The Impact of Remittances on the Economic Growth of Nigeria

Table of Contents

Dedication

Acknowledgement

Abstract

CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Objectives of the Study
1.4 Research Questions
1.5 Justification of the Study
1.6 Scope of the Study
1.7 Organisation of the Study

CHAPTER TWO: LITERATURE REVIEW
2.1 Conceptual and Theoretical Review
2.2 Empirical Review
2.2.1 Growth Theories
2.2.2 The Harrod-Domar Model
2.2.3 Pure Altruism Theory
2.2.4 Pure Self Interest Theory
2.2.5 New Economics of Labor Migration Theory
2.3 Implication of the Literature Review for the Current Study

CHAPTER THREE: THEORETICAL FRAMWORK AND METHODOLOGY
3.1 Theoretical Framework
3.2 Methodology
3.2.1 Model Specification
3.2.2 Estimation Tecniques
3.2.2.1 Testing for Stationarity Property
3.2.2.2 Cointegration Test
3.2.2.3 Error Correction Mechanism
3.2.3 Sources and Measurement of Data

CHAPTER FOUR: PRESENTATION AND ANALYSIS OF RESULTS
4.1 Presentation of Results
4.1.1 Descriptive Statistics
4.1.2 Trend Analysis of Independent Variables
4.1.3 Unit Root Test
4.1.4 Ordinary Least Square
4.1.5 Discussion of Results vis a vis Apriori Expectation of Variables
4.1.6 Error Correction Model
4.2 Discussion of Results
4.3 Comparison of Results with Previous Findings

CHAPTER FIVE: SUMMARY, CONCLUSION & RECOMMENDATIONS
5.1 Summary of Findings
5.2 Conclusion
5.3 Recommendations
5.4 Suggestions for Further Studies

References

Appendix

List of Tables

List of Figures

List of Abbreviation

List of Tables

Table 1: Descriptive Statistics

Table 2: A Table showing the Unit Root Test Results

Table 3: Ordinary Least Square Estimates

Table 4: Error Correction Model Estimates

List of Figures

Figure 1: Official Remittances

Figure 2: Gross Fixed Capital Formation

Figure 3: Official Development Assistance

Figure 4: Foreign Aid

Figure 5: Gross Domestic Product

Figure 6: Exchange Rate

List of Abbreviation

AID = Foreign Aid

CBN = Central Bank of Nigeria Statistical Bulletin

EXR = Exchange Rate

FDI = Foreign Direct Investment

GCF = Gross Fixed Capital Formation

GDP = Real Gross Domestic Product

ODA = Official Development Assistance

REM = Official Remittances

WDI = World Bank’s World Development Index

Dedication

This research work is dedicated to God Almighty, for His faithfulness, mercies and everlasting grace, thank you for making the completion of this research work possible. I am forever grateful.

Acknowledgements

My sincere gratitude goes to my wonderful Supervisor, Dr. O.O Adebiyi for her immeasurable academic guidance and dedicated supervision of this project.

My deep appreciation also goes to my Course Adviser Dr. A.J. Omojolaibi and all other lecturers in the Department of Economics who have taught me all through my years in the University of Lagos.

I am also very grateful to my immediate family, most especially my wonderful parents; Mr. and Mrs. Akindolie for their unflinching support and encouragement, also to my adorable siblings; Ayodeji, Omolara and Titilayo for their continuous behind the scene encouragement and moral support.

Finally, I would like to sincerely appreciate all my great friends most especially the council of friends of Busayo Ajala, Felix Dakuru, Ope Adebajo, Damilola Ogunmoroti, Anunobi Joshua, Femi Ogunbambo, Usman Lawal, Chisom Ndubuisi, Kika Okafor, Frank Utoh, Cyprian Imahansoloeva, amongst others, for everything we strived to achieve together during the course of our stay on campus and writing this project too.

ABSTRACT

Remittance, due to its size and impact, has become a new phenomenon in the global financial system. Data from World Bank revealed that total remittance in 2015 was $21.1 billion compared to $947 million in 1996, this represents a growth of over 2000 percent over the period. This is what necessitated the need to investigate the impact of remittance on economic growth in Nigeria. The broad objective of the study is to determine the impact of remittance on economic growth in Nigeria. This study employed annual secondary data covering the period 1996 to 2015. Data sources included Central Bank of Nigeria Statistical Bulletin and World Development Index data publications. Data collected were analyzed using Ordinary Least Squares to analyze the relationship between the dependent variable Real Gross Domestic Product (GDP) and independent variables Official Remittance (REM), Gross Fixed Capital Formation (GCF), Official Development Assistance (ODA), Foreign Aid (AID), Foreign Direct Investment (FDI) and Exchange Rate (EXR). Official Remittance, Gross Fixed Capital Formation and Exchange Rate all had positive and significant impacts on economic growth captured by Real Gross Domestic Product while Foreign Aid, Official Development Assistance and Foreign Direct Investment had insignificant impacts on economic growth. This study concludes that remittance significantly has a positive impact on economic growth in Nigeria. Since a positive and significant relationship has been established between remittance and economic growth, this study recommends government increases remittance inflows into the country by developing the financial sector in order to reduce the cost associated with the inflow of remittances and reduction of tax rate for transactions so people can send money through appropriate channels in order to aid government collect actual data on remittance flows.

CHAPTER ONE INTRODUCTION

1.1 Background of the study

International remittances has been recognized as an important driver of the economy of most developing countries. It plays vital roles in poverty reduction, income redistribution and economic growth, especially in rural areas. According to Hernandez- Coss and Bun (2006), Nigeria is the largest recipient of remittances in Sub-Saharan Africa. They reported that the country receives nearly 65 percent of officially recorded remittance flows to the region and 2 percent of global flows. The Central Bank of Nigeria (CBN) reported approximately US$2.26 billion in remittances for 2004. The phenomenon of Nigerian emigrants, considered as an escape from hardship on the home front and a depletion of human capital is somehow paying off for the country. This is in view of the revelation that Nigerians abroad grew the economy by a whopping $7billion in the year 2008 and that Nigeria is the sixth highest destination of remittances from its citizens living in the Diaspora (World Bank, 2008; The Nation, 2009).

Remittances reflect the local labour working in the global economy and have been shown to explain partly the connection between growth and integration with the world economy (Addison, 2004). Remittances enhance the integration of countries into the global economy and reflect the local labour working in the globalized economy.

