AN ASSESSMENT OF THE IMPACT OF INTEREST RATES DEREGULATION ON ECONOMIC GROWTH IN NIGERIA (1964-2009)

Obute  Christopher¹, Adyorough Asor², and Itodo Ahmed Idoko³

¹Department of Economics, Benue state university, Makurdi.

²Department of Business Management, Benue State University, Makurdi.

³Department of Economics, University of Mkar, Gboko, Benue State.

ABSTRACT

Nigeria’s financial sector reforms of 1986 which began with interest rates deregulation, was aimed at enhancing funds mobilization and disbursement to achieve economic growth and development. However, the deregulation exercise has been met with mix feelings. While some believe the exercise would help to promote investment and economic growth by enhancing savings, others are of the opinion that the exercise would push up real lending rates thereby discouraging investments, in view of the inverse relationship between investment and real lending rate.  It was against this backdrop that this research was carried out to assess the impact of interest rate deregulation on economic growth in Nigeria. The objectives of the research were to establish the relationship that exists between deregulated interest rates and economic growth through savings and investment in Nigeria, and also to make a comparative analysis between the impact of regulated and deregulated interest rates on economic growth in Nigeria. It was hypothesized that interest rates deregulation do not have significant influence on economic growth in Nigeria. The research used Time series data, sourced mainly from Central Bank of Nigeria (CBN) bulletin and World Bank data base. Four separate models were estimated to capture the relationship between; Real Deposit Rate (RDR) and Total Savings (TS) (Model 1), Real Lending Rate (RLR) and investment (INV) (Model 2), INV and economic growth (Model 3), and, RLR and economic growth (RGDP) (Model 4) for both the deregulation era (1987-2009) and the regulation era (1964-1986). The research revealed that RDR does not have significant impact on total savings before and after the deregulation exercise, RLR also does not have significant impact on investment before and after the deregulation exercise, investment has a positive and significant impact on economic growth before and after the deregulation of interest rate, and, RLR does not have a significant impact on economic growth before and after the deregulation exercise. This may be due to the incomplete deregulation of interest rates as its value is still tied to the monetary policy rate even after the deregulation exercise. It is therefore recommended that interest rates should be effectively deregulated to allow the country reap the full benefits of the financial reforms introduced about 25 years ago with very little satisfactory results.