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5300
ISSN 2286-4822
www.euacademic.org
EUROPEAN ACADEMIC RESEARCH
Vol. IV, Issue 6/ September 2016
Impact Factor: 3.4546 (UIF)
DRJI Value: 5.9 (B+)
Effect of Public Sector Credit on Economic Growth:
Empirical Evedence from Nigera
I. G. OKAFOR
Department of Banking and Finance
Caritas University, Enugu, Nigeria
J. U. J. ONWUMERE
Professor
Department of Banking and Finance
University of Nigeria, Enugu Campus
EZEAKU HILLARY CHIJINDU
Department of Banking and Finance
Caritas University, Enugu, Nigeria
Abstract:
The paper investigates the impact of public sector credits on
economic growth in Nigeria over the period 1987-2013. The Engel and
Granger residual approach were employed to establish if the variables
have long-run relationship. Descriptive statistics and the Augmented
Dickey-Fuller unit root test were adapted to test for normality and for
stationarity respectively. The error correction model (ECM) estimation
technique was used for the regression. The results from this paper
shows that deposit money bank credit to the public sector have negative
and non-significant impact on economic growth in Nigeria within the
period under study. Meanwhile, broad money supply has positive and
non-significant impact on economic growth. A long run relationship
was also established among the variables. The correlation matrix
revealed the existence of positive relationship between public sector
credit and economic growth. This study will therefore recommend that
there should be adequate monitoring of credits channeled to the public
sector to ensure that they are judiciously appropriated in such ways
that will enhance the creation of goods and services which would
stimulate economic growth.
I.G. Okafor, J.U.J. Onwumere, Ezeaku Hillary Chijindu- Effect of Public Sector
Credit on Economic Growth: Empirical Evedence from Nigera
EUROPEAN ACADEMIC RESEARCH - Vol. IV, Issue 6 / September 2016
5301
Key words: Public sector credit, money supply, Economic Growth,
Error Correction Model, Nigeria
INTRODUCTION
The existence of public sector can be attributed to the
prevalence of political and social ideologies, which depart from
the premises of consumer choice and decentralized decision-
making (Ajibola, 2008). Against this backdrop, a major activity
of the government includes the determinant of the optimal
financing of public goods under a democratic society. One of the
sources of public sector finances includes external borrowing
from banks and other financial institutions (Onuoha, 2005).
According to Bhatia (2002), in an underdeveloped
country, public expenditure has an active role to play in
stimulating the economy through the provision of
infrastructure facilities. In his own contribution, Taiwo and
Abayemi (2011) wrote that the mechanism in which
government spending on public infrastructure is expected to
affect the pace of economic growth depend on the precise form
and size of total public expenditure allocated to economic and
social development projects in the economy. This effect,
therefore, is basically in the nature of re-allocation of resources
from less to more desirable lines of investment.
Musgrave and Musgrave, (1980) postulate that it is
interesting to pause and consider what may be said more
sympathetically about the underlying causes of increasing
public sector borrowings and expenditure growth. They
maintained that high need for capital goods, technical changes,
population change, relative costs of public services and
changing scope of transfers are the major causes of expenditure
growth in the public sector. However, as these basic facilities
are built up and capital market developed, the path is cleared
for capital formation of the manufacturing type to go into place
I.G. Okafor, J.U.J. Onwumere, Ezeaku Hillary Chijindu- Effect of Public Sector
Credit on Economic Growth: Empirical Evedence from Nigera
EUROPEAN ACADEMIC RESEARCH - Vol. IV, Issue 6 / September 2016
5302
and for industrial development in the private sector to occur.
Accordingly, one would expect the public share in capital
formation to decline over time (Allen et al 1991).
Central Bank of Nigeria (2009) notes that flow of credit
to the priority sectors fell short of prescribed targets and failed
to impact positively on investment, output and domestic price
level. Certainly, these comments have triggered questions on
the effectiveness and productivity of bank credits on the
Nigerian economy. In the same vein, there remains a gap in
understanding the impact of the banking system credit to the
public sector on economic growth in Nigeria while, also, the
relationship between the two have received little interest from
researchers and, therefore, need to be empirically investigated.
