Financial Distortions and Economic Growth in Nigeria

Abstract

This study examined the effect of financial distortions on economic growth in Nigeria from 1990 to 2024, using time series data sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin and the National Bureau of Statistics (NBS). An ex post facto research design was adopted, focusing on four key indicators of financial distortion: interest rate spread (IRS), parallel market exchange rate premium (PMERP), credit to the private sector (CPS), and cash reserve requirement (CRR), with real gross domestic product (RGDP) as the proxy for economic growth. The methodology involved the Augmented Dickey-Fuller unit root test for stationarity, diagnostic tests, and Ordinary Least Squares (OLS) multiple regression analysis using EViews 10.0.The regression results revealed that IRS and CPS had significant positive effects on RGDP, with coefficients of 0.0835 (p = 0.0126) and 0.2998 (p = 0.0004), indicating that moderate interest rate spreads and increased credit access supported growth. Conversely, PMERP had a significant negative effect (coefficient = -0.0095, p = 0.0201), suggesting that exchange rate divergence hindered growth. CRR showed a negative but statistically insignificant effect on RGDP (p = 0.3572), indicating limited direct impact during the period. The findings aligned with Financial Repression Theory and supported existing empirical studies, emphasizing the importance of sound macro-financial policies. The study recommended expanding credit to the private sector, stabilizing exchange rates, and managing interest rate spreads. It contributed to the literature by offering a long-term empirical assessment of financial distortions in Nigeria and provided policy guidance for sustainable economic development.