FOREIGN RESERVE CHANGES, DOMESTIC CREDIT AND OUTPUT IN NIGERIA: ANY CAUSALITY?

Transcription

1 Indian Journal of Commerce & Managemen Sudies ISSN: EISSN: DOI: 0.884/ijcms/v8i/ DOI URL: hp://dx.doi.org/0.884/ijcms/v8i/ FOREIGN RESERVE CHANGES, DOMESTIC CREDIT AND OUTPUT IN NIGERIA: ANY CAUSALITY? Augusine C. Osigwe, Deparmen of Economics and Developmen Sudies, Federal Universiy, Ndufu-Alike, Ikwo, Nigeria Anhony I. Okechukwu, Deparmen of Economics and Developmen Sudies, Federal Universiy, Ndufu-Alike, Ikwo, Nigeria Emmanuel I. Agupusi, Deparmen of Economics and Developmen Sudies, Federal Universiy, Ndufu-Alike, Ikwo, Nigeria ABSTRACT This sudy considered he causaliy ha exis among foreign reserve changes, domesic credi and oupu in Nigeria. There was a robus review of relevan lieraure. The esimaed empirical model of his sudy leaned on he reviewed lieraure o mimic he works of Arshad (008) for Pakisan, Iwedi (0), Oluian (0) for Nigeria. The Granger causaliy es resuls indicaed ha unidirecional causaliy runs consisenly from domesic credi o foreign reserve across he examined lags. This implies ha domesic credi causes oal reserve and he converse does no exis. The resuls also revealed ha, oupu Granger causes oal domesic credi a lags one and wo. The reverse of his unidirecional causaliy does no hold. A lag hree, causaliy does no exis beween he duos. No causaliy occurred beween domesic credi and oupu across he hree lags. On he basis of he empirical findings of his sudy, he auhors recommended ha he auhoriies concerned should have eye on he foreign reserve whenever hey inen o inker he size of he domesic credi. A reasonable size of oupu should be mainained in readiness for he ime(s) when scaling up domesic credi makes economic sense. Keywords: Foreign reserve, Domesic credi, Oupu, Granger causaliy, Nigeria. JEL Classificaion: B C Inroducion: Domesic credi is he credi ha a counry s cenral bank makes available o borrowers wihin he same naion; his may include commercial banks and even involve he governmen iself. Ofenimes, a governmen, wheher on a local, municipal, or naional scale, has o borrow money in order o fund is projecs and offer services o is consiuens. I herefore incurs known as governmen deb. This may eiher be exernal deb, which is owed o exernal financial eniies, or inernal deb, which is owed o lenders wihin he same counry. A counry s cenral bank, which has he auhoriy o lend currency o he governmen involved, may also exend credi o commercial banks. However, such banks usually urn o he cenral bank as a las resor. For boh governmens and banks, a cerain ineres rae is charged. This is known as a discoun rae, which may serve as basis for ineres raes imposed by oher financial insiuions and is usually seen o be quie compeiive. Foreign reserves in a sric sense are only he foreign currency deposis and bonds held by cenral banks and moneary auhoriies (IMF, 004). However, he erm in popular usage commonly includes foreign exchange and gold, special drawing righ (SDRs) and inernaional moneary fund (IMF) reserve posiions. These are asses of he cenral bank held in differen reserve currencies, such as he dollar, euro and yen, and used o back is liabiliies. The quaniy of foreign reserves can change as a cenral bank implemens Volume VIII Issue, January

2 Indian Journal of Commerce & Managemen Sudies ISSN: EISSN: moneary policy. A cenral bank ha implemens a fixed exchange rae policy may face a siuaion where supply and demand would end o push he value of he currency lower or higher. In a fixed exchange rae regime, hese operaions occur auomaically, wih he cenral bank clearing any excess demand or supply by purchasing or selling he foreign currency. Mixed exchange rae regimes ('diry floas', arge bands or similar variaions) may require he use of foreign exchange operaions (serilized or unserilized) o mainain he argeed exchange rae wihin he prescribed limis. Over he years, here has been an increase of credi from banks o he Nigerian economy. According o World Bank (0), domesic credi provided by banking secor in Nigeria beween980-0 has being flucuaing. For insance, in 980, domesic credi value was.