The Effect of Financial Sector Development on the Nigeria’s External Sector, 1986-2012

Abstract

One of the basic macroeconomic objectives of any nation is to maintain external balance. This requires that the nation’s export would at least equal and at best be positive. The drives towards this objective are to be led by the financial sector. It is on the basis of this that this research work is situated within the theoretical framework of the supply leading hypothesis. The work adopts the 3 stage least square to estimate the 5 equations of the external sector in investigating the effect of Nigeria’s financial sector development on the external sector. The work finds out that financial sector variable has serious impact (both positive and negative) on the dependent variables but at different significant levels. For example, for FDI, only MCAP was statistically significant but for IMPK only ROT was not significant of all the financial variables used.  All the variables have a robust goodness of fit as none of the R adjusted is less than 88%. The simulation results showed that shocks in the financial markets would create disturbance in the external sector. The paper therefore recommends that exchange rate and interest rate should not be absolutely left to be determined by the free forces of demand and supply. Alternative trade agreements with other countries using other international currencies than Dollar would help strengthen Naira against Dollar rather than further devaluing Naira. When these are done, it is expected that the long desired external balance would be achieved/close by.

Keywords: Financial Sector Development,External Sector, Import of Non-capital, Import of Capital, Export of Non-Petroluem, Export of Petroleum, Capital Balance, Foreign Direct Investment, Net Export, Import, Export, and Simulations.