THE EFFECTS OF THE DE-REGULATION POLICY OF INTEREST RATES ON INVESTMENT IN NIGERIA 1987 -1996

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THE EFFECTS OF THE DE-REGULATION POLICY OF INTEREST RATES ON INVESTMENT IN NIGERIA 1987 -1996

Abstract:

De-regulation policy of interest rate is the removal of controls and ceiling on interest rate such that it will be determined by the inter play of market forces of demand and supply of funds. Before the reforms, credit was administratively determined reflecting the developmental objective of the governmnet. This was observed to hamper investment expansion as investment level was on the decline with attendant problems of low output and unemployment, consequent upon laying off of staff. Also, savings was low and as such no enough savings that will be transformed into investment. Thus, there was the need to evolve policy that would encourage investment via savings by de-regulating interest rates. It is against this background that this research work aimed at assessing the impact of this policy on investment by comparing both the periods of regulation and de-regualtion. In the course of this study, we found out that investment responded positively to interest rate in all the three equations in chapter fourcontrary to conventional postulation. There, it was found that the coefficient estimates of interest rate were not statistically significant in the application of t-test. On the other hand, the coefficients of profit was properly signed in equation one only but statistically significant in all the equations. The negative relationship between investment and profit may not be unconnected to the fact that public investement constitutes a greater share in aggregate investment , and, this is not hedged against interest rate and profit. And, what seemed to be expansion in level of investment was the high inflationary rate and exchange rate following the depreciation of the Naira. Secondly, In comparing average savings for regulation period with de-regulation period, the average for regulation era, N10.30658b is higher than the average for de-regulation era, N7.93079b, implying that the effectiveness of interest rate policy depends on other factors such as saving habits, provision of adequate banking services and ensuring increase in real disposable income of the people. Based on the problems facing investors as found in this study, a number of recommendations were made which we believe will be beneficial to all concerend. Among these were; the use of differential interest rate policy to release the scarcity of savings to stimulate savings in order to raise accessible rates of return on investments and, to discriminate between productive investment and speculative unproductive investment. That, policy of interest rates should be as flexible to take into account the realities of our economy and not necessarily be dogmatic. Also, there was the need for government intervention to mimimize the divergence between the allocation of resources based on the free interplay of the market forces and the one based on government development priorities in the country. The use of selective credit control was suggested as a means of guiding economic activities in the development process. Finally, a supportive policy and institutional framework need be provided for a more effective way to promote investment. Such includes macro stability, an environment conducive to a low cost of doing business and adequate political institutions that foster social consensus and political stability

THE EFFECTS OF THE DE-REGULATION POLICY OF INTEREST RATES ON INVESTMENT IN NIGERIA 1987 -1996

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