Interest Rate Deregulation and Dynamics of Industrial Sector's Productivity in Nigeria


Johnbosco Chukwuma Ozigbu


The systematic deregulation of interest rate in Nigeria in 1987 has continued to generate unending controversies among policy makers and other key stakeholders about its spill-over effects on sectoral performance and economy wide aggregate. In view the growing controversies, this paper analyzed the long-term implication of interest rate deregulation on the productivity of the industrial sector in Nigeria between 1987 and 2016. Specifically, this paper focused attention on the impacts of prime lending rate, deposit rate, monetary policy rate and cash reserve ratio on industrial output. The datasets on each of the variables were culled from the Central Bank of Nigeria Statistical Bulletin. The Autoregressive Distributive Lag (ARDL) model was adopted for the estimation of the long run behavior of the exogenous variables. The Augmented Dickey-Fuller (ADF) stationarity test approach and ARDL based bounds test approach to cointegration were applied to test the null hypotheses of a unit root and no long run relationship respectively. It was found from the ADF tests results that the variables are fractionally integrated. The bounds test result also indicates that the variables are long run relationship, hence necessitating the rejection of the null hypothesis of no cointegration. The long run regression result shows that at 10 percent level, prime lending is positively related to industrial output. This finding is in contrary to the theoretical expectations. It was equally uncovered from the result that monetary policy rate negatively impacted on industrial output at 5 percent level. Similarly, the deposit rate contracts the productivity of the industrial sector in the long run. In of these findings, this paper recommends among others that the Central Bank of Nigeria should ensure that interest rate deregulation is frequently monitored and primarily tailored towards ensuring that the prevailing market rate of interest provides opportunity for improved performance of the industrial sector.