In similar perspective, Taiwo and Abayomi (2011) note that the
justification of public sector credits is for the provision of
infrastructural facilities, which will consequently drive
economic growth. However, they further posit that the effects of
such government spending on economic growth are still an
unresolved issue theoretically as well as empirically.
The fewness of studies on public sector credit and
economic growth nexus has continued to create huge knowledge
gap in finance literature. In other words, the relation and
linkage between deposit money bank credit to the public sector
and growth of the economy has specifically suffered some
neglect and oversight. While a number of literatures assessed
the contribution of private sector, or aggregate bank credit to
growth, few discourses have given attention to the subject. The
vacuum thereof has necessitated this study with a view to
contributing to the existing knowledge.
LITERATURE REVIEW
The world economies have at one time or the other been visibly
hit by recession, which subsequently posed hindrances to
economic growth and development. Sequel to these
I.G. Okafor, J.U.J. Onwumere, Ezeaku Hillary Chijindu- Effect of Public Sector
Credit on Economic Growth: Empirical Evedence from Nigera
EUROPEAN ACADEMIC RESEARCH - Vol. IV, Issue 6 / September 2016
5303
developments, the public sector has received intense interest in
financial literature. This can evidently be attributed to the roles
that the public sector plays, directly or indirectly, in promoting
economic growth. Public sector is often used interchangeably
with government sector. As opposed to the private sector, the
public sector encompasses all the people in a country.
Mohammed and Umar (2002) elaborated on public sector by
emphasizing that it is referred as such because in this modern
democratic era, the government is the only association in which
all the people of a country have the same right to access to all
the amenities provided by it whether they are rich or poor. The
public sector operations include local, state, and federal
governments’ activities.
The role of the public sector in fostering economic
growth is very crucial. It assumes even greater responsibilities
when the economy is retarding. Hence, engendering innovating
values, entrepreneurial revolution, modernization and
industrialization have become vital areas the public sector
works on, while introducing changes in different sectors in
order to increase their productivity (Jan and Syed, 2002).
It is a popular postulation that increased public
investment is necessary for boosting economic activities and
increasing the overall output in an economy. However, in spite
of these developments, the effects of public investments on
output growth are still empirically ambiguous. The investment
activities of the public sector establish foundations for economic
growth and development. Their impact comes from both direct
and indirect effects – either through increased employment and
wages and the rise of productivity of the private sector (Drezgic,
2008).
EMPIRICAL REVIEW
Economic literature is replete with possible qualitative and
quantitative explanatory variables that influence growth rate
I.G. Okafor, J.U.J. Onwumere, Ezeaku Hillary Chijindu- Effect of Public Sector
Credit on Economic Growth: Empirical Evedence from Nigera
EUROPEAN ACADEMIC RESEARCH - Vol. IV, Issue 6 / September 2016
5304
per capita output over time. Tuuili (2002) for example, uses the
ratio of banks’ claims on private sector to GDP, annual
consumer price index, and the interest rate margin to analyze
the relationship between finance and economic growth. The
models specified by Balogun’s (2007) theoretical models were
more expansive and included money supply, minimum
rediscount rates, private sector credit, ratio of banking sector
credit to the government, ratio of stock market capitalization to
credit to the private sector, and exchange rates.
Fapetu and Obalade (2015) investigated the impact of
sectoral allocation of deposit money bank loans and advances
on economic growth in Nigeria. Regression analysis of the
ordinary least square method was used. The results showed
that only the credit allocated to government, personal and
professional have significant positive contributions on economic
growth during the intensive regulation. However, it was
revealed that bank credits generally have no significant
contribution to economic growth during deregulation regime in
Nigeria.
