Bank Liquidity, Interest Rate Policies, And Private Sector Expansion in Nigeria

Abstract

This study examines the relationship between bank liquidity, interest rate policies, and private sector expansion in Nigeria over the period 1990–2024. The study is motivated by the need to understand how financial sector dynamics influence the growth of the private sector, which remains a critical driver of economic development. Secondary time-series data were sourced from the Central Bank of Nigeria and other relevant statistical agencies. The Autoregressive Distributed Lag (ARDL) model was employed to analyze both short-run and long-run dynamics among the variables. The results of the bounds test confirm the existence of a long-run equilibrium relationship among private sector expansion, bank liquidity, interest rate, credit to the private sector, inflation, and exchange rate. In the short run, exchange rate fluctuations exert a negative and significant effect on private sector expansion, while bank liquidity demonstrates a positive impact with a lag. Inflation is found to be insignificant in the short run. In the long run, credit to the private sector emerges as a significant positive determinant of private sector expansion, while inflation has a significant negative effect. Lending interest rate and exchange rate are statistically insignificant, suggesting that structural factors may weaken the transmission of interest rate policies. The study concludes that private sector expansion in Nigeria is more responsive to credit availability and macroeconomic stability than to interest rate movements alone. It recommends policies aimed at improving access to credit, maintaining price stability, and strengthening financial intermediation to enhance sustainable private sector growth.