Economic Analysis of Domestic Sector Credit and Domestic Investment Nexus

Evidence from Nigeria

Abstract

Domestic investment has continued to face severe challenges in the Nigerian economy following inadequate access to credit and unfavourable investment climate in Nigeria. This has affected the significant contributions of the private sector to national development. As a result of these challenges, this study examined the impact of private sector credit on domestic investment in Nigeria from the period of 1985 to 2020, using both the Ordinary Least Square, the Granger causality test and the vector error correction model approaches on the variables of credit to the private sector, domestic investment, aggregate saving, exchange rate and inflation as both explanatory and control variables to this study. The results show among others that exchange rate, inflation and foreign direct investment had a negative relationship with domestic investment, while domestic credit, GDP growth rate, broad money supply, aggregate saving and total government revenue had a positive relationship with domestic investment. The policy implications of these results were extensively discussed in line with the objectives of this study. From the empirical findings, the  study therefore recommended inter-alia the urgency of the government to improve on the structural reforms and in particular the banking sector reforms as well as to improve on the stability of the macroeconomic variables for sustainable domestic investment.