Nexus between Foreign Remittances and Economic Growth in Nigeria: Role of the Financial Sector

Abstract

In recent times, the economic growth literature is becoming more interested in the macroeconomic impacts of foreign remittances. This focus could be because foreign remittances now constitute the largest source of foreign capital flows for developing countries next to foreign direct investment (FDI). To this end, the present study analyzed the possible role of the financial sector in the nexus between foreign remittances and economic growth in Nigeria over the period of 1981 to 2015. To circumvent the possible endogeneity problem among foreign remittances, financial development and economic growth, we employed the two-stage least squares (2SLS) technique. Unlike the previous findings, we offered new evidence that the complementarity or substitutability between foreign remittances and financial development in promoting Nigeria's economic growth depends on the indicators of financial development used. We confirmed the complementary hypothesis in the case of the quantitative indicators of financial development, while we validated the substitutability hypothesis in favour of its qualitative measure. Both migrant workers and their beneficiaries should be encouraged to make use of banks so that foreign remittances could be made available to finance genuine investments. This could be possibly achieved through boosting the confidence of migrant workers in the domestic financial system and by raising the deposit rate so as to entice the beneficiaries to save a large chunk of remittances received.

Analysis of Savings-Investment Gap in Sub-Saharan Africa: Does the nexus between Foreign Remittances and Domestic Financial Sector matter?

“…In addition, the adjustment parameter or the coefficient on the error correction term (ECT) fulfils the convergence condition of being 15 Our results also paralleled the previous findings of Ramirez and Sharma (2008); Giuliano and Ruiz-Arranz (2009); Mundaca (2009); Dzansi and Shukur (2010); Bettin and Zazzaro (2011);Nyamongo, Misati, Kipyegon and Ndirangu, (2012); Lartey (2013); Chia (2014), andEl Hama (2016) while negating the findings of Chowdhury (2016). We also affirmed the findings of Garba, et al (2020) that there are both complementarity and substitutability effects of remittances and financial sector development on economic growth via the investment channel. Similarly, Adeniyi, et al, (2017) revealed that the complementarity or substitutability effect of remittances and financial development on output volatility depends on the indicators of financial development used.…”

“…On the other hand, Kousar, Rais, Mansoor, Zaman, Shah and Ejaz (2019) discovered that remittance raises poverty level and income inequality while financial development has a positive impact on poverty reduction and income inequality in Pakistan. Further, Olaniyan (2019) and Garba, et al, (2020) tested the validity of the complementarity and substitutability hypotheses in Nigeria using generalized methods of moment and two-stage least square (2SLS) methods, respectively. These studies revealed that remittances had negative effect on economic growth but enhance economic growth when interacted with financial development indicators, particularly liquid liabilities, private sector credit and total bank deposits.…”

“…Section three presents a brief review of the relevant theoretical and empirical literatures. Section four comprises the methodological approach and data utilized in 1 See, for instance, Adenutsi (2011), Hassan and Shakur (2017), Peprah, Ofori and Asomani (2019), Kousar, Rais, Mansoor, Zaman, Shah and Ejaz (2019), Misati, Kamau and Nassir (2019), Olaniyan (2019), Garba, Adekunle and Adeniyi (2020).…”

“…Garba, et al (2020) suggest the need to encourage migrant workers and their beneficiaries to make use of banks so that remittances could be made available to finance genuine investment projects.…”

Financial liberalization, remittances and economic growth in Nigeria (1990–2018)

“…The more open the economy is to the rest of the world, the higher the inflow of remittances passing through the financial market. Second, previous studies in Nigeria (Anetor, 2019; Olaniyan, 2019; Garba et al , 2020) appear to have focused on domestic financial development using single variables such as M 2 as share of GDP and bank credit to private sector as measures of financial development. On this premise, this study focuses on financial openness.…”