% of GDP. I gradually increased o 49.9% in 986 which was he highes value for over 0 years now, while he lowes value was 4.9% in 006. Bu since 007 despie he recapializaion exercise in he banking indusries, he domesic credi gradually came up, recording 0.% in 007, 6.7% in 008, 6.9% in 009 and decreased o 0.7% in 00, before jumping o 7.7% in 0 and decreased o 5.% in 0 (World Bank, 0). On he oher hand, foreign exchange reserves in Nigeria decreased o USD million in December from USD million in November of 05. Foreign exchange reserves in Nigeria averaged 080. USD million from 960 o 05, reaching an all-ime high value of USD million in Sepember of 008 and a record low of 6. USD million in June of 968 (CBN, 05). Sanusi (0) advocaed for he immediae implemenaion of he reasury single accoun (TSA); he reurn of governmen accouns o he Cenral Bank o reduce he huge cos of governmen deb due o poor cash flow managemen; reenion of he moneary policy rae (MPR) a per cen, plus or minus per cen; privae secor cash reserve raio (CRR) a per cen; public secor CRR a 50 per cen; and liquidiy raio a 0 per cen. This was in a bid o affec he level and direcion of Nigeria s foreign reserve. Moneary policy in Nigeria has been carried ou hrough he porfolio behaviour of he CBN in erms of he conrol of is credi and managemen of reserves. Credi conrol is being used o check movemen in domesic price level, while he exchange rae policy serves as measure for deermining he compeiiveness and curren accoun performance as well as foreign reserves. The firs half of 980s, CBN s reserves relaive o domesic credi winessed coninual decline, i however sared o increase from 986 up ill 990. Around he las quarer of 990 he reserves nose-dived again unil 99 when i picked up again, recording $.40 billion in 996 o $8.8 billion in 005, ill he end of may 007, when Nigeria s gross reserves sood a $4. billion - comprising he CBN's exernal reserves of $.5 billion, $9.4 billion in he excess crude accoun, and $.8 billion in federal governmen's savings. I peaked a $6 billion in Sepember 008 during he Yar'Adua/Jonahan Adminisraion when oil prices reached a peak of $47 per barrel. I again decreased o $40.48 billion in 00 and falling subsequenly o a low of $.7 billion in Sepember 0, which was as a resul of he downurn of he global economy and oil marke. In 0, he reserve rose o $44. billion on December 8 and dropped o $4.6 billion on December, 0, approximaely $500 million below is value in 0 and been depleed furher by $bn since January 04. Exernal reserves has, in recen imes, played significan role in he Nigeria economy. I has increased he level of money supply and herefore impac posiively on he level of economic aciviies as more funds became available for invesmen in producive aciviies (Aluko, 007). Agains his backdrop, his paper examined he causaliy of reserve changes, domesic credi and oupu in Nigeria. I is srucured as follows: Secion wo deails he profile of foreign reserve and domesic credi and oupu in Nigeria. Secion hree oulines he review of relevan lieraures. Mehodology adoped is conained in secion four whereas secion five capures he presenaion of empirical findings. The paper was concluded in secion six. Profile of foreign reserve, domesic credi and oupu in Nigeria: As shown in Figure, from 970 o 04, domesic credi in Nigeria winessed obvious insabiliy, having recorded a negaive.60 per cen of he GDP in 97. From 974 o 985, i consanly increased, recording i highes single year value of per cen of GDP in 985. Wihin he range of 986 o 005, he domesic credi value o he GDP had a clawing movemen, recording a lowes average value of 8.60 per cen and 4.90 per cen in 004 and 005, respecively. More so, from 006 o 04, domesic credi value peaked up on he average of 5 per cen of he GDP. On he oher hand, he Nigerian foreign reserve almos mainained a seady rise over he ime covered in his sudy. I recorded 90.7 billion USD for he firs ime in 97. In 000, i rose o billion USD and sood a billion USD in 00. Reserve had a seady growh paern; from billion USD in 004 o billion USD in 008. In he year 009, i depreciaed o billion USD and jumped o is peak value of billion USD in 04. (Figure ). Volume VIII Issue, January