Ezeaku (2014) examined the impact of bank credit on
economic growth in Nigeria using time series data from 1987 to
2012. The OLS regression econometric technique was used in
analyzing the data. The estimated regression results indicated
that aggregate bank credits impacted positively and
significantly on economic growth over the period of the study.
Among other things, the study recommended that policies on
public sector borrowing and spending should be reviewed in
other to discourage credit diversion, mitigate gross
unproductive investments and that more credit be channeled
into subsectors with more evident linkage effect such as
agriculture, manufacturing, energy and infrastructural
development.
In a related study, Yakubu and Affoi (2013) analyzed the
impact of the commercial banks credit on economic growth in
Nigeria using data from 1992 to 2012. The ordinary least
I.G. Okafor, J.U.J. Onwumere, Ezeaku Hillary Chijindu- Effect of Public Sector
Credit on Economic Growth: Empirical Evedence from Nigera
EUROPEAN ACADEMIC RESEARCH - Vol. IV, Issue 6 / September 2016
5305
square econometric technique was employed in analyzing the
data. It was shown that the commercial bank credit has
significant impact on the economic growth in Nigerian.
Emecheta and Ibe (2014) examined the impact of bank
credit on economic growth in Nigeria employing the reduced
form of vector autoregressive (VAR) technique using time series
data between 1960 and 2011. Real GDP was the proxy for
economic growth while ratios of private sector (CPS) to GDP
ratio and M2 to GDP were proxies for financial indicator and
financial depth respectively. The study found that there is a
positive and significant relationship between bank credit to the
private sector, broad money and economic growth in Nigeria.
Oluitan (2012) assessed the significance of bank credit in
stimulating real output growth in the case of Nigeria. The
study observed that credit Granger causes output. There was
also indication that credit is also positively associated to capital
inflows and imports. The findings suggested that bank credit is
strongly linked to the opening of the economy to international
trade and capital flows.
Obamuyin, Edun and Kayode (2010) investigated the
effect of bank lending and economic growth on the
manufacturing output in Nigeria. Times series data covering a
period 1973 to 2009 were collected and tested with the co-
integration and vector error correction model (VECM)
techniques. The findings of the study revealed that
manufacturing capacity utilization and bank lending rates have
significant effect on manufacturing output in Nigeria.
According to Bayraktar and Wang (2006), banking sector
openness had a direct and indirect effect on economic growth
through a combination of improvement in access to financial
services, and the efficiency of financial intermediaries as both of
these cause a lowering of costs of financing which in turn
stimulates capital accumulation and economic growth.
Guryayet, et al., (2007) also found that the effect of financial
I.G. Okafor, J.U.J. Onwumere, Ezeaku Hillary Chijindu- Effect of Public Sector
Credit on Economic Growth: Empirical Evedence from Nigera
EUROPEAN ACADEMIC RESEARCH - Vol. IV, Issue 6 / September 2016
5306
development on economic growth of Northern Cyprus although
positive, was negligible.
Shan and Jianhong (2006) in their study of the Chinese
economy found a two-way causality between finance and
economic growth. With the aid of VAR technique and using five
variables namely: GDP, total credit to the economy, labour,
investment and trade, the study observed that financial
development was the second most important factor after the
contribution from labour force growth in affecting economic
growth. They also found that strong economic growth in the last
twenty years has significant impact on financial development
by providing a solid credit base.
METHODOLOGY AND DATA
The study will be treated as an ex post facto research since the
study will rely on historical data covering the period under
study, whereas Ordinary Least Square technique will be used
in analyzing our data. Data for this study is extracted from the
Central Bank of Nigeria Statistical Bulletins. Ratio of public
sector credit to real GDP and broad money supply to real GDP
ratio are the independent while real GDP is the dependent
variable. In other to avoid a spurious result, Augmented
Dickey-Fuller (ADF) will be used to test for stationarity.