Remittance has become an important source of revenue both for government through tax and fees and for households. At households’ levels, it helps increase income and consumption smoothing (Kannan and Hari, 2002; International Monetary Fund (2005), and Jongwanich, 2007); increase saving and asset accumulation (Hadi, 1999); and improve access to health services and better nutrition (Yang, 2003) and to better education (Edward and Ureta, 2001). Likewise, at village/community level, remittance income can help stimulate local commodity markets and local employment opportunities. Remittances have proved to be less volatile, less procyclical, and therefore a more reliable source of income (for agricultural production and other household uses) than other capital flows to developing countries, such as foreign direct investment (FDI) and development aid (Gammeltoft, 2002; Ratha, 2003).

The publication of World Bank (Migration and Development Brief, 2013) reveals Nigeria as the top-remittance receiving country in Africa [Fifth in the world following India ($71 billion), China ($60 billion) Philippines ($26 billion) and Mexico ($22 billion)]. The World Bank reported that $21 billion was remitted into the country in 2013 fiscal year and predicted future increment of remittances inflow into the country. Similarly, it is noteworthy that Nigerians abroad were recorded to have remitted US$10 billion in 2010 which has put the country ahead of other African countries as the biggest recipient of remittances (World Bank 2011).

Although the World Bank has predicted increase in remittances inflow into Nigeria, the country has no extant policy to regulate its use for national development apart from the usual consumption behaviour of remittances recipient households. It is imperative to mention that in spite of the position of Nigeria as top remittance recipient country in Africa and fifth in the world in 2013 financial year, the Central Bank of Nigeria is uncertain about the actual amount of money remitted to the country due to its lack of methods to measure informal/unofficial ways through which remittances enter the country. This suggests that remittances enter the country through informal ways and this could make the official figures a less than accurate reflection of the reality as people prefer to send remittances home at low cost, mostly through friends who are visiting their home country.

However, despite the high remittances inflow into Nigeria, the country is still struggling economically, and is yet to make judicious use of remittances like other developing countries of the world (for example, India, Bangladesh, Philippine, and Mexico).

The remittances of the diasporas, despite being a show of attachment to the country of origin, serve as a vehicle towards the economic growth of such country. In a study carried out on the impact of migrants’ remittances on economic growth in sub-Saharan Africa with special reference to Nigeria, Ghana and South Africa. Ikechi and Anayochukwu (2013) state that migrants’ remittances were found to have impacted positively on the economic growth of the economies studied, though with varying degree.

In fact the main objective of the paper is that diasporas remittances has an impact on economic growth of their country of origin. Diasporas remittances not only represent a source of relief for households in meeting basic needs but also facilitate the building of resources for increased human capital through both education and health care, increased physical and financial investments in residential real estate and starting up small businesses. It is against this backdrop that this research investigate the impact of remittance on economic growth.

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 N2,776,675.1 in 1996 to N7,763,511.2 in 2014 (CBN Statistical Bulletin, 2015), domestic savings still fall short of investments which stood at N9,284,945.38 in 2014 (CBN Statistical Bulletin, 2015). 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, 2005). 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 N5,228,032.5 in the first half of 2014 alone, and external debt also rising four times over from N617,320.0 in 1996 to N5,695,072.2 in 2015 (Migration and Development Brief, 2015). Although it declined in 2016, it rose again in 2017.

Also, since 1990 total Overseas Development Assistance (ODA) has dropped by more than half (Sims & Lake, 2010) 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 growth 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 previously 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) in 1986 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 Objectives of the Study

Given the size of remittance inflows to Nigeria and the ongoing debate on the linkages between remittance and economic development, it is imperative to undertake this research work. In the light of the above, this research is to achieve the following objectives:

1. To examine the trend of remittance and economic growth in Nigeria over the period.
2. To determine the impact of remittance on economic growth in Nigeria.

1.4 Research Questions

1. What is the trend of remittance and economic growth in Nigeria over the period?
2. What is the impact of remittance on economic growth in Nigeria?

1.5 Justification 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, 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.

1.6 Scope of the Study

This study covers a period between 1996 to 2015, 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 adoption 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.

1.7 Organisation of the Study

This study is divided into five (5) chapters. Chapter one discloses information on the essence of the study, stating its objectives and the significance of the study. Chapter two talks about the conceptual framework, the empirical review, the literature review and method of analysis found in the literature. Chapter three covers the theoretical framework, methodology, data requirement and source. Chapter four unveils the data presentation and data analysis. Chapter five comprises of the conclusion, recommendation and limitations of studies.

CHAPTER TWO LITERATURE REVIEW

2.1 Conceptual and Theoretical Review

Economic growth is, in a limited sense, an increase of the national income per capita, and it involves the analysis, especially in quantitative terms, of this process, with a focus on the functional relations between the endogenous variables; in a wider sense, it involves the increase of the GDP, GNP and NI, therefore of the national wealth, including the production capacity, expressed in both absolute and relative size, per capita, encompassing also the structural modifications of economy.

We could therefore estimate that economic growth is the process of increasing the sizes of national economies, the macro-economic indications, especially the GDP per capita, in an ascendant but not necessarily linear direction, with positive effects on the economic-social sector, while development shows us how growth impacts on the society by increasing the standard of life.

Economic growth is a complex, long-run phenomenon, subjected to constraints like: excessive rise of population, limited resources, inadequate infrastructure, inefficient utilization of resources, excessive governmental intervention, institutional and cultural models that make the increase difficult, etc.

Economic growth is obtained by an efficient use of the available resources and by increasing the capacity of production of a country. It facilitates the redistribution of incomes between population and society. The cumulative effects, the small differences of the increase rates, become big for periods of one decade or more. It is easier to redistribute the income in a dynamic, growing society, than in a static one.

There are situations when economic growth is confounded with economic fluctuations. The application of expansionist monetary and tax policies could lead to the elimination of recessionary gaps and to increasing the GDP beyond its potential level. Economic growth supposes the modification of the potential output, due to the modification of the offer of factors (labour and capital) or of the increase of the productivity of factors (output per input unit). When the rate of economic growth is big, the production of goods and services rises and, consequently, unemployment rate decreases, the number of job opportunities rises, as well as the population’s standard of life.

One of the consequences of poor economic performance in a country is migration.

Neoclassical micro-economics defines migration as an individual strategy for income maximization. Migration is in two folds, internal and international, which is phenomenal in developed and developing countries respectively. Internal migration is defined as the movement of people within their country of origin (in-migration and out- migration), which could be due to various social, economic and political factors. International migration, which is the interest of this study is the movement of people outside their countries of origin (emigration) into another country (immigration) (Nwajiuba, 2005).The decision to migrate stems from a search for self and family improvement and is usually to a place where opportunities are perceived as better (Nwajiuba, 2005). Migration is a result of wage differences between developed and developing countries caused by differences in availability of physical, social and human capital. According to Todaro (1969), migration is an economic phenomenon, fueled by differences in expected, and not necessarily, actual earning opportunities and this has remained a landmark in the analyses of migration and remittances.

