IMPACT OF CAPITAL FLOW, SUDDEN STOP AND REVERSAL ON ECONOMIC GROWTH IN NIGERIA

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IMPACT OF CAPITAL FLOW, SUDDEN STOP AND REVERSAL ON ECONOMIC GROWTH IN NIGERIA

Abstract:

Sudden stops and reversals of capital inflows or the withdrawal of international capital are often cited as the immediate causes or triggers of most financial and currency crises, including the recent global financial crisis. This research examines the structure and dynamics of the foreign private capital inflows to Nigeria, as well as its effects on Nigeria’s economic growth. It also investigates the extent to which capital flows affect Nigeria’s degree of vulnerability to external crises and the effects of sudden stops and reversals on the Nigerian economy. Using a vector autoregressive approach (VAR) model, results from this estimated VAR show that the effects of sudden stops and reversals on real GDP growth were negative; an episode of sudden stop would reduce real GDP growth by 0.105 percentage point, while an episode of reversal will reduce real growth by additional 0.118 percentage point. This finding is in line with the a priori expectations. From the Impulse Response Function analyses the effects of total private capital flows, FDI, and Portfolio flows on economic growth were all found to be positive, as expected. . The variance decomposition analysis, given the positive effect of FDI on growth, suggest that FDI has the highest potential for boosting economic activities relative to the other forms of capital flows in Nigeria. One policy implication of this finding is that policy makers should design policies that will enhance the flow of foreign direct investment rather than portfolio investment to Nigeria.

IMPACT OF CAPITAL FLOW, SUDDEN STOP AND REVERSAL ON ECONOMIC GROWTH IN NIGERIA

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