PRIVATE SECTOR ACCESS TO CREDIT AND MANUFACTURING OUTPUT IN NIGERIA

ABSTRACT

Nigerian economy has been skewed towards a mono-economy with much reliance on the oil sector. However, with the fall in global oil price, there is now a shift of interest to a more promising sector capable of liberating the economy. This study is centered on private sector access to credit and manufacturing output in Nigeria. The study utilized quarterly time series data from 1981 to 2015. The key objectives of the study were to determine the impact of private sector access to credit on manufacturing output, to determine the direction of causality between private sector access to credit and manufacturing output, and to determine the response of manufacturing output and private sector access to credit to trade openness in Nigeria. The study adopted ARDL model in the estimation of the impact of private sector access to credit on manufacturing output; Toda Yamamoto VAR Granger causality test to check the direction of causality between private sector access to credit and manufacturing output and lastly, the study adopted Structural Vector Auto-regression in determining the response of manufacturing output and private sector access to credit to trade openness in Nigeria. The result of the unit root test showed that with the exception of interest rate, all other variables were found to be stationary after first difference. The study adopted Schwarz Information Criterion for the ARDL model and Hanna- Quinn Criterion (HQC) for the VAR model. The study conducted ARDL bound test and found that the variables used in the estimation of the ARDL model have long run association and thus, it estimates the long run and short run model for the ARDL. The result of the ARDL model showed that although private sector access to credit has significant impact on manufacturing output, the magnitude of the impact was meagre to bring about the desired changes expected of the manufacturing sector. The reason for this is that for accessed credit to yield maximum return,  other factors  such  as  prudent  management of  credits and  investment environments needed to be in place. However, when Toda Yamamoto Granger causality test was conducted, the result confirmed that there exists bi-directional causality betweenprivate sector access to credit and manufacturing output in Nigeria. The result of the impulse response conducted using structural VAR confirmed that both private sector access to credit and manufacturing output response to each other’s shock but both do not response to shocks to trade openness. The implication of this is that the size of the market for Nigerian manufactured goods is small to receive a shock from trade openness and the financial system is not fully developed to allow for adequate capital flow across border. In view of the findings above, the study therefore recommends that the government should provide enabling investment environment and adequate financial training to promising entrepreneurs in order to increase the marginal return on credits.

CHAPTER ONE

INTRODUCTION

1.0 Back ground of the study.

Over the years, oil and agriculture have been the major sources of Nigerian revenue with greater percentage coming from the oil sector. This increased revenue from oil led to the neglect of other sectors such as the  manufacturing sector,  information communication sector,  and  even  the agricultural sector that was known to be the next after oil. Oil discovery thus created a puzzle whether is a blessing or a curse to Nigeria.

However, the manufacturing sector plays a catalytic role in a modern economy which has many dynamic benefits crucial for economic transformation. The transformation agenda of President Goodluck Jonathan was aimed at  improving capacity utilization in Nigeria’s manufacturing sector and help to increase local content linkages with other sectors of the economy, ensuring global competitiveness for manufactured goods and achieving rapid and sustained economic growth through breeding of the nation’s productive base. This reform has had its positive impact on the manufacturing as Central Bank of Nigeria (CBN) reported that the Nigerian economy had been growing at seven percent rate annually and might double in the next ten years (CBN, 2012).

It is to this vital role expected of the manufacturing sector in an economy that prompted Alao (1995) to posit that manufacturing sector is sine qua non for economic growth. He argued that manufacturing sector creates investment capital at a faster rate than any other sector of the economy while promoting wider and more effective linkages among different sectors. The sector increases productivity in relation to import replacement and export expansion, creating foreign exchange earning capacity, raising employment and per capita income, which causes unique consumption patterns. This sector is less prone to price volatility in the world market and that could be one of the reasons behind nations’ emphases on its tremendous contribution in an economy.

The monolithic state of African economics is widely lamented and condemned as a victory of colonial interests over African interests. The intention of the colonial administration was to make use of the resources in Africa in order to develop their industries at home. In that, Africa was used as markets for her ever increasing manufacturing output. This obnoxious and nonchalant attitude displayed by the colonial administration slowed the take-off stage and the pace of

manufacturing sector in Nigeria. In modern period, Nigeria has been making effort to push-up the productivity growth of manufacturing sector by carrying out various reforms in the industries and financial institutions. One among the industrial policies is the Nigeria Industrial Revolution Plan (NIRP). The NIRP aims to expand the country’s industrial capacity by pursuing systematic development  in  agro-allied  industries;  metals  and  solid  minerals  processing;  oil  and  gas industries;   light   manufacturing;   construction   and   services   (Central   Bank   of   Nigeria,

2013).However,  despite  Nigeria’s  immense  economic  reforms  which  were  all  aimed  at improving industrial production and capacity utilization of manufacturing sector output, there are still growing concerns on the decline of the output in the sector in recent times (Akpokerere and Ighosewe, 2015).