Remittance has been defined by many scholars from different disciplines and organisations. According to Kihangire and Katarikawe (2008), remittance is defined as money sent home by migrants working abroad to their home countries. Similarly, remittance has been defined as a portion of migrant workers earnings sent to their countries of origin and this could be in cash or gifts (Odozi et al. 2010; Chukwuone 2007; Quartey 2006). According to Magnusson, 2009 remittances are the portion of migrant workers’ earnings sent back to their countries of origin primarily used to support families back home (Magnusson, 2009).

Tewolde (2005) argues that remittances are financial and non-financial materials that migrants receive while working overseas and sent back to their households in their countries of origin. Ratha (2003) also defines remittances as migrants’ funds transfers, which are resources that a migrant convey into or takes out of a country. Consequently, International Organization for Migration (2006) largely defines remittances as the monetary flows connected to migration, that is, cash transfers by migrants or immigrants living abroad to a relation in home countries. International Labour Organization (2000) also defines remittance as part of migrant workers’ income remitted back from their employment countries to their countries of origin.

Remittance which is a consequence of migration is also defined broadly as monetary transfers that a migrant makes to the country of origin, in other words, financial flows associated with migration. Most of the time, remittances are personal, cash transfers from a migrant worker or immigrant to a relative in the country of origin. They can also be funds invested, deposited or donated by the migrant to the country of origin (IOM Glossary). Remittances can include personal deposits, investments, intra-family transfers, charitable donations made by migrants both as crisis relief and long-term development contributions, and pension and social security transfers from destination countries where migrants obtain the right to pensions.

2.2 Empirical Review

2.2.1 Growth Theories

Although individual amounts of remittances might be negligible, their cumulative sum adds up to substantial amounts which should contribute significantly towards foreign currency build-up (Singh and Sausi, 2010) and consequently impact growth. Ratha (2003) calls remittances “an important and stable source of external development finance”. A review of some growth theories therefore, will help in understanding the remittance-growth nexus.

2.2.2. The Harrod - Domar Model

In Keynesian literature, development and growth models emerged according to Harrod (1939) and Domar (1946). This model which is a synthesis of two growth models done by Sir Roy Harrod (1939) and Evsey Domar (1946, 1947) is one of the earliest fall out of Keynes’s (1936) General Theory aimed at extending Keynes’s analysis into the long run (Hacche, 1979).

According to Keynes in the short run the overriding significance of investment is its influence on effective demand and the stock of capital may be taken as given and independent of it. However in the long run this is not so, investment expenditure does augment capital stock. The Harrod -Domar Model attempts to show the relationship between the Savings Ratio (SR), the Capital -Output Ratio (COR) and economic growth (Iyoha et al, 2002). Where Capital - Output Ratio (COR) is the unit of capital required to produce a unit of output while the savings ratio is the ratio of aggregate savings to the national income. According to Harrod and Domar every economy must save a percentage of its national income and invest in new investments in order to increase its capital stock, a condition necessary for growth. The basic assumptions of the model are as follows:

1. The model assumes a closed economy without government intervention.
2. It is assumed that for equilibrium to exist planned investments should equal planned savings.
3. The assumption of only two factors of production i.e labour and capital and no technical progress.
4. It assumes the homogeneity of labour which grows at a natural constant rate.
5. The model also assumes a constant return to scale.

The economic reasoning behind the Harrod - Domar Model is that to grow the economy, a nation must save and invest a certain proportion of its GDP and that the more a nation can save and invest the faster the rate of growth of that economy. However the actual rate of growth of an economy for any level of saving and investment will depend on how much additional output they get from an additional unit of investment.

The implication of the Harrod - Domar Model was that the maintenance of the steady state growth, with full employment was unlikely to be accomplished in a free market capitalist economy. The Harrod - Domar Model is described as a knife-edge model because it has no built in stabilizers that tend to move an economy back to a full employment equilibrium rate of growth once it has deviated from it. The Harrod - Domar Model is also criticized for its absolute rigidity of the assumptions upon which the model was built; the growth rate of the labour force is exogenously determined, and hence if the savings ratio and the capital-output ratio are fixed which means they cannot be determined within the system, then the model leaves no room for flexibility.

2.2.3 Pure Altruism Theory

The Pure Altruism theory highlights that migrants remit money back home in concern of the welfare of the remaining family members (Hagen-Zanker & Siegel, 2007:5; OECD, 2006:145). Chami et al. (2003:4) report that in this model, the migrant’s utility is derived from that of his/her family back home. The migrant is rather satisfied when the welfare of his family back home is better off (OECD, 2006:145). This implies that the migrant is motivated to remit more funds to his family when there are unfavourable economic conditions holding in the home country. The theory observes that remittances are “compensatory transfers” since they increase when the migrant’s home country is faced with economic disruptions such as droughts and a financial crisis (Chami et al., 2003:4).

In order for the migrant to remit more funds, the economic disruptions or “bad luck”, a term used by Chami et al. (2003:4), must be creating a shortfall for the remaining family. As a result, the compensatory nature of remittances under the Pure Altruism model implies that remittances are countercyclical, that is, they increase during times when there is deterioration in economic conditions in the business cycle (Vargas-Silva, 2008:292; Chami et al., 2003:4). The Bank of Uganda (2007) emphasises that altruistic remittances can be countercyclical to GDP patterns possibly because migrants tend to remit more during periods of economic disturbances in order for their families in the home country to smoothen their consumption. Also commenting on behavioural patterns of remittances under a Pure Altruism model, Brown (2006:63) suggests that there is an inverse relationship between the volumes of remittances and economic conditions holding in the home country. Under this model, favourable economic conditions in the home country would imply a reduction in the volume of remittance inflows.

2.2.4 Pure Self Interest Theory

The Pure Self Interest theory is modelled around the argument that remittances are not always countercyclical. There are some instances or contexts where volumes of remittances reduce following poor economic conditions in the recipient country. In such a case, there is no inverse relationship between volumes of remittances and the economic performance of the home country as postulated by Brown (2006:63). In fact, there might be a positive correlation between volumes of remittances and economic performance of the home country where bad economic conditions may result in low volumes of remittances. Such behavioural patterns have led to the formulation of the Pure Self Interest theory.

Lucas and Stark (1985:904) claim that migrants’ self-interest can be one other motive for remittances. In this context, migrants remit money in order for them to invest or inherit in assets back home and also for them to return home with dignity .When there is deterioration in economic performance of the home country; migrants are most likely to remit less since the situation will have a negative impact on both investible and inheritable assets. There is most likely to be an increase in the volumes of remittances if the home economy is undergoing a favourable spell.

