ASSESSING THE IMPACT OF FINANCIAL FRICTION AND INVESTMENTS ON ECONOMICGROWTH AND DEVELOPMENT IN NIGERIA
Abstract
A key driver of economic growth and development across the globe is finance and financial system plays is crucial to promote this process. This study examined the relationship between financial friction, investments, and economic development in Nigeria over the period 1981-2024, with particular emphasis on the asymmetric effects of financial sector dynamics. Economic development is proxied by the growth rate of GDP per capita, while gross fixed capital formation (GFCF) represents investment, credit to the private sector (CPS) captures financial intermediation, and interest rate spread (INTR) serves as a proxy for financial friction. The study adopts a Nonlinear Autoregressive Distributed Lag (NARDL) modelling framework to account for possible asymmetries in the effects of financial friction by decomposing interest rate spread into positive and negative changes. Empirical findings reveal that while investment exerts a positive but statistically insignificant effect on economic development, credit to the private sector has a negative and significant impact, suggesting inefficiencies in credit allocation. The results further indicate that positive changes in interest rate spread are negative but insignificant, whereas negative changes (reductions in spread) have a positive and statistically significant effect on economic development, highlighting the growth-enhancing role of reduced financial friction. The interaction between financial friction and credit is negative and significant, implying that prevailing financial system inefficiencies further weaken the developmental impact of credit. The study concludes that improving the efficiency of financial intermediation and reducing financial frictions are critical to enhancing development outcomes. Consequently, it recommends targeted financial sector reforms aimed at lowering interest rate spreads, strengthening credit allocation mechanisms, and ensuring that investment is directed toward productive sectors capable of driving sustainable economic growth.
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