EFFECT OF MONETARY POLICY ON MANUFACTURING VALUE-ADDITION IN NIGERIA: 1981 – 2018

Abstract

Nigerian economy has not demonstrated a genuine match to industrialization, as shown by the experiences of industrializing nations because there is absence of a well articulated and implemented monetary policy framework required to actualize the benefits of savings and capital mobilization to the productive sector. This paper attempts to examine the effect of monetary policy on manufacturing value-addition in Nigeria. Monetary policy rate, prime lending rate, open market operation, broad money supply and manufacturing sector credit are captured as monetary policy variables (independent variables) while value-added manufacturing output is the dependent variable. Time series secondary data, sourced from National Bureau of Statistics and Central Bank of Nigeria statistical bulletins is used. The data are subjected to Augmented Dickey-Fuller (ADF) and Philips-Perron (PP) stationarity tests to determine the appropriate econometric tool for analyses. The results of both tests show that all the variables are stationary at both first difference and at level. This condition satisfies the choice of Autoregressive Distributed Lag (ARDL) model for estimation. The paper reveals that in the short run; only broad money supply majorly drives the growth of manufacturing value-addition in Nigeria. However, the long-run significant driver of manufacturing value-addition in Nigeria is largely from manufacturing sector credit. This is a pointer to the need to facilitate a favourable investment climate through appropriate monetary policy tool like manufacturing sector credit which represents more accurately the role of financial intermediaries in channeling fund to manufacturers and investors to boost output growth in the productive sector. The paper concludes that monetary policy variables generally exert significant effect on value-added manufacturing output at 5% level. The paper recommends policy intervention such as well managed and single-digit benchmark interest rate for manufacturers to attract increased investments, which must be tailored towards enhanced value-addition to the manufacturing sector.