The key driver of increased productivity is the private sector. Private sector ensures efficiency in the utilization of resources such as funds, raw materials and human resources in production, and their productivity is somewhat dependent among other things on the available funds.  This made Rutto, Were and Nzomoi (2012) to argue that access to credit enhances the productive capacity of businesses. They added that businesses and enterprises with adequate financial access have greater potential to grow. A number of studies in developing economies have equally noted that businesses in Africa, especially the small and medium manufacturing firms are credit constrained (Bigsten et al, 2000; Loeningand Soderbom, 2008; soderbom, 2000).

There has been fluctuation in the level of credit accessed by the private sector as there are swings in the manufacturing sector productivity in Nigeria. The amount of credit accessed rises and falls at random while the manufacturing productivity trots in a sluggish manner. Figure 1.1 depicts the amount  of  credit  allocated  to  the  private  sector  in  US  dollars  and  the  percentage  of manufacturing share of merchandise export in Nigeria. From the figure, it can be seen that in

1985, the total credit to private sector is approximately 15.42 million US dollars while the percentage of the manufacturing sector’s export to the merchandise export was close to zero. In

1998, there was an increase in the percentage of manufacturing output to total merchandise export by 2.47 percent following an increase in private sector credit access from $14,139m to

$372,574.1m. However, despite an increase in private sector access to credit in 2003 (by more than 100 percent), the manufacturing export as a percentage of merchandise export dropped to

2.07 percent.  This has been the swings in manufacturing export given the fluctuations in private sector credit access in Nigeria.

40

35

30

25

manufacturing output (%

20                                                                                                                GDP)

15                                                                                                                PRIVATE SECTOR CREDIT IN

million US$

10

5

0

1985                 1998                 2003                 2008

Fig1.1 private sector access to credit and the manufacturing export as a % of merchandise export in Nigeria.

1.1 Statement of the Problem

Nigeria has been exporting oil and primary products for decades and the cobra effect caused by oil discovery slowed the pace of development of the Nigerian economy. Oil prices fluctuate continuously and the share of agricultural product is too meagre to speed up the rate of growth and development envisaged by the  nation,thus the need to  industrialize. Industrialization is considered as the key to economic growth. Most developed countries of the world relied mainly on the production and exportation of industrial products and their resultant gains from trade are enormous. The orchestrated benefits of trade openness are hinged on its capacity to foster overall productivity in the domestic economy by allowing the home country to concentrate investment in sectors in which it has a comparative advantage (Adeola and Chete, 2002). Adeoye and Atanda (2012) argued that those who win are those who trade in goods and services characterized with increasing returns.

Manuel (2003) argued that despite having plentiful natural resources, the largest domestic market in Africa, and an abundant and cheap labour force, Nigeria’s industrial performance has been highly disappointing in the last decade. The table below depicts the performance of Nigeria manufacturing output (% of GDP), domestic credit to private sector and trade openness for the

period of 2000 to 2014. Between 2000 and 2001 there was an increase in the level of trade openness, manufacturing output and domestic credit to private sector. This increase was later followed by a sharp fall in each of these variables. However, trade openness witnessed about

18.67 per cent increase from 2002 to 2003 and domestic credit to private sector only increased by about 5.91 per cent while manufacturing output dropped by about 1.04 per cent.     Also, between 2010 to 2011, trade openness and manufacturing output increased by about 23 per cent and 9.7 per cent while domestic credit to private sector decline by about 19 per cent. With these fluctuations  in  the  manufacturing  sector,  Nigeria  has  become  dangerously  dependent  on petroleum as the only means to obtain foreign exchange. As a result, Nigeria is  losing its competitive manufacturing edge and is becoming increasingly marginalized in the international industrial scene. Nigeria faces severe flaws in its production and export structures, which have been the outcome of inappropriate policies, macro-economic instabilities, a distorting business environment, lack of transparent governance and weak industrial capabilities.

In like manner, in Nigeria, the level of private sector access to credit has been fluctuating following the reforms in financial system. These fluctuations as can be seen in the fig 1.2 below have led to the creeping movement of the manufacturing output (% of GDP) in Nigeria. The level of manufacturing output (% GDP) kept fluctuating from 2000 to 2010 after which value started increasing. However, it is pertinent to know that even when the value of manufacturing output (% of GDP) started increasing, the values of trade openness and domestic credit to private sector were still fluctuating.

In view of the problems above, this study hopes to investigate the impact of private sector access to credit (measured by domestic credit to private sector) on manufacturing output in Nigeria. The study will also investigate the response of manufacturing output and private sector access to credit to trade openness shocks. See table 1.1 below for the values of manufacturing output, trade openness and private sector access to credit for the period of 2000 to 2014.

Table 1.1: percentage values of trade openness, manufacturing output (% GDP) and domestic credit to private sector for the period of 2000 to 2014.

