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THE EFFECT OF TRADE AND FINANCE ON ECONOMIC GROWTH AND DEVELOPMENT IN NIGERIA

ABSTRACT

In Nigeria, trade and finance has been fluctuating and has not made significant impact on economic growth as a result of inadequate credit to the private sector that is supposed to improve investment in the economy. This study therefore examines the impact of financial development on economic growth in Nigeria, covering 1986 to 2022. The autoregressive distributed lag model was employed and the long run result reveals that interest rate (INT), lagged value of broad money supply (M2(-1)) and domestic credit to private sector (DCP) have positive impacts on GDPG while broad money supply (M2) has a negative impact on GDPG. The short run estimate indicates that INT and DCP have positive impact on economic growth, while the coefficient of M2 has negative impact on economic growth in Nigeria. In conclusion, financial development can be said to contribute to economic growth. This is because, when government allocates adequate credit to private sectors, investments are made in enhancing the productivity that will encourage investments to take place. These investments will lead to employment generation, and in turn lead to output growth. In this regard, the study recommends that the Nigerian government should increase allocation of credit to the private sector in order to improve investment and ensure the autonomy of relevant monetary authorities.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Economic growth and development are pivotal to the prosperity and sustainability of nations, particularly in developing economies like Nigeria. Trade and finance are two fundamental components that significantly influence these processes. Trade, which refers to the exchange of goods and services between countries, fosters economic growth by enabling access to broader markets and diverse products (Bose & Shakib, 2020). It stimulates competition, encourages innovation, and increases productivity, which are crucial drivers of economic growth (Khan & Rahman, 2022). Meanwhile, finance, encompassing the management of money, investments, and other financial instruments, plays a vital role in facilitating trade and supporting economic activities (Ademola & Olatunji, 2019). Effective financial systems mobilize savings, allocate resources efficiently, and provide the necessary capital for investments, thereby contributing to sustainable economic development (Eze & Igwe, 2021).

In Nigeria, the interplay between trade and finance is particularly significant, given the country's rich natural resources and diverse agricultural products (Ejiogu, 2020). Historically, Nigeria's economy has been heavily reliant on oil exports, which constitute a substantial portion of its trade revenue (World Bank, 2023). This reliance on oil has created vulnerabilities, as fluctuations in global oil prices can have profound effects on the economy. However, there have been concerted efforts by the government to diversify the economy through non-oil exports, which underscores the importance of trade in achieving economic stability and growth (Olayiwola et al., 2019). The promotion of sectors such as agriculture, manufacturing, and services is essential for reducing the country's dependence on oil and enhancing overall economic resilience (Ogunleye, 2022).

The financial landscape in Nigeria has undergone significant transformations over the years, characterized by reforms aimed at strengthening financial institutions, improving access to credit, and enhancing the regulatory framework (Chinonso & Eze, 2022). The establishment of the Central Bank of Nigeria (CBN) has been instrumental in implementing monetary policies that support economic growth while ensuring price stability (Okwu, 2020). Moreover, the growth of microfinance institutions has provided alternative financing options for small and medium-sized enterprises (SMEs), which are vital for job creation and economic diversification (Abubakar, 2021). However, despite these advancements, challenges remain, including inadequate infrastructure, high-interest rates, and limited access to finance for many businesses, which hinder the potential benefits of trade and finance on economic growth (Adeyemo, 2019).

The relevance of trade and finance in fostering economic development in Nigeria is further accentuated by the country's demographic dynamics. With a population exceeding 200 million, Nigeria has a young and vibrant workforce, which presents significant opportunities for economic growth if harnessed effectively (National Bureau of Statistics [NBS], 2023). Trade and finance can stimulate job creation, enhance skills development, and empower individuals economically, thereby contributing to poverty reduction and social development (Oseni et al., 2020). However, this potential can only be realized through strategic policies that promote inclusive trade practices and accessible financial services (Ike, 2021).

Furthermore, Nigeria's participation in regional and international trade agreements has implications for its economic growth. The African Continental Free Trade Area (AfCFTA), launched in 2021, aims to boost intra-African trade by reducing tariffs and creating a single market for goods and services (African Union, 2021). This agreement provides Nigeria with an opportunity to expand its trade relationships and enhance its competitiveness in the global market (Okafor, 2023). However, for Nigeria to fully leverage the benefits of such agreements, it must address existing structural challenges in its trade and financial systems (Eze & Igwe, 2021).

In conclusion, the interplay between trade and finance is critical to Nigeria's economic growth and development. The historical reliance on oil exports necessitates a diversification strategy that emphasizes non-oil sectors, supported by robust financial systems. The potential of Nigeria's demographic dividend can be harnessed through effective trade and finance policies that promote job creation, enhance productivity, and foster sustainable economic development. As the country navigates the complexities of its economic landscape, understanding the relationship between trade, finance, and economic growth will be vital for formulating policies that drive prosperity and resilience.