2.2.5 New Economics of Labor Migration (NELM) Theory

The New Economics of Labor Migration (NELM) Theory associated with the work of Oded Stark (Stark, 1991) is seen as a criticism of the micro version of the Neo-classical theory conceptualizing migration as an individual decision. According to Stark (1991), migration is a tool that households use to maximize income as well as diversify sources of income. By sending a family member away from home to work, a household makes an investment that will be recovered given that the migrant’s remit some income later. They posit that if individuals migrate to increase their own income, as suggested by Hay and Co (1980) in Stark, (1991), then they are not expected to send remittances back home. The NELM theory fits into the Nigerian situation where a household pulls resources together to send one member out of the country with an agreement/unvoiced expectation to remitting back home. This is collaborated by Stark and Lucas (1988) in their argument that there exists an implicit or explicit contractual arrangement between the family and the migrant.

The family angle of migration is also articulated by Taylor (1999). According to him, although individuals migrate, they do not sever ties with their source households. In this case the family seeks to maximize utility instead of the individual. Migration may have significant effects on household economic activities regardless of the theories. Migrant- sending households are often recipients of remittances from migrants. As Taylor et al (2001) indicated, migrants are usually attached to their rural homes and as a result of their “homeward” focus they have economic incentives to promote and enhance the welfare of those left behind. This is possible, through remittances that they send back home to loved ones.

Another point raised by NELM proponents is that wage differential is not a necessary condition for making a decision about migration because international migration does not necessarily stop when differences in wages disappear. The theory indicates that migration stems from market failures outside the labor market. According to NELM theory, missing, inefficient, or poorly functioning markets are conditions necessary for the migration of labor to occur.

A review of some of the works on remittances will help form a base for our discourse in this research. Several theoretical and empirical works such as Köksal (2006); Barua et al (2007); Glystos (1993) amongst others contributed to the global debate on the impact of remittances on a nation’s economy, which if properly directed and channeled has the capacity to grow a nation’s economy.

Köksal (2006) analyzed the determinants and impact of remittances using the Turkish economy as a case study. In addition to confirming the micro and macroeconomic determinants traditionally emphasized in the remittance literature with respect to the Turkish economy. He stressed the financial infrastructure offered to Turkish migrants. Turkish Banks according to him are the most important channels for the transmission of remittances, along with the Central Bank of Turkey; they are the main actors for collecting and placing these funds and have played a crucial role for attracting remittances into the country. The Central Bank of Turkey achieved this by allowing only migrants and Turkish citizens residing abroad to open bank accounts for medium and long term savings accounts from which direct withdrawals are only possible within Turkey, the Central Bank offered higher interest rates than the Turkish commercial banks.

Barua et al (2007) analyzed remittances using two broad approaches to remit; altruism and portfolio (investment). They formulated the remittance-determination model selecting variables according to the objective of the study and in line with the existing literature in this field.

The variables used include Workers’ remittances, Migration stock, Host country economic condition, Home country economic condition, Income differential, Dummy variables, Inflation Differential, Return on financial assets, Exchange rate. The main variable of interest was income differential between host and home country, which they found to be positively correlated with the inflow of remittances to Bangladesh in all the regression results, an indication of altruistic motive to remit. There was no evidence of investment motive to remit in their preliminary model. They found Stock of migrants abroad and exchange rate to be positively significant in most of their regression analysis but found inflation differential (difference of home-host country inflation using consumer price index) to be negatively correlated with the remittances where real interest rate was excluded.

Abeng (2006) reviewed the work of Netapti et al (2005) titled Determinants of Workers’ Remittances: The Case of Turkey. In his review, he indicated that the Turkish economy was similar to that of the Nigerian economy because historically the Turkish economy just like the Nigerian economy in the 1960s was predominantly agricultural before being transformed into an industrialized economy. Based on the existing literature and the economic topography of the country they used a macroeconomic model in the analysis of the determinants of workers remittances, and estimated using official cash remittances, stock of workers abroad, per capita income of Turkey, black market premium, real overvaluation, domestic inflation, and domestic output growth. Other variables included a dummy variable for years of military rule as well as the host country per capita income and interest rate differential of about eleven host countries with the largest stock of Turkish emigrants. The paper employed the Ordinary Least Squares (OLS) technique. Their findings included that higher interest rate in Turkey attracted remittances while political instability significantly discouraged remittance flows. They found that for the

period 1979-1993, macroeconomic variables such as black market premium, interest rate differentials, growth, inflation rate, and period of military rule significantly affected remittance flows. The central thrust of their findings was that a sound exchange rate policy coupled with economic and political stability was key factors in attracting remittance flows.

Aydas et al. (2005) demonstrated that macroeconomic variables have a significant impact on workers’ remittances to Turkey also. Using the black market premium, interest rate differential, inflation rate, growth in home and host country incomes, and periods of military regime. They found these to have significantly affected Turkish remittance flows.

Using co-integration techniques, Bouhga-Hagbe (2004) provided a model on how altruism, “attachment” to the home country, and portfolio diversification may act as potential motives behind workers’ remittances. Their findings show that the impact of workers’ remittances on Morocco’s external position and the conduct of monetary policy were significant. Remittances almost covered the trade deficit and had contributed to surpluses of the external current account, as well as the overall BOP. The study shows that remittance increase with poor economic performances in the home country. Altruism as a motive for remittance according to them, could also contribute positively to the stability of remittances in the long run, also exchange rate through the “substitution” and “wealth” effects could influence the level of remittances.

Another study by Bouhga-Hagbe (2006) investigating “altruism,” as a motive for sending remittance and argue this motive could contribute to the stability of its inflow. Using cointegration techniques, they estimated the long-run relation between remittances and some of their potential determinants for Egypt, Jordan, Morocco, Pakistan, and Tunisia. Their model is specified as follows:

Remittancest= α Agricultural GDP + β Exchange rate + γ Trend + ε (2.2)

Where Remittances denotes remittances by migrants resident abroad; Agricultural GDP stands for real agricultural GDP; Exchange rate is the US$ exchange rate against the local currency; Trend represents time; and ε is a Gaussian error term with zero mean and finite variance. Agricultural real GDP was used as a proxy for “hardship”.

According to Bouhga-Hagbe (2006), real agricultural GDP was used as an indicator of ’hardship’ for a country that receives remittances from migrants resident abroad. In other words, a fall in real agricultural GDP may be interpreted as an increase in ’hardship’ which according to the literature should be a ‘push’ for migration. It is expected that as ‘hardship’ increases indicated by a fall in real agricultural GDP emigration rates would rise. Their results suggest that the statistical model explained the evolution of remittances in the long- run in the five countries, which means the variable “Agricultural GDP” significantly enters the long-run relation and remittances tend to be negatively correlated with agricultural GDP which supports the view that altruism played an important role in workers’ decision to send money .