Diagnostic tests will also be run to authenticate the reliability
of our model, and results. The relevant diagnostic tests will
include serial correlation LM test, Heteroskedasticity Test:
Breusch-Pagan-Godfrey, and Ramsey Reset test.
Model Specification
After selection of the aforementioned variables, we can describe
the economic growth function of Nigeria in the following way:
I.G. Okafor, J.U.J. Onwumere, Ezeaku Hillary Chijindu- Effect of Public Sector
Credit on Economic Growth: Empirical Evedence from Nigera
EUROPEAN ACADEMIC RESEARCH - Vol. IV, Issue 6 / September 2016
5307
The model and functional relationships for equation (1) is
therefore specified thus:
Where;
RGDPt = Real Gross domestic product at time t.
PSC/RGDPt = Public sector credit to real GDP ratio at time t
M2/RGDPt = Broad money stock to real GDP ratio at time t
β0 = Constant term.
β1& β2 = Coefficients of the explanatory variable.
ε = error term
RESULTS AND ANALYSIS
In this section, results are presented and analyzed.
Table 1. DESCRIPTIVE STATISTICS
GDPGR
PSCRGDP
M2RGDP
Mean
5.390370
14.90741
17.25556
Median
6.200000
11.10000
16.50000
Maximum
21.17700
36.70000
38.00000
Minimum
-10.75200
5.900000
8.600000
Std. Dev.
5.597604
10.07170
6.620849
Skewness
-0.072848
1.235984
1.501238
Kurtosis
5.642442
2.956343
5.521769
Jarque-Bera
7.879193
6.876599
17.29595
Probability
0.019456
0.032119
0.000175
Sum
145.5400
402.5000
465.9000
Sum Sq. Dev.
814.6624
2637.419
1139.727
Observations
27
27
27
Source: Authors’ 2016.
Table 1 shows some of the preliminary statistical indicators in
our model variables. On average, the economic growth rate
during 1987-2013 equals 5.4%, while the highest growth rate in
GDP during the period remains at 21.12% with lowest growth
rate at -10.75%. The ratio of public sector credit to real GDP
equals 14.9% and the ratio of broad money supply to real GDP
I.G. Okafor, J.U.J. Onwumere, Ezeaku Hillary Chijindu- Effect of Public Sector
Credit on Economic Growth: Empirical Evedence from Nigera
EUROPEAN ACADEMIC RESEARCH - Vol. IV, Issue 6 / September 2016
5308
equals 17.3%. As revealed from table 4.1, there was a negative
skewness of GDP growth rate (-0.07) indicating that the degree
of departure from symmetry of the distribution was negative.
But, the kurtosis value of 5.6 reveals that the degrees of
peakedness of GDPGR within the period of this study were not
normally distributed as it tended to deviate from the mean.
Figure 1 Graphical Representation of model proxies
Source: Authors’ 2016.
(i) Unit root test
Test for unit root was carried out on the variables in other to
ascertain their stationarity, which is a condition for subjecting
the variables to further tests. The essence is that, given that we
are dealing with time series data, we need to avoid any chance
of producing spurious results, and also check against
autocorrelation problems in order to authenticate the reliability
of our results. The Augmented Dickey-Fuller unit root test was
used to find out if the data is stationary.
Table 2. Augmented Dickey-Fuller Unit Root Test
Source: Authors’ 2016.
Variable
ADF Test
Statistic
1% Critical
Value
5% Critical
Value
10%critical
Value
Test for
Unit
Root
Durbin-
Watson
stat
GDPGR
-4.998676
-3.752946
-2.998064
-2.768752
1(1)
1.981585
PSCRGDP
-4.926836
-3.724070
-2.991878
-2.605542
1(1)
1.742738
M2RGDP
-4.607165
-3.674839
-2.986225
-2.592604
1(1)
1.661823
I.G. Okafor, J.U.J. Onwumere, Ezeaku Hillary Chijindu- Effect of Public Sector
Credit on Economic Growth: Empirical Evedence from Nigera
EUROPEAN ACADEMIC RESEARCH - Vol. IV, Issue 6 / September 2016
5309
Table 2 shows that the variables are all stationary at first
difference, 1(1). It can be seen that for each of the variable, the
calculated ADF test statistic is less than the critical values at
1%, 5% and 10%, which confirms their stationarity. The results
are also free from problems of autocorrelation as indicated by
the Durbin-Watson stat values, which are approximately equal
to the critical value of 2.0.
