished the impact of financial system development on the non-oil sector from the oil sector. The study also differs from the usual yet unsatisfactory approach of measuring financial system development in Nigeria to build an index as a measure that characterizes the whole development in the financial sector using Principal Components Analysis (PCA). The result reveals that there exist mediating factors that alter the impact of finance on growth. Specifically, the findings indicate that financial system development has a negative and insignificant impact on the growth of oil sector while the influence of financial system development on the growth of non-oil sector is positive and significant. The study therefore recommend that policymakers should channel the high receipts from the export of crude to productive investments through financial institutions that will allocate the resources more efficiently to improve the quality of investment capable of driving growth.

Keywords:

• financial system development
• oil sector
• non-oil sector
• economic growth
• ARDL method

Subjects:

• E51
• G21
• O47
• Q41

PUBLIC INTEREST STATEMENT

Theoretical and empirical evidence have shown that financial system development stimulates economic growth. However, there are potential heterogenous impact of finance on growth in an oil-dominant economy that is yet to be rigorously investigated in existing studies. This paper examines whether oil and non-oil sectors benefits equally from the financial development impact. The estimation results show evidence of heterogeneity on the influence of finance on growth in oil-dependent economy of Nigeria. Whereas financial development is insensitive to the growth of the oil sector, non-oil sector growth is substantially driven by financial development. The weakness of financial development in resource mobilization and efficient allocation in the oil sector could be attributed to resource course syndrome and thus explain reasons why the natural resources in Nigeria do not trickle down to address her economic growth sustainability needs. We conclude that policymakers should reform the activities of financial institution across all sectors.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Oliver E. Ogbonna

Ogbonna E. Oliver is currently a PhD student in the Department of Economics, University of Nigeria Nsukka, Enugu State, Nigeria. As a researcher in the fields of development Economics, he specializes on areas related to Macroeconomic Modelling and Forecasting, Monetary and Financial Economics, and International Economics.

Ikechukwu A. Mobosi

Ikechukwu Andrew Mobosi is a PhD candidate at the level of final report in the Department of Economics, University of Nigeria Nsukka, Enugu State, Nigeria. He specializes in quantitative Economics.

Okwudili W. Ugwuoke

Okwudili Walter Ugwuok is postgraduate student in the Department of Economics, Federal University Lafia, Nasarawa State, Nigeria. His research interest is on Development economics.