Adopting the model developed by Bouhga-Hagbe, (2006), Elkhider and co-workers (2008) used the VAR model to investigate the relationship between remittances and other variables (agricultural GDP and exchange rates). Their results showed remittances have no effect on themselves but they have a permanent negative shock on the exchange rate over a period of one to three years and that the exchange rate had a negative effect on remittances, while agricultural GDP had a positive influence. Their results suggest that exchange rate policy (devaluations, changes in parity or the parity premium, etc.) does not have a positive impact on remittances. On the other hand, a change in agricultural GDP resulted in a change in remittances in the same direction. For the short-term trend under the VECM, the exchange rate had a positive effect on remittances. The exchange rate has a provisional or transitory shock effect on itself. It also had a transitory shock effect on remittances and GDP. GDP had a transitory shock effect on itself and remittances and the exchange rate.

Chami, et al, 2006 in a study for the IMF (based on annual panel data) of 87 countries during the period 1980-2003 indicated that while host country GDP has a positive significant impact on remittances, home country GDP, presence of multiple exchange rates and black market premia, restrictions on holding foreign exchange deposits have a statistically negative impact on remittances. Variables like financial development, political risk, law and order, relative investment opportunity were found to be of little significance in influencing inward remittance flows. The study also investigated and found that removal of all exchange rate distortions led remittances to increase by 1-2 percentage points of GDP, implying that policies and regulations have important bearing on the inflow of remittances.

Chami et al (2003) used panel data for the period 1970-1998 to investigate the relationship between workers’ remittances and per capita GDP growth. They estimated using the change in the log of workers remittances to GDP ratio as an independent variable Their panel regressions found remittances to be negatively correlated with growth among a sample of developing and developed economies. To support this result they gave the reason that income from remittances can lead to a moral hazard problem, where the migrant’s family members reduce their work effort and depend on remittances.

Natalia et al, (2006) examined whether the results obtained by Chami et al (2003) suffered from model misspecification, using a dynamic panel regression. Their argument is that contradictory findings have resulted when looking at the remittances-growth link because of an omitted variable bias. Their main argument is that the effect of remittances on growth could work through different channels with institutions being the most important one. They used the logarithm of the Remittances/GDP ratio as the independent variable in all their estimations as well as the control variables of Chami et al (2003).

In order to test the hypothesis that institutions affect the impact of remittances on growth, they interacted remittance variables separately in the regression equation with different indexes of institutional quality in order to ensure that the interaction term does not proxy for remittances or institutions and test the significance of the interacted coefficient. The result of their dynamic panel regressions showed that remittances have positive and statistically significant impact on long-term macroeconomic growth when controlling for endogeneity. They also found that remittances impact tend to increase, the higher the quality of the receiving countries’ policies, institutions, and political environment.

In Nigeria, Ezra and Nwosu (2008) presented a paper on Worker’s Remittances And Economic growth: Evidences From Nigeria. The objectives of this paper was to spur discussions on how the utilization of remittances could lead to economic growth in a developing country, to identify how the correlations of remittances with macroeconomic variables help to illuminate their role in buffering economic shocks: trade shocks, large swings on capital flows, or natural disasters and encourage policies that will favour remittance inflow into the country through official channels for proper documentation.

They also conducted a test for endogeneity of some of the chosen variables in the model using a two-stage Least Squares Instrumental Variable [2SLSIV] approach. They found that remittances have a significant impact on economic growth in Nigeria through investment in private and human capital, with a pass-through effect on private consumption. Also remittances have the capacity to reduce poverty through a multiplier effect.

In another work by Chukwuma Agu (2009), the relationship between remittance flows and the rest of the economy was investigated using a four-sector medium scale macro model with 49 variables comprising 18 endogenous variables, 31 exogenous variables and 14 identities. The study found very weak link between remittances, the real sector and components of aggregate demand except private consumption which showed marginal significance. His results show significant leakages for remittance proceeds through imports and that non-subsistent remittances are channeled into the stock market. As a result of his findings he recommends that using specific policies, the weak relationship between remittances and the rest of the domestic economy (domestic output and employment) could be strengthened to bring about growth.

Mbutor (2010) employed the vector autoregressive (VAR) methodology with two stage deductions. His findings showed that a one unit innovation on the policy rate does not have an immediate impact on all the intervening variables. In the second period, GDP stays unchanged: aggregate prices rise by 2.2%; deposit rates decline marginally; while exchange rate appreciates by 1.4%. This results show that the prosperity of the domestic economy increases remittances to Nigeria; while exchange rate depreciation depresses remittances.

Oke (2008) uses survey data on Remittance and the Socio-Economic Conditions of Nigerian Migrants in the Netherlands. Some of the findings include that the degree of integration into host country matters for Nigerian migrants to settle and send remittance home. Secondly, his work proved the countercyclical nature of remittances in that the migrants and confirmed that the probability to remit is not dominated by income. The work indicated that most of the Nigerian migrants migrated on their own against the household theories of migration to escape socio-economic hardship and to better their life. However their major aim for coming might also be connected with remittance according to migration theory. His work also confirmed that migrants face many problems of settling down when they first come to Europe.

Ojapinwa and Odekunle (2013) investigated workers’ remittance and their effect on the level of investment in Nigeria. They studied one of the links between remittances and fixed capital formation, in particular, how local financial sector development influences a country’s capacity to take advantage of remittances. Using time series data for the period 1977-2010, the study employed the ADF and Philip-Perron modified unit root tests and based its analysis on a Dynamic Ordinary Least Squares- two-stage Instrumental Variable [2SIV] approach to control for the endogeneity problem that arises from utilization of lag independent variables. They found out that remittances boost stock of physical investment in Nigeria with positive relationship with developed financial systems by providing complementarities to finance investment in a developed financial system. Substantial government allocation on social services is equally important in accelerating capital formation. The findings of this study strongly suggest that for Nigeria to benefit from international transfers, Nigeria financial sector should be fine-tuned to complement remittances potential capital formation.

