Bank Credit, Industrial Sector and the Nigerian Economy: A VAR Approach

Abstract

Industrial output and economic growth in Nigeria has been lackluster and efforts have been geared towards stimulating the industrial sector with a view to accelerating economic growth. Bank credit and government expenditure have been identified as key variables that engender industrial output and hence economic growth. The study explores an empirical analysis of the interrelationships among Bank Credit, industrial output, government expenditure and economic growth in Nigeria using the methodology of vector auto-regressions (VARs). The study estimates a multivariate (4-equations) auto-regressions model using annual time-series data on real gross domestic product, industrial output, loans and advances and government expenditures for the period 1980 through 2013. The study carries out Unit roots tests for all variables and tests of cointegration. In addition, Forecast Variance Decomposition and Impulse Response Functions are carried out to examine dynamic interrelationships among the variables in the VAR system. The results show that the predominant sources of variations in the rate of economic growth are due largely to “own shocks,” innovations from loans and advances and government expenditures. Consequently, it is recommended that government should increase expenditure in key infrastructure, as well as ease access to bank credit for the industrial sector with a view to spurring economic growth in Nigeria.