The impact of lending rate on the manufacturing sector in Nigeria

Abstract

The study investigates the impact of lending rate on output of the manufacturing subsector using the Vector Error Correction Model (VECM) and annual data from 1981- 2014. The empirical results indicated that high lending rate had negative impact on manufacturing output in the long-run. This suggests that increase in lending rate undermines manufacturing output, thus retarding growth in the real sector. Specifically, the estimates revealed that a 1.0 per cent increase in lending rate reduces manufacturing output by 0.03 per cent. The study, therefore, recommends the implementation of investment friendly policies that narrows the lending rate by the deposit money banks (DMBs} in order to stimulate output growth in the manufacturing sub-sector and allow global competitiveness of products. Similarly, development finance institutions should be encouraged to lend at concessionary rates to the manufacturing sector.