2.3 Implication of the Review for the Current Study

The literature review on the relationship between remittances and economic growth is not conclusive in answering the research question about the impact of remittances on economic growth. The literature has helped in identifying the motivations for remittances and has also been significant in highlighting the growth effects of other external sources of capital. This comes as a result of the conflicting theoretical and literature on how remittances impact economic growth of recipient countries. While migration optimists perceive that remittances have a positive effect on economic growth through increased physical capital and human capital investments, migration pessimists share a different perspective. They argue that remittances have a negative impact on economic growth due to increased consumption which has inflationary effects and moral hazards that result in reduced labour supply and falling enrolment in education. Even the available empirical evidence is highly conflicted, some studies conclude on positive growth effects of remittances (Fayissa & Nsiah, 2010a; Fayissa & Nsiah, 2010b; Pradhan et al., 2008), some on negative growth effects of remittances (Singh et al., 2010; Chami et al., 2003) while some maintain that remittances have no impact on economic growth (Barajas et al., 2009; Rao & Hassan, 2011).

There is need for further empirical research on this subject. Examination of the role of remittances in economies still faces a challenge of the quality and coverage of data in several countries. There is no universal agreement on how to measure the impact of remittances to developing countries. These data limitations are attributed to informal means of channelling remittances to migrant sending countries and improper procedure of capturing remittance statistics.

CHAPTER THREE THEORETICAL FRAMEWORK AND METHODOLOGY

3.1 Theoretical Framework

The underlying theory of this research is motivated by a Standard Growth Model where worker remittances, Foreign Direct Investment (FDI) and Official Development Assistance (ODA) are all introduced as determinants of investment. Every capital flow encourages the investment that leads to economic growth, whereas investment itself is aggregate of private and public investment (Awolusi, 2012). Private investment is composed by FDI, Remittance and gross capital formulation.

3.2 Methodology

Microsoft Excel spreadsheet was used to plot the time series of the concerned variables which are Real Gross Domestic Product (GDP), Official Remittances (REM), Gross Fixed Capital Formation (GCF), Official Development Assistance (ODA), Foreign Aid (AID), Foreign Direct Investment (FDI) and Exchange Rate (EXR) in other to achieve the first objective of this study. Ordinary Least Squares using E-Views was employed to analyze the relationship between the dependent variable Real Gross Domestic Product (GDP) and independent variables Official Remittances (REM), Gross Fixed Capital Formation (GCF), Official Development Assistance (ODA), Foreign Aid (AID), Foreign Direct Investment (FDI) and Exchange Rate (EXR). The period covered by this study is 1996 to 2015. The statistical formulation of the model can therefore be presented as follows:

3.2.1 Model Specification

Awolusi (2012) specified a model on Foreign Direct Investment and economic growth in Nigeria using the variables specified thus;

GDP_t= f ( ODA , FDI, Rem, Trade)

Where

ODA is Official Development Assistance

FDI is Foreign Direct Investment

Rem is Remittances and the share of remittances devoted to private investment.

FDI and remittances generate growth via external private sources.

However, this work modifies Awolusi’s model and specifies impact of remittance on economic growth as follows;

GDP = REM + GCF + AID + ODA + FDI + EXR + ε…... ..(1)

where:

GDP is real GDP

REM is official remittances

GCF is gross fixed capital formation

ODA is official development assistance

AID is foreign aid

FDI is foreign direct investment

EXR is the exchange rate

Trend represents time

ε is a Gaussian error term

Furthermore,

GDPt = β0 + β1REMt + β2GCFt + β3AIDt + β4ODAt + β5FDIt +β6EXR +

εt….. (2)

LogGDPt = β0 + β1LogREMt + β2LogGCFt + β3LogAIDt + β4LogODAt + β5LogFDIt +

β6LogEXRt + εt... ..(3)

The a prior expectations are β0 > 0, β1 > 0, β2 > 0, β3 > 0, β4 > 0, β5 > 0, β6 < 0

Logarithmic form will be used for the data. This transformation is to reduce the problem of heteroscedasticity, as log transformation compresses the scale in which the variables are measured (Gujarati, 2004).

3.2.2 Estimation Techniques

3.2.2.1 Testing for Stationarity Property

Analyzing the time series properties or stationary properties of the variables is imperative, and the application of Ordinary Least Square (OLS) techniques with nonstationary variables can provide spurious outcomes. Thus, before further estimation of the variables, it is necessary to investigate stationarity using Unit Root Test.

3.2.2.2 Cointegration Test

The econometric methodology first examines the stationarity properties of the time series. Augmented Dickey-Fuller (ADF) test will be used for detecting a unit root in remittances and economic growth in our analysis. ADF will be performed to identify the integrated order of the variables.

Time series should be checked for cointegration. For two or more variables to be cointegrated, the time series must have similar statistical properties i.e., they must be integrated of the same order. The Engle-Granger two step method (Engle and Granger, 1987) is used for this purpose. The order of integration of the variables is identified in the first step while in the second step the residuals are estimated from the Ordinary Least Squares (OLS) regression on the levels of the variables.

3.2.2.3 Error Correction Mechanism (ECM)

According to Engle representation theorem if there is some co-integration then there must be an Error Correction Mechanism (ECM). Hence, after determining the integrated order of the variables the first step is to run the regression on the levels. From this regression residual can be retrieved and can be tested for the integrated order. And if is less than the order of variables then there exist a long run relationship and using the one period lag of the residual the short run model can be estimated along with Error correction mechanism. The ECM is internally consistent if the two time series variables are cointegrated in the same order or if they are stationary (Greene, 2003).

3.2.3 Sources and Measurement of Data

The data for the study are secondary data. Data will be collected from the most accurate and comprehensive remittances data available from the Central Bank of Nigeria (CBN) and World Development Index (WDI). Other data will be sourced from Central Bank of Nigeria (CBN), Statistical Bulletin, 2016 and National Bureau of Statistics as well as relevant websites.

CHAPTER FOUR PRESENTATION AND ANALYSIS OF RESULTS

4.1 Presentation of Results

Following the earlier chapters on the background of study, review of literature and presentation of the research methodology, this chapter focuses on the presentation of the empirical results and analysis. Under this section, an empirical analysis of the models presented in the previous chapter is conducted; the results will be interpreted and explained accordingly. This chapter, thus, consists of preface, presentation, analysis and discussion of results of the study. It also seeks to examine the empirical evidence of the impact of official remittances on economic growth in Nigeria. In this chapter the result if the data collected during the process of carrying out the research work will be presented and analysed accordingly. The period covered by this study spanned from 1996 to 2015.

4.1.1 Descriptive Statistics

Table 1: Data Distribution

Abbildung in dieser Leseprobe nicht enthalten

The result shows that all the average values for all the variables were positive. However, the mean value of Exchange Rate which is 118.8379 units was the highest for the period and this is closely followed by the mean value of LAID with an average value of 94.46163 units.