(ii) TEST FOR CO-INTEGRATION
Engel and Granger residual based approach was used to
establish the presence of co-integration among the variables as
shown below:
Table 3 Engel and Granger test for co-integration
Source: Authors’ 2016.
The outcome of the Engel and Granger co-integration test above
indicates that model 3 is a long-run model. Notably, the
residual of the short-run regression is subjected to a unit root
test and is stationary at level, at 1%, 5% and 10% critical
values. This reveals evidence of long-run relationship in our
model equation. In other words, GDPGR, PSCRGDP and
M2RGDP are co-integrated, and the model is a long-run model.
Hence, error correction model will be employed in assessing the
effects of the regressors on the regressand.
I.G. Okafor, J.U.J. Onwumere, Ezeaku Hillary Chijindu- Effect of Public Sector
Credit on Economic Growth: Empirical Evedence from Nigera
EUROPEAN ACADEMIC RESEARCH - Vol. IV, Issue 6 / September 2016
5310
Table 4 CORRELATION MATRIX
VARIABLE
GDPGR
PSCRGDP
M2RGDP
GDPGR
1.000000
PSCRGDP
0.203934
1.000000
M2RGDP
0.282623
0.731558
1.000000
Source: Authors’ 2016.
As revealed by table 4, GDPGR has a positive relationship with
CPS/RGDP and M2/RGDP. This implies that 1% increase in
GDP growth rate increases over the period in Nigeria is due to
20% and 28% increase in CPS/RGDP and M2/RGDP
respectively. It is also indicated that CPS/RGDP and M2/RGDP
are positively correlated. In other words, 1% increase in ratio of
broad money supply to real GDP brings about a 73% increase in
public sector credit to real GDP ratio.
Table 5 REGRESSION RESULTS
Error Correction Model
Dependent Variable: D(GDPGR)
Method: Least Squares
Included observations: 26 after adjustments
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
0.731142
0.946728
0.772283
0.4482
D(PSCRGDP)
-0.122037
0.372400
-0.327704
0.7462
D(M2RGDP)
0.120596
0.310735
0.388099
0.7017
ECT(-1)
-0.811839
0.168530
-4.817173
0.0001
R-squared
0.515110
Mean dependent var
0.652000
Adjusted R-squared
0.448988
S.D. dependent var
6.140370
S.E. of regression
4.558007
Akaike info criterion
6.012286
Sum squared resid
457.0594
Schwarz criterion
6.205839
Log likelihood
-74.15972
Hannan-Quinn criter.
6.068023
F-statistic
7.790360
Durbin-Watson stat
1.663480
Prob(F-statistic)
0.001004
Source: Authors’ 2016
Model Equation:
GDPGR = 0.731142 – 0.122037PSCRGDP + 0.120596M2RGDP – 0.811839
(0.7462)* (0.7017)*
Note: * (p-values)
I.G. Okafor, J.U.J. Onwumere, Ezeaku Hillary Chijindu- Effect of Public Sector
Credit on Economic Growth: Empirical Evedence from Nigera
EUROPEAN ACADEMIC RESEARCH - Vol. IV, Issue 6 / September 2016
5311
The result in table 5 above reveals that the overall regression
model is significant. This is evidenced by the probability of F-
statistic (0.001004), which is less than 5%. This result is
reliable also because the Durbin-Watson statistic (1.663480) is
very significant as it is approximately 2.0, which confirms that
the regression does not have autocorrelation problems. It is also
noteworthy that the error term (ECT), which is the residual
value, is negative and significant. This indicates a movement
towards attainment of long-run equilibrium in our model.
