EFFECT OF INTEREST RATES AND EXCHANGE RATE ON ECONOMIC GROWTH OF NIGERIA

Abstract

This study investigated the effect of interest rates and exchange rate on economic growth of Nigeria. The dependent variable is real gross domestic product while the independent variables were savings deposit rate, prime lending rate, exchange rate and total investment. The data spanned the period 1981-2021. The data were sourced from the CBN Statistical bulletin 2021 edition and analysed using the Error Correction Model (ECM) technique. The variables were found to be stationary at first difference and cointegrated hence the adoption of the ECM technique in estimating the model parameters. The result revealed that prime lending rate and exchange rate decreased economic growth of Nigeria for the period
reviewed but only exchange rate decreased growth significantly. However, savings deposit rate and investment increased economic growth but only investment increased growth significantly. The model estimated a speed of adjustment of 16.4 percent and a model fitness of 90.03 percent. The conclusion emanating from the study was that both prime lending rate and
exchange rate had decreasing effects on the Nigerian economy. The positive and significant effect of investment on growth proved the doggedness of public and private investors in the face of rising prime lending rate and risings exchange rate of the local currency. Part of the
recommendations Were that savings deposit rate should be relatively increased through the monetary policy rate to discourage stacking there by making funds available in deposit money banks for investment in the real sector and that the CBN should maintain a single digit prime lending rate while ensuring that bank rate is also stabilized to avoid sudden changes or volatility to both prime lending rate and exchange rate.