The maximum and minimum values indicate the highest points and lowest points of the variables throughout the study period. The highest value for Gross Domestic Product during the period under study was 31.87638 units and this occurred in the year 2015; this was as a result of re-basing of our gross domestic product from using base prices of 1990 to 2010 base prices which led to an affirmation of the recent rapid rise in the gross domestic product of the country in last decade.

Variability measured by standard deviation indicates that foreign aid had the highest variability of 69.31180 units while the second variable that followed was exchange rate with a standard deviation of 47.54548. Gross Domestic Product was the least varied at 0.433557.

The values of all the variables, confirms that they are positively skewed away from the normal distribution except from Exchange Rate, LGDP and LREM that were negatively skewed away from the normal distribution The values of LGDP, LREM, LGCF, LAID and LFDI which are below the kurtosis of 3, the normal distribution point indicates that the variables are platykurtic while LODA and Exchange Rate were above the kurtosis of 3, the normal distribution, indicates that the variables are leptokurtic.

The Jarque-Bera probability of 0.000000 for LODA which is less than the 5% level of significance (P < 0.05), further reveals a statistically significant deviation of the variable from normality and it also means that it is normally distributed

4.1.2 Trend Analysis of Independent Variables

In order to achieve the first objective which is to determine the trend of remittance and economic growth in Nigeria over the period, the time series under study will be plotted. This helps to identify the presence of any trend behaviour in the variables in question over time. The figures in this section show the trend of official remittance and economic growth in Nigeria over the study period from 1996-2015

Fig. 1: Official Remittances

Abbildung in dieser Leseprobe nicht enthalten

Source: Author ’ s Computaion (2017).

Fig 1 shows the trend of the remittance in Nigerian economy from 1996-2015. The remittance received in Nigeria rises from initial to 1997, where it starts to fall till 2003. This fall can be attributed to a change in system of government and the introduction of better means of communication, anti-corruption bodies (EFCC and ICPC) to tackle corruption, raising of minimum wage to N7500, increase in power sector generation capacity from anout 2,500MW to 4000MW in 2003, all these made Per Capita Income to increase from $31,553.6 in 1997 to $41,838.5. This increase asserts that there was a significant rise in the standard of living during, hence the fall in official remittance during the period. From 2004 takes an upward spike until 2008, this supports the revelation that Nigerians abroad grew the economy by a whooping $7 billion during the period and that Nigeria was the sixth highest destination of remittances from citizens living in the diaspora. There was a slight fall from 2008 to 2009 due to the global financial crises of 2008 which was caused by the banks inability to reclaim credit extended, and thereafter, it rises till 2015.

Fig 2: Gross Fixed Capital Formation

Abbildung in dieser Leseprobe nicht enthalten

Source: Author ’ s Computaion (2017).

Fig 2 shows the trend pattern of the Gross Fixed Capital Formation in the Nigerian economy from 1996-2015. A close observation of the trend shows that gross fixed capital formation maintained significant fluctuations all through the period covered by the study. The Gross Fixed Capital Formation in Nigeria rises steadily from initial to mid 2003 and falls from 2004 to 2005 due to the stock market crises of 2004 and the banking reforms of 2005. From then, it rises and falls interchangingly till the year 2013 where it rises till 2015 which was due to the successful democratic transition that assured investors of stability in system of government.

Fig 3: Official Development Assitance

Abbildung in dieser Leseprobe nicht enthalten

Source: Author ’ s Computaion (2017).

Fig 3 shows the trend of the official development assistance in the Nigerian economy from 1996-2015. The official development assistance received in Nigeria rises from initial to 2006 and falls sharply from then till 2008 where it start rising continuously till 2015. The all time high of 104.44 billion is attributed partly to the Paris Club writing off of 60% of the debt owed by Nigeria which was valued at $18 billion and the recovery of looted funds during the military era which were treated as development assistance.

Fig 4: Foreign Aid

Abbildung in dieser Leseprobe nicht enthalten

Source: Author ’ s Computaion (2017).

Fig 4 shows the trend pattern of foreign aid in the Nigerian economy from 1996- 2015. A close observation of the trend shows that foreign aid maintained significant fluctuations all through the period covered by the study. Furthermore, it is obvious that between the period of 1996 to 1999 foreign aid inflow sustained a minimum fluctuation with the most outstanding growth observed within the periods 2008 (N179.01 billion) and 2010 (N224.2 billion). A significant decline in foreign aid is seen in 2008 due to the financial economic meltdown.

Fig 5: Gross Domestic Product

Abbildung in dieser Leseprobe nicht enthalten

Source: Author ’ s Computaion (2017).

Fig 5 shows the trend of the Economic growth captured by GDP in the Nigerian economy from 1996-2015. The Economic growth in Nigeria falls from initial to 1998, where it starts rising till 2003 due to a change in government from military rule to civilian. GDP growth rate during this period rose by 5% (2% in 1998 to 7% in 2003) due to the introduction of internet, GSM, rising of minimum wage to N7500, increase in power sector generation capacity from 2500MW in 1998 to 4000MW in 2003. The introduction of anti- corruption bodies EFCC and ICPC also helped to reduce corruption and strengthen GDP during the period. From 2004 it falls and rises interchangingly till 2012 this is due to changes in government and implementation of different policies. It rises continuously from 2013 till 2015 due to the rebasing of Nigeria’s GDP in 2014 from a 1990 base year to 2010 which placed GDP at N80.2 trillion making Nigeria the largest economy in Africa.

Fig 6: Exchange Rate

Abbildung in dieser Leseprobe nicht enthalten

Source: Author ’ s Computaion (2017).

Fig 6 shows the trend of the Exchange Rate to dollars in the Nigerian economy from 1996- 2015. The Exchange Rate in Nigeria was constant from 1996 till 1999 due to President Sani Abacha’s fixing of the naira at N22 to $1 from 1993 when he assumed office to 1998 when he died, then exchange rate rose sharply from then till 2004 due to the Interbank Foreign Exchange Market (IFEM) introduced by the then CBN governor Joseph Sanusi. This rise was due to severely depleted reserves by the military, low oil prices and struggle to service it’s $33 billion foreign debt which was eating up valuable foreign exchange. Between the period of 2004 to 2009, a fall in the trend of exchange rate is noticed, this is because of the rise of oil prices during the period from $30 per barrel to $140 per barrel in 2008 and Nigeria also obtained a debt relief of $18 billion from the Paris Club. A continuous rise is also noticed from 2009 to 2015, this is attributed to a 60% drop in oil prices which reduced Nigeria’s revenue by almost 81% in the period

4.1.3 Unit Root Test

Table 2: Stationarity Test Using Augmented Dickey-Fuller(ADF) Unit Root test

Abbildung in dieser Leseprobe nicht enthalten

Source: Author ’ s Computaion (2017).