Sequel to this, the residual (ECT) coefficient (-0.811839), which
is the speed of adjustment, shows that 81% of the errors in the
long-run is corrected over one year period.
The results further indicate that public sector credit
(PSCRGDP) does not have positive impact on economic whereas
broad money supply (M2RGDP) has a positive but non-
significant impact on economic growth over the period of this
study.
The R2 in the regression assumes that every regressor in
the model explains the dependent variable. From the model
above, the R2 value of 0.515110implies that 51 percentage
variations in the dependent variable (GDPGR) was explained
by the independent variables (PSCRGDP and M2RGDP) and
the remaining 49% was explained by variables not included in
the model. The adjusted R2 take account of more number of
regressors if included and it still explains 45% variation in the
dependent variable.
(iii) Diagnostic Results
Table 6 DIAGNOSTIC TEST RESULTS
Test
F-statistic
P-value
Breusch-Godfrey Serial Correlation LM Test
0.371931
0.6431
Heteroskedasticity Test: Breusch-Pagan-Godfrey
0.427770
0.6283
Ramsey RESET Test
1.516473
0.2306
Source: Authors’ 2016.
I.G. Okafor, J.U.J. Onwumere, Ezeaku Hillary Chijindu- Effect of Public Sector
Credit on Economic Growth: Empirical Evedence from Nigera
EUROPEAN ACADEMIC RESEARCH - Vol. IV, Issue 6 / September 2016
5312
Results in table 6 above reveal that our model has no serial
autocorrelation problem. It can also be observed that the results
provide strong evidence that the model did not violate the
assumption of homoskedasticity and we therefore reject the null
hypothesis that the model is not homoskedasticity. The results
of the Ramsey test indicate that our model has no specification
errors, and is therefore well specified.
IMPLICATIONS, CONCLUSION AND RECOMMENDATIONS
There are very few studies in literature that sought to examine
the effect banking system loans and advances to the public
sector have on economic growth. The public sector in Nigeria,
which comprises the local, state and central government have
often sought for credit from deposit money banks as a way of
bridging financing gaps, and with the perceived aim of
enhancing growth through investment, empowerment and
developmental projects. The theoretical expectation however is
that such activities would translate to rapid, or some measure
of growth of the domestic economy. Most of the qualitative
researches by public sector administrators and social scientists
have only succeeded in giving us theoretical postulations and
opinions on public sector financial habit without elucidating an
empirical scientific approach in assessing the link between
public sector credit and economic growth. After exploring
various econometric techniques, it was revealed that
PSCGDPGR and M2RGDP have positive relationship with
GDP. The results also showed that public sector credit has
negative and non-significant impact on economic growth in
Nigeria. This can be attributed to the fact that chunk of the
loans and advances to the public sector may have been diverted
or misappropriated. Such facilities may have also been invested
in white elephant project and such other ventures that do not
crate value hence do not lead to increase in output. This very
finding has raised doubt on the justification for public sector
I.G. Okafor, J.U.J. Onwumere, Ezeaku Hillary Chijindu- Effect of Public Sector
Credit on Economic Growth: Empirical Evedence from Nigera
EUROPEAN ACADEMIC RESEARCH - Vol. IV, Issue 6 / September 2016
5313
borrowings. The argument therefore is that if public sector
credit has no positive contribution to growth in GDP, is there
any reason why such facilities should be encouraged? However,
broad money supply has positive and non-significant effect on
growth. We also found out that there exist a long-run
equilibrium relationship between PSCRGDP and M2RGDP,
and GDPGR. This study will therefore recommend that there
should be adequate monitoring of credits channeled to the
public sector to ensure that they are judiciously appropriated in
such ways that will enhance the creation of goods and services
which would stimulate economic growth.
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EUROPEAN ACADEMIC RESEARCH - Vol. IV, Issue 6 / September 2016
5314
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