3 Indian Journal of Commerce & Managemen Sudies ISSN: EISSN: Source: Analysis of daa from WDI (05) Review of Relaed Lieraure: Khan (008) sudied he long-run and shor-run dynamics of foreign reserves and domesic credi in Pakisan. The sudy formulaed and examined he moneary approach o he balance of paymens by incorporaing he currency subsiuion version of money demand funcion for Pakisan over he period using FM-OLS and Johansen- Juselius co inegraion echniques. The resuls suggesed ha real oupu, real exchange rae and domesic credi play an imporan role in he deerminaion of foreign reserves in Pakisan in long-run as well in shor-run. Moreover, he moneary auhoriies serilized foreign exchange reserves by % in long-run and 4% in shor-run. The resuls suppored he evidence of long-run causaliy running from foreign reserves o domesic credi. The policy implicaion from he empirical analysis was ha he validiy of he moneary approach o he balance of paymens and he effeciveness of moneary policy depend on he naure of he money demand funcion. On he oher hand, Oluian (0) assessed he significance of real bank credi in simulaing real oupu growh in Nigeria. Annual ime series daa on Real Privae Secor Credi (RPSC), Real Gross Domesic Produc (RGDP), Real Toal Expor (REXP), Real Toal Capial Flow (RCAPAC), and Real Impor (RIMP), covering he period from was used. Employing he Engle Granger and Johansen based ECM mehod in esablishing he direcion of causaliy, i was observed ha credi Granger causes oupu. In esing he facors ha mobilized credi, she found ha expors in general are negaively relaed o credi. However, while oil expors were negaively relaed o credi, non-oil expor had posiive relaionship wih credi. Credi was also posiively linked o capial inflows and impors. These findings suggesed ha bank credi is inexricably linked o he opening of he economy o inernaional rade and capial flows in he non-oil secor. Emechea and Ibe (04) examined he impac of bank credi on economic growh in Nigeria. The sudy applied he reduced form of vecor auoregressive (VAR) echnique and used ime series daa from 960 o 0. Using curren gross domesic produc (GDP) as he dependen variable and bank credi o he privae secor (CPS) o GDP raio and broad money (M) o GDP raio as he explanaory variables. The sudy furher used he Augmened Dickey-Fuller (ADF) and Phillips Perron (PP) uni roo ess in esing he saionariy of he variables, and found ou ha he variables were inegraed of order one. Their finding showed ha here is a significan posiive relaionship beween bank credi o he privae secor, broad money and economic growh. Also, pas values of all he variables were significan in predicing heir curren values. This resul implied ha he bank consolidaion and recapializaion exercise was a welcome developmen and ha furher seps should be aken o ensure he sabiliy of he banking secor. Iwedi, e al (05) examined he direcion of causaliy beween banking secor credi and economic growh in Nigeria over he period The causal links beween he pairs of variable of ineres were esablished using pairwise Grangers causaliy es. The granger causaliy es resuls revealed ha here exis unidirecional causaliy flowing from gross domesic produc (GDP) o credi o he privae secor (CPS) and credi o governmen secor (CGS). Bi-direcional causaliy runs beween Coningen Liabiliy and GDP. These suggesed ha growh in he volume of coningen, liabiliies could boos invesmen in he economy and exer a posiive impac on level of produciviy; hence having a conagious effec on he oupu level of goods and services in he economy. In he opposie direcion, growh in GDP can also boos he oal amoun of new funds needed hrough he window of invesmen, produciviy, invenions, innovaion and diversificaion, hereby giving birh o he issue of new credis o fund new businesses and he expansion of already exising ones in he economy. The sudy recommended ha he managers of he Nigeria economy should fashion ou appropriae policies ha will enhance he bi-direcional flow of influence beween he banking secor where invesable Volume VIII Issue, January

