The Impact Of External Personal Remittance On Economic Growth In Nigeria (1986- 2020)

Project and Seminar Material for Economics

The Impact Of External Personal Remittance On Economic Growth In Nigeria (1986- 2020)


Abstract


Remittances, over the years have become a topical issue globally because of its phenomenal volume and its potential to serve as an alternative source of development finance in a nation’s economy. The growing importance of remittances as a source of foreign exchange is reflected in the fact that they have outpaced foreign direct investment and official development assistance to Nigeria in recent years. In order to investigate the impact of remittances on economic growth in Nigeria and its macroeconomic determinants, the Regression and VEC models were used in carrying out the analysis using quarterly data from 1986- 2020. Variables included in the Regression model are GDP, remittance, foreign aid, investment in physical and human capital, portfolio investments, degree of openness, FDI and institutions, while for the VAR, remittances, real agricultural GDP, exchange rate and inflation were used. We found remittances have a positive and significant impact on economic growth and real agricultural GDP, exchange rate and inflation determine remittances inflow in Nigeria. Finally, we found that Nigerians in diaspora are motivated to remit for investment and altruism motives. The main policy implications from this study are that Nigeria can improve her economic growth performance by strategically harnessing the contributions of remittances for economic development.


Chapter One


General Introduction

1.1. Background to the Study

Economic performance has been highly unsatisfactory in Nigeria in the last thirty years. The per capita GDP for Nigeria has remained almost the same as it was in 1972 and GDP growth rate has been slow, with negative growth in 1981-84. This situation coupled with other macroeconomic problems led the country to adopt the Structural Adjustment Programme (SAP) in 1986. Despite this the growth rate was still negative in 1987. This poor economic performance characterized by economic stagnation, macroeconomic instability, corruption, poor resource management and untold economic hardship (Chukwuone et al, 2007) has continued in Nigeria forcing international migration in the country. The need to accelerate the rate of economic growth has motivated policymakers to make effort to encourage foreign capital flow into the country, which could be in the form of Foreign Direct Investments (FDI), remittances which is of particular interest to this study, Overseas Development Assistance (ODA) and the like.

Migration which involves relocation of residence assumed a phenomenal dimension in the past decades as a result of poor economic performance which resulted in economic hardship in the country. Tanner (2005) defines migration as the international migrant residing in a country in which they are not natives. It is estimated that one out of every 35 persons is an international migrant. This is equivalent to about three percent of the world population. According to the United Nations Population Fund (UNFPA) report, these numbers are “expected to grow as migration pressures, created by the development gaps between poor and rich countries and fuelled by the process of globalization and demographic dynamics, will result in further migration”. International migration is believed to generate welfare gains for both migrants, countries of origin and destination as well as reduce poverty, the benefits to home countries of migrants been realized basically through remittances (Ratha and Mohapatra, 2007).

Remittance is generally defined as that portion of migrants’ earnings sent from the migration destination to the place of origin. Although remittances can also be sent in kind, the term “remittances” is usually limited to monetary and other cash transfers transmitted by migrant workers to their families and communities back home (Puput, 2010). As migration continues to increase, the corresponding growth of remittances has come to constitute a critical flow of foreign currency into many developing countries and Africa in particular. Migrant remittances from abroad are an important source of income for the Nigerian economy, representing 4.71 percent of the Gross Domestic Product (GDP) in 2008. In fact over the last decade Nigeria, according to the World Bank, is believed to be the single largest recipient of remittance in SubSaharan Africa receiving between 30 and 60 percent of remittance to the region and the 20thlargest recipient in the world as at 2005 according to the Global Economic Prospects (2006). Remittance has in recent times become a major source of development finance and the nature of remittances makes it a viable finance tool in the hands of economists for national development for many developing and developed countries alike.

Remittances flow into a country through formal and informal channels. It is pertinent to note however that, the amount of remittances arriving through the formal channel historically depends upon several factors.

Macroeconomic variables such as home and host country GDP, exchange rate, interest rate, inflation, investment facilities, and financial infrastructure for remitters etc. are considered to be important factors (Barua et al, 2007).

The question however is, to what extent do remittance impact on economic growth in Nigeria, secondly to what extent does macroeconomic variables affect remittance inflow in Nigeria?

