Financial Liberalization and Fixed Capital Formation in Nigeria: A Reassessment

Abstract

This study reassesses the impact of financial liberalization on gross fixed capital formation (GCF) in Nigeria. Drawing on the theoretical underpinnings of the McKinnon-Shaw hypothesis, which posits that financial repression hinders economic growth, financial liberalization has been a key reform in developing economies like Nigeria. The study examines the influence of five dimensions of financial liberalization—interest rate liberalization, exchange rate liberalization, capital account openness, capital market capitalization, and private sector credit—on GCF using an expost facto research design and secondary data from the Central Bank of Nigeria and World Development Indicators. Employing the Autoregressive Distributed Lag (ARDL) model, the findings indicate that lending interest rate and capital account openness have a positive and significant effect on GCF in the long run, while the exchange rate exhibits a negative but insignificant effect. Market capitalization and private sector credit show a positive but statistically insignificant impact on GCF. However, the financial liberalization variables collectively demonstrate a significant joint effect on gross fixed capital formation. The study concludes that while certain aspects of financial liberalization positively influence fixed capital formation in Nigeria, the overall impact is varied, suggesting the need for carefully calibrated policies. The findings provide insights for policymakers aiming to stimulate investment, manage inflation, and contribute to sustainable fixed capital formation within a liberalized financial environment.