Deposit Money Banks’ Credit and Public Domestic Investment in Nigeria: Pre and Post Structural Adjustment Programme Analysis

Abstract

This study investigates the influence of deposit money banks' credit on public domestic investment in Nigeria across three distinct time frames: the pre-Structural Adjustment Programme (SAP) period (1970–1985), the post-SAP period (1986–2022) and the entire study period (1970–2022). Utilizing annual time series data, the research applies the Error Correction Mechanism (ECM) and the Quandt-Andrews structural breakpoint techniques for analysis. Findings indicate that total credit to the economy, credit allocated to the agricultural and manufacturing sectors, and total savings within deposit money banks exert a positive and significant effect on public domestic investment in all examined periods. Conversely, the prime lending interest rate and the official Naira-to-US Dollar exchange rate had an adverse impact on public domestic investment across the analysed periods. The ECM coefficients for the respective time frames (-0.542794, -0.902596 and -0.940916) were negative and statistically significant at the 5% level, suggesting disequilibrium adjustments of 54.3%, 90.3% and 94.1%, respectively, from the short-run to the long-run equilibrium. The Quandt-Andrews structural breakpoint test identified 2007 as a structural break year, aligning with the global financial crisis, which had a profound effect on Nigeria’s economy. Based on these findings, the study suggests that the Central Bank of Nigeria should implement effective strategies to manage prime lending interest rates and exchange rates to avoid disruptive structural breaks and foster stable public domestic investment.