The consequences of international migration for growth and development in countries of origin remain hotly debated and poorly understood (Nwajiuba, 2005). However, the role of migrant remittances is one of much interest within the current discourse on international migration and development. It is significant particularly for countries which are still developing (Ratha et al., 2008) and Nigeria is no exception to these trends. This study is an attempt to help make contributions to the global debate in this direction. Empirical investigation into the impact of remittances on economic growth and the macroeconomic determinants of remittances in Nigeria is relevant given the volume of remittances inflow into the country and the increasing role economist now place on remittances as an alternative source of development finance.


1.2. Statement of the Problem

The gap between domestic savings and investment is wide in Nigeria. Though savings has risen steadily in real terms from N277,667.5 in 1996 to N5,763,511.2 in 2009, domestic savings still fall short of investments which stood at N7,284,945.38 in 2009. The dearth of capital for financing developmental policies and project has been a major problem plaguing the country and has forestalled projected growth in Nigeria (Ihimodu, 1985). Furthermore, the inability of government in Nigeria to generate sufficient foreign exchange due to heavy reliance on a mono- product export which is prone to negative price shock in the case of oil at the international market has led to many years of instability in government revenue and consequently served as checks on import demand and a constraint to effective implementation of national development plans (Adewuyi and Adeoye 2003). This problem of inadequate capital for development financing has led the government into huge deficit financing through borrowing both domestic and external debt with domestic debt more than tripling in the period under study; rising from N419,975.6 in 1996 to N3,228,032.5 in the first half of 2009 alone, and external debt also rising four times over from N617,320.0 in 1996 to N2,695,072.2 in 2005. Although it declined in 2006 and 2007, it rose again in 2008 and 2009.

Also, since 1990 total Overseas Development Assistance (ODA) has dropped by more than half (Sims & Lake, 2000) and foreign direct investments are dwindling. Given the above scenario greater importance is now being placed on alternative sources of finance such as remittances for national development (ECOSOC (2000); Ratha, (2003). Remittances now represent a major part of international capital flows, surpassing foreign direct investment (FDI), export revenues, and foreign aid for many developing countries (Giuliano and Ruiz-Arranz (2005) in Bichaka and Christian (2008). The assertion by Nightingale (2003) indicates that a well-articulated remittance management regime will aid economic growth and development as an alternative source of foreign exchange earnings and as a source of liquidity and palliative for balance of payment deficit.

While migrant remittances have been acknowledged to be increasingly important to developing countries, little incentives seem to have been put in place to strengthen them. The lack of policies to channel or encourage remittances through formal channels and to investment sectors over time has probably impacted on the overall contribution of remittances to economic development in Nigeria. A recent survey of the remittance industry by the Central bank of Nigeria in collaboration with some Development Partners acknowledged like many others before it, that the size of remittance transfers may be bigger than variously estimated. Measured by the policy measures and incentives, it is safe to assert that policy interest in migrant remittances is still weak in Nigeria despite high human capital migration from the country since the adoption of Structural Adjustment Programme (SAP) which brought untold economic hardship. It is in this light that this study will contribute to the weak and recent literature with respect to remittances and growth in Nigeria


1.3. Research Objectives

Given the size of remittance inflows to developing countries, Nigeria in particular and the ongoing debate on the linkages between remittance and economic growth, it is imperative to undertake this research work. In the light of the above, this research is to achieve the following broad objectives

  1. To determine the impact of remittance on economic growth in Nigeria.
  2. To investigate the macroeconomic determinants of remittances inflow in Nigeria.
  3. To find out the impact of shocks of macroeconomic determinants on remittances inflow in Nigeria.

1.4. Significance of the Study

This study is first justified by the dearth of capital problem plaguing the country which has forestalled projected growth and the consensus by economists that remittances could be used as an alternative source of development finance. Even though Nigeria is agreed to be one of the largest recipients of remittances in Sub Saharan Africa and the twentieth largest recipient of remittances in the world as at 2005 according to the Global Economic Prospects (2006), it is yet to be ascertained the direct impact of remittances on economic growth in Nigeria. Much attention has been placed on other sources of foreign capital like FDI and foreign aid but very little attention seems to have been placed on remittances in the country. However, the growing importance of remittances as a source of foreign exchange is reflected in the fact that they have outpaced foreign direct investment and official development assistance to the country in recent years. Given the volume of remittance inflow into Nigeria in recent years it is critical to carry out this research to find out if remittances have had any significant impact on economic growth in the country.