Year       2000	Manufacturing GDP)   3.667227	Output(%	Domestic credit sector (measure access to credit) 12.350318	to of	private private	Trade openness       71.381

2001	4.213242	16.572565	81.813
2002	3.426106	13.044195	63.384
2003	3.390342	13.815685	75.219
2004	3.061206	13.137308	48.448
2005	2.832143	13.235898	50.748
2006	2.577617	13.183336	64.609
2007	2.521544	25.248824	64.463
2008	2.41013	33.751099	64.973
2009	2.469561	38.386559	61.803
2010	6.552817	15.421559	42.651
2011	7.188658	12.476314	52.794
2012	7.793216	11.803908	44.38
2013	9.031204	12.594113	31.026
2014	9.75413	14.608983	30.2

Source: World Development Indicator – index Mundi (2015)

The  data  in  table  1.1  above  can  be  graphed  to  depict  the  fluctuations  in  trade openness, manufacturing output and domestic credit to private sector. It can be seen clearly that sometimes increase in trade leads to increase in both manufacturing output and domestic credit to private sector. However, the direction and extent of the movements of these variables are not quite clear and are still problems that need attention.

100

80

60

40

20

0

Fluctuations in Domestic credit to private

sector, Manufacturing output export and Trade

Openness

2000    2001    2002    2003    2004    2005    2006    2007    2008    2009    2010    2011    2012    2013    2014

Manufacturing Output (% GDP)

YEAR

Domestic credit to Private Sector (Measure of Private Sector Access to credit) in million US $ Trade Openness

Source: Author’s computation using MS Excel

Fig 1.2 Fluctuations in domestic credit to private sector and manufacturing export (% of

GDP)

In the light of the fluctuations in these variables, it is of concern that the economy’s benefit from trade openness has not been substantially tapped. The manufacturing Association of Nigeria (MAN, 2010) equally confirmed that the general trend in productivity industry has been cyclical and thus not a good indication of improvement in the sector. Akpokerere and Ighosewe (2015) also noted that Nigeria manufacturing industry has suffered from neglect owing to the nation’s over dependence on oil since 1970s and the government is currently making effort to diversify the  economy.  It  is  working  to  reinvigorate the  manufacturing  sector  so  as to  increase  its contribution to Nigeria’s prosperity via various credit schemes and policies.

This raises serious problems that need to be addressed if manufacturing sector is to contribute immensely  to  the  economy  following  the  increasing  rate  of  trade  openness  in  the  world economy. The fluctuation in the productivity of manufacturing sector in Nigeria and the nature of her export products are serious concern in this era of decreasing prices of oil. If Nigeria must speed up her growth rate, something needs to be done and on time to correct these anomalies.

1.2 Research Questions

In the light of the problems above, this research proposed the following research questions.

1.  What is the impact of private sector access to credit on manufacturing output in Nigeria?

2.  What   is  the  direction  of  causality  between  private  sector   access  to   creditand manufacturing output in Nigeria?

3.  What is the response ofmanufacturing output and private sector access to creditto trade openness in Nigeria?

1.3 Research Objective

The broad objective of the study is to determine how to increase the international market share of Nigeria industrial products. However, in achieving the broad objective, the specific objectives have been marshaled as follow;

1.         To determine the impact of private sector access to credit on manufacturing productivity in Nigeria.

2.        To  ascertain  the  direction  of  causality  betweenprivate  sector  access  to  creditand manufacturing output.

3.        To determine the response of manufacturing output andprivate sector access to credit to trade opennessin Nigeria.

1.4 Hypotheses of the Study

In order to address the research questions and achieve the specific objectives above, this study proposed the following hypotheses.

H01: private sector access to credit has no impact on manufacturing output growth in

Nigeria.

H02: there  is  no  causality between private sector access to  creditand manufacturing output.

H03: private sector access to credit and manufacturing output do not respond to trade opennessin Nigeria.

1.5 Significance of the Study

This study unlike other related studies hope to find the impact of private sector access to credit on manufacturing output. The study will also unveil the direction of causality betweenprivate sector access to credit and manufacturing output in Nigeria. With this, the time lag it will take manufacturing sector to feel the impact of credit received can also be ascertained. It also explains how changes in private sector access to credit respond to trade openness in Nigeria. The findings however would not only fill the gap in literature but also serve as eyes opener on how increased private sector access to credit can affect manufacturing sector output in order to relief Nigerian from this hardship created by decline in oil price. Also, it would serve as a blue print to the monetary authority of Nigeria for ascertaining the type of policy to pursue regarding private access to credit and for the policy makers to have an idea of the type of manufacturing policy to adopt in order to encourage manufacturers especially the small and medium scale manufacturers.

Lastly,  this  work  will also  be  beneficial to  students and  researchers through the  depth of knowledge it provides.

1.6 Scope of the Study

This study is carried out mainly on private sector access to credit and manufacturing sector productivity growth in Nigeria. Another area it considered is the response of private sector access to credit to trade openness. This is because of the purpose it hopes to achieve. It solely depends on quarterly data from Central Bank of Nigeria (CBN), Index Mundi (2015) and the National Bureau of Statistics (NBS) that covers 1981 to 2014. Quarterly data will be used to address loss of degrees of freedom resulting from lag length selection.

Lastly, the variables of interest for the study include trade openness (defined as the ratio of import plus export to GDP), manufacturing output, gross fixed capital formation, private sector access to credit, average capacity utilization, cumulative foreign private investment in manufacturing, interest rate (domestic lending rate) and official exchange rate.

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