1.2 Statement of the Problem

The relationship between trade, finance, and economic growth in Nigeria is characterized by significant challenges that hinder optimal performance. Despite the country’s vast natural resources and potential for diverse trade activities, economic growth has been inconsistent and insufficient to meet the needs of its rapidly growing population. The over-reliance on oil exports has rendered the economy vulnerable to global oil price fluctuations, limiting sustainable development (Bose & Shakib, 2020). Moreover, the financial sector, while improved through reforms, still faces obstacles such as high-interest rates, inadequate access to credit, and insufficient financial literacy among small and medium-sized enterprises (SMEs) (Adeyemo, 2019). These factors collectively contribute to low levels of investment, hampering trade facilitation and ultimately affecting economic growth.

Furthermore, the inadequacy of infrastructure and regulatory challenges poses additional barriers to effective trade and finance (Ike, 2021). The lack of essential infrastructure such as roads, ports, and communication systems hampers trade efficiency and increases transaction costs, further inhibiting economic growth (Ejiogu, 2020). The interplay between these challenges underscores the need for a comprehensive analysis of the impact of trade and finance on economic growth and development in Nigeria, identifying actionable strategies to enhance the synergy between these crucial sectors.

1.3 Objectives of the Study

The main objective of this study is to determine the effect of trade and finance on economic growth and development in Nigeria. Specific objectives include:

i. To evaluate the impact of trade diversification on economic growth in Nigeria.

ii. To determine the relationship between financial inclusion and economic development.

iii. To find out the role of government policies in facilitating trade and finance.

1.4 Research Questions

i. What is the impact of trade diversification on economic growth in Nigeria?

ii. What is the relationship between financial inclusion and economic development in Nigeria?

iii. How does government policy facilitate trade and finance in Nigeria?

1.5 Research Hypotheses

Hypothesis I
H0: There is no significant impact of trade diversification on economic growth in Nigeria.
H1: There is a significant impact of trade diversification on economic growth in Nigeria.

Hypothesis II
H0: There is no significant relationship between financial inclusion and economic development in Nigeria.
H2: There is a significant relationship between financial inclusion and economic development in Nigeria.

Hypothesis III
H0: There is no significant role of government policy in facilitating trade and finance in Nigeria.
H3: There is a significant role of government policy in facilitating trade and finance in Nigeria.

1.6 Significance of the Study

This study is significant in several ways. First, it contributes to the existing literature on trade, finance, and economic growth by providing empirical evidence specific to the Nigerian context. Understanding the relationship between these variables can inform policymakers and stakeholders on the importance of strategic trade and finance policies in driving economic growth. Second, the findings can serve as a foundation for future research, enabling scholars to explore related areas such as the impact of trade agreements and financial reforms on economic development. Finally, this study may guide private sector stakeholders in formulating strategies to navigate the challenges of trade and finance, ultimately contributing to a more resilient economy.

1.7 Scope of the Study

The scope of this study encompasses an examination of the relationship between trade, finance, and economic growth in Nigeria from 2018 to the present. It focuses on various sectors of the economy, including agriculture, manufacturing, and services, to understand how trade diversification and financial inclusion contribute to economic development. The study also considers the role of government policies in shaping trade and finance dynamics. Geographically, the research will primarily focus on Nigeria, although comparative insights from other African nations may be referenced to provide broader context.

1.8 Limitations of the Study

This study faces several limitations. First, the availability of reliable data may pose challenges, particularly regarding historical trade and financial statistics. Additionally, the complex interplay between trade, finance, and economic growth may make it difficult to isolate specific effects and establish causality. Furthermore, while the study aims to provide a comprehensive analysis, it may not capture all variables influencing economic growth, such as political stability and cultural factors. Despite these limitations, the research will endeavor to provide a meaningful contribution to understanding the effect of trade and finance on economic growth and development in Nigeria.

1.9 Definition of Terms

Trade: The exchange of goods and services between countries, which can be measured in terms of exports and imports.

Finance: The management of money and investments, encompassing banking, credit, and financial markets that facilitate economic activities.

Economic Growth: The increase in the production of goods and services in an economy over time, typically measured by Gross Domestic Product (GDP).

Economic Development: The process by which the overall health, well-being, and academic level of the general population improves.

Financial Inclusion: The accessibility of financial services to all segments of the population, particularly the underserved and economically disadvantaged.

Trade Diversification: The strategy of expanding the variety of goods and services exported to reduce reliance on a limited number of products or markets.

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