Furthermore, understanding the impact of remittances on growth and the macroeconomic determinants of remittances should create a climate for policies that have the capacity to encourage and fully harness the benefits of remittances towards economic growth and development in Nigeria.


1.5. Scope of the Study

This study covers a period of fourteen years from 1996:1 to 2009:4. The choice of this period accrues to the unavailability of official data on remittances prior to this time and the fact that the economic hardship that forced many families to make migration decisions started with the introduction of the Structural Adjustment Program (SAP) which was introduced in the country in 1986 and this period is well beyond the SAP period, giving migrants enough time to have settled down and started remitting. It also marks the period where the percentage of remittance to GDP increased in Nigeria and became a topical issue globally because of its phenomenal volume.


1.6. Statement of Hypotheses

The following hypotheses will guide this research:

  • H0: Remittances do not have significant impact on economic growth in Nigeria.
  • H0: Macroeconomic determinants of remittances do not have significant impact on remittances inflow in Nigeria.
  • H0: Remittance inflow to Nigeria is not affected by shocks to its determinants.

1.7 Organization of the Study

This proposal is organized into three chapters. Chapter one is on the general introduction and it consist of background to the study, statement of research problems, objectives of the study, significance of the study, research hypothesis, scope of the study and outline of the study.

Chapter two focuses on review of literature while chapter three contains the methodology. Chapter four is presentation of result and discussions while chapter five is the summary, conclusions and recommendations.


Chapter Five


Summary, Conclusion and Recommendations

5.1 Summary

The main goal of this study was to investigate the impact of remittances on economic growth from 1986- 2020. In chapter one, the study traced Nigeria economic growth performance over the years and its effect on migration, a situation that has led to huge volumes of remittance inflow into the country. We reviewed some growth theories, migration theories, some macroeconomic determinants of remittances, the size of remittances and remittances institutions amongst others in chapter two. We observed that there are several push and pull factors forcing migration in Nigeria and pulling migrants into destination countries. Chapter three discussed the methodology adopted in order to empirically test our hypothesis. The study used the Ordinary Least Square (OLS) and the Vector Error Correction (VEC) for its analysis.

Major Findings

  1. Remittances have a positive and significant impact on economic growth in Nigeria.
  2. Real agricultural GDP, exchange rate and inflation are determinants of remittances in
    Nigeria.
  3. There is a long run relationship between remittances and its determinants.
  4. Based on the results we have achieved, the most plausible explanation for remittances from Nigerian residents abroad are investment and altruism motives.

5.2 Conclusion

This study undertook an empirical investigation of the impact of remittances on economic growth and the macroeconomic determinants of remittances in Nigeria. According to Gupta et al. (2007) cited in Bichaka and Christain (2008) “remittances are neither a panacea nor a substitute for a sustained and domestically engineered development endeavor for curing the problems of low- income countries”. Furthermore, large-scale migration could have a catastrophic effect on domestic labor markets in specific sectors such as higher education, government services, science and technology, manufacturing and services, especially where those migrating to other countries are largely skilled workers who are difficult and expensive to replace. However in the case of Nigeria, in the face of mass unemployment migration could help ease the load on the domestic labor markets.

In this light, migrant transfers in the form of remittances can ease the immediate budget constraints of families by bolstering crucial spending needs on food, health care, and are also a valuable resource that provides access to education for children who otherwise would have left school for lack of means. Although individual amounts of remittances might be negligible, but their cumulative sum adds up to substantial amounts which should contribute significantly towards foreign currency build-up (Singh and Sausi, 2010) and ultimately impact on economic growth. Nigeria therefore, needs to pay more attention on policies that have the capacity to harness the benefits of remittances for economic development.


5.3 Recommendations

Policy implications that may be drawn from this study is that Nigeria can improve her economic growth performance, not only by investing on the traditional sources of growth such as human capital, trade, foreign direct investment e.t.c, but also by strategically harnessing the contributions of remittances. Firstly since there is a long run relationship between remittances and its determinants, these macroeconomic variables should be influenced positively to encourage remittance inflow into Nigeria. Also remittances inflow should be directed towards investment channels by increasing investment opportunities in the country. Finally to harness fully the benefits of remittances, formal channels of remitting which are efficient, reliable and goes down to the rural communities should be encouraged so it provides a source of foreign exchange which can be used for development financing.


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