The above table reveals that Real Gross Domestic Product (LGDP), Foreign Aid (LAID), Official Development Assistance (LODA) and Exchange rate all have their time series to be stationary at first difference while Official Remittances (LREM), Gross Fixed Capital Formation (LGCF) and Foreign Direct Investment (LFDI) all have their time series to be stationary at second difference.

4.1.4 Ordinary Least Squares

Table 3

Abbildung in dieser Leseprobe nicht enthalten

Source: Author ’ s Computaion (2017).

From the above result, we can write our long run equation as follows:

LGDP = 20.5646 + 0.1777LREM + 0.2224LGCF - 0.0003LAID - 0.001LODA -

0.0084LFDI + 0.0025EXR

4.1.5 Discussion of Results vis a vis Apriori Expectation of Variables

Official Remittance (LREM): From the findings, there is a positive relationship between official remittance and economic growth captured by gross domestic product. The coefficient of official remittance is 0.177719 which implies that a percentage change in official remittance will change gross domestic product by 0.2 percent.

Gross Fixed Capital Formation (LGCF): From the findings, there is a positive relationship between gross fixed capital formation and economic growth captured by gross domestic product. The coefficient of gross fixed capital formation is 0.222386 which implies that a percentage change in gross fixed capital formation will change gross domestic product by 0.2 percent.

Foreign Aid (LAID): From the findings, there is a negative relationship between foreign aid and economic growth captured by gross domestic product. The coefficient of foreign aid is -0.000278 which implies that a percentage change in foreign aid will change gross domestic product by -0.0003 percent.

Official Development Assistance (LODA): From the findings, there is a negative relationship between official development assistance and economic growth captured by gross domestic product. The coefficient of official development assistance is -0.000994 which implies that a percentage change in official development assistance will change gross domestic product by -0.001 percent.

Foreign Direct Investment (LFDI): From the findings, there is a negative relationship between foreign direct investment and economic growth captured by gross domestic product. The coefficient of foreign direct investment is -0.008409 which implies that a percentage change in foreign direct investment will change gross domestic product by - 0.01 percent.

Exchange Rate (EXR): From the findings, there is a positive relationship between exchange rate and economic growth captured by gross domestic product. The coefficient of exchange rate is 0.002531 which implies that a unit change in exchange rate will change gross domestic product by 0.003.

The high R- squared is suggestive of the fact that 97.6% of the total variations in Gross Domestic Product can be attributed majorly to the explanatory variables. Adjusted R-squared is 96.6% which is still very high after adjusting the system degree of freedom.

F-statistic reads 89.89592 with a p-value of 0.00000, the F-statistic is significant which implies that the dependent variable is appropriately explained by the independent variables. Also, the Durbin Watson Statistic is 1.77 which shows the model is not serially correlated (No Auto-Correlation).

4.1.6 Error Correction Model (ECM)

Since the variables are co-integrated, we computed our Error Correction Model, and the result obtained are presented below:

Table 4: Error correction model estimates

Dependent Variable: D(LGDP)

Abbildung in dieser Leseprobe nicht enthalten

Source: Author ’ s Computaion (2017).

Table 4.5 above shows the estimation results of the Error Correction Model (ECM). A cursory look at each of the coefficient of the explanatory variables reveals that the coefficient of the official remittance is positive and significant. This conforms with a priori expectation.

The results of gross capital formation, foreign aid and official development assistance positively affect gross domestic product. Gross capital formation, foreign aid and official development assistance are positively insignificant at 5% level indicating that increase in gross capital formation, foreign aid and official development assistance increases gross domestic product. Also, foreign direct investment and exchange rate negatively affects gross domestic product but foreign direct investment has an insignificant impact on gross domestic product, while exchange rate has a significant impact on gross domestic product. The table shows that the coefficient of ECM is significant with the appropriate negative sign. This shows that the speed of adjustment to long run equilibrium is 8.75% when any past deviation will be corrected in the present period. This implies that the speed of adjustment is very low.

1.1 4.2 Discussion of Results

The error correction model employed in this study is used to estimate the impact of remittance on economic growth in Nigeria. The proxy used for economic growth is gross domestic product. Official remittance indicates a positive and significant impact on economic growth which is measured by gross domestic product.

Official Remittance (LREM): From the findings, there is a positive relationship between official remittance and economic growth captured by gross domestic product. The coefficient of official remittance is 0.050360 which implies that a percentage change in official remittance will change gross domestic product by 0.1 percent.

Gross Fixed Capital Formation (LGCF): From the findings, there is a positive relationship between gross fixed capital formation and economic growth captured by gross domestic product. The coefficient of gross fixed capital formation is 0.110019 which implies that a percentage change in gross fixed capital formation will change gross domestic product by 0.1 percent.

Foreign Aid (LAID): From the findings, there is a positive relationship between foreign aid and economic growth captured by gross domestic product. The coefficient of foreign aid is 0.177719 which implies that a percentage change in official remittance will change gross domestic product by 0.2 percent.

Official Development Assistance (LODA): From the findings, there is a positive relationship between official development assistance and economic growth captured by gross domestic product. The coefficient of official development assistance is 0.000596 which implies that a percentage change in official development assistance will change gross domestic product by 0.001 percent.

Foreign Direct Investment (LFDI): From the findings, there is a negative relationship between foreign direct investment and economic growth captured by gross domestic product. The coefficient of foreign direct investment is -0.005434 which implies that a percentage change in foreign direct investment will change gross domestic product by - 0.001 percent.

Exchange Rate (EXR): From the findings, there is a negative relationship between exchange rate and economic growth captured by gross domestic product. The coefficient of exchange rate is -0.001953 which implies that a unit change in exchange rate will change gross domestic product by -0.002.

The value of R² indicates that about 33.5% of the variation in gross domestic product is due to variations in the independent variables. The overall model significance is checked relying on the F-statistic and p value which show that the variables are jointly significant at 1% level of significance. The significance of the F-Statistic implies that the dependent variable is appropriately explained by the independent variables. The Durbin- Watson statistic gave a result of 1.70 which is indicative of near absence of autocorrelation between any of the variables.

4.3 Comparison of Results with Previous Findings

The variables of interest for this study are economic growth measured by gross domestic product, official remittance, gross fixed capital formation, foreign aid, official development assistance, foreign direct investment and exchange rate. Based on the analysis of the data gathered, official remittance has appositive and significant impact on economic growth while foreign direct investment and exchange rate are negatively but insignificantly and negatively but significantly related to economic growth respectively. This result corresponds with the findings of Ojapinwa and Odekunle (2013) in