4 Indian Journal of Commerce & Managemen Sudies ISSN: EISSN: funds are sourced and he real secor of he economy where goods and services are produced. Theoreical Framework and Mehodology: Theoreical Framework: The basic objecive of his paper is o examine he casual relaionship among reserve changes, domesic credi and oupu in Nigeria. The model of his sudy draws heavily on he reviewed lieraure o mimic he empirical works of Arshad (008) for Pakisan, Iwedi (0), Oluian (0) for Nigeria. Mehodology : The ADF and Philip-Perron [PP] mehods of uni roo es were adoped o es for he saionariy of he variables. The causaliy among he variables is raced wih he Johansen co-inegraion echnique and he Granger causaliy es (GCT). Long-run relaionship (co-inegraion) beween wo variables indicaes ha causaliy runs in a leas one direcion. I is one of he major hrus of his sudy o deermine he causal relaionship (if any) among reserve changes, domesic credi and oupu. The pairwise GCT was adoped o achieve his objecive. A ime series X is said o Granger cause a ime series Y if and only if i can be clearly shown hrough series of -ess and F-ess on he lagged values of X (wih lagged values of Y inclusive) ha all he lagged X values provide saisically significan informaion abou he fuure values of Y. The null hypohesis underlying he GCT is ha he variable under sudy (say X) does no Granger-cause he oher (say Y). Iniially, he GCT is based on esimaing a pair of regression models in he following generic fashion: ( ) ( ) I is assumed ha v and v are uncorrelaed. Granger (969) posis ha X is said o Granger-cause Y if β i is no equal o zero and Y will also Granger-cause X if λ i is no equal o zero. If hese wo siuaions simulaneously exis, hen bi-direcional causaliy exis. The firs wo scenarios represen unidirecional causaliy and if none of hem prevails, hen i is concluded ha here is independence beween he wo variables X and Y. This siuaion presens he simples form of Granger causaliy specificaion which involves only wo variables (X and Y), dealing wih bilaeral causaliy. However, in his sudy, he siuaion is more complex, involving hree variables, hus, making i mulivariable causaliy hrough he echnique of vecor auoregression (VAR). Thus, he GCT is based on esimaing he following VAR model: i i i j jdcre j k koput k () DCRE i i i j jdcre j k koput k (4) OPUT i i i j jdcre j k koput k (5) Where; = Foreign Reserve, DCRE = Domesic Credi and OPUT = Oupu. The hypohesis of no causaliy beween variables is rejeced if he F-saisic for he resriced and unresriced residual sum of squares is significan a he convenional % or 5% level of significance. In esing for jus causaliy, one needs no presen he esimaed coefficiens of he VAR model explicily (Gujarai and Porer, 009). Daa for his sudy which spanned from 970 o 0 were sourced from WDI (04). This period was chosen as a resul of uniform availabiliy of daa for he seleced variables. Empirical Resuls: The resuls of he ADF and PP uni roo es for saionary of he variables presened in Table indicae ha he variables became saionary afer firs differences. In oher words, hey are inegraed of order one,. Thus, we rejeced he null hypohesis of non-saionary for all he variables. Variable L LDCRE LOPUT Table : ADF and PP Uni Roo Resuls ADF Saisic ** ** ** Order of Inegraion PP Saisic ** ** ** Order of Inegraion NB: ** implies significan a % level of significance. Ganger Causaliy Tes Resuls: The opimal lag lengh fails a hree for AIC lag selecion crieria and a one for he SIC. Granger causaliy remains sensiive o lags. Thus, he empirical findings are guided by he opimal lags. The resuls of he Granger causaliy es indicae ha unidirecional causaliy runs consisenly from domesic credi o foreign reserves across he hree lags. This implies ha domesic credi causes oal reserve and he converse does no exis. The resuls also revealed ha, oupu Granger causes oal domesic credi a lags one and wo. The reverse of his unidirecional causaliy does no hold. A lag hree, causaliy does no exis beween he duos. No causaliy exised beween domesic credi and oupu across he hree lags (Table ). Volume VIII Issue, January

5 Indian Journal of Commerce & Managemen Sudies ISSN: EISSN: Table : Granger causaliy es resuls Null Hypohesis does no Granger DCRE does no Granger Cause does no Granger DCRE does no Granger Cause does no Granger DCRE does no Granger Cause GDP does no Granger Cause does no Granger GDP does no Granger Cause does no Granger GDP does no Granger Cause does no Granger DCRE does no Granger GDP does no Granger Cause DCRE DCRE does no Granger GDP does no Granger DCRE does no Granger GDP does no Granger Lag Order F-Saisic (Prob.).7977 (0.00) * (0.09).49 (0.76) 4.858* (0.07) (0.474).799* (0.059) * (0.067).040 (0.0857) ** (0.0049) (0.78).667 (0.06).0896 (0.878) (0.744) (0.604) (0.5567) (0.69) (0.7484) 0.40 (0.989) Decision Rejec Rejec Rejec Rejec Rejec NB: ** (*) denoe rejecion of he null hypohesis a %(5%) level; p-values in Parenhesis. Source: Auhors Compilaion using Eviews. Conclusion: In he main, his sudy considered he casual relaionship among foreign reserve changes, domesic credi and oupu in Nigeria. The model of his sudy leaned on he reviewed lieraure o mimic he empirical works of Arshad (008) for Pakisan, Iwedi (0), Oluian (0) for Nigeria. The resuls of he Granger causaliy es indicae ha unidirecional causaliy runs consisenly from domesic credi o foreign reserve across he hree lags. This implies ha domesic credi causes oal reserve and he converse does no exis. The resuls also revealed ha, oupu Granger causes oal domesic credi a lags one and wo. The reverse of his unidirecional causaliy does no hold. A lag hree, causaliy does no exis beween he duos. No causaliy exised beween domesic credi and oupu across he hree lags. On he basis of he empirical findings of his sudy, he auhors hereby recommend ha he auhoriies concerned should have eye on he foreign reserve a any momen hey inen o inker he size of he domesic credi. A reasonable size of oupu should be mainained in readiness for he ime(s) when scaling up domesic credi makes economic sense. A fuure sudy may consider he causaliy ha runs among foreign reserve changes, domesic credi and seleced secoral oupu as agains he aggregae oupu as done in his sudy. References: [] Aluko, J. J. (007). The Moneizaion of he Nigeria s Foreign Exchange Inflows. CBN Bullion. Vol. (4). [] CBN (007). Building and managing Exernal Reserves for Economic Developmen. The CBN Bullion Vol., No.. [] Emechea B.C. and Ibe R.C (04). Impac of bank credi on economic growh in Nigeria: applicaion of reduced vecor auoregressive (VAR) echnique. European Journal of Accouning Audiing and Finance Research Vol., No.9, pp.-, November 04. Published by European Cenre for Research Training and Developmen UK ( [4] Granger, C. W. (969). Invesigaing Causal Relaions by Economeric Models and Cross- Specral Mehods, Economerica: Journal of he Economeric Sociey, Vol. 7, No., pp [5] Gujarai, DN and DC Porer (009). Basic Economerics, 5h ediion, New York: McGraw-Hill. [6] IMF (004). Annual Repor on Exchange Arrangemens and Exchange Resricions. [7] Iwedi M., Okey-Nwala P. O. and Wachukwu I. P. (05). Causaliy Modelling of he Banking Secor Credis and Economic Growh in Nigeria. IIARD Inernaional Journal of Banking and Finance Research Vol. No [8] Khan, M. A. (008). Long-Run and Shor-Run Dynamics of Foreign Reserves and Domesic Credi In Pakisan. Inernaional Journal of Applied Economerics and Quaniaive Sudies Vol.5. [9] Okonjo (05). Nigeria: Why Foreign Reserves, Excess Crude Accoun Depleed. The Guardian Newspaper. [0] Oluian R. O. (0). Bank Credi and Economic Growh: Evidence from Nigeria. Inernaional Business and Managemen Vol. 5, No., 0, pp Canadian Research & Developmen Cener of Sciences and Culures. [] Osuji E. (05). Inernaional Oil Prices and Exchange Rae in Nigeria: A Causaliy Analysis. Inernaional Journal of Academic Research in Economics and Managemen Sciences 05, Vol. 4, No. ISSN: [] Sanusi L. (0). Depleing he Excess Crude Accoun (ECA), a Repor. Rerieved from serves.hml#ixzzgd7mngd. [] World Bank (0). World Bank Saisical Daabase. ****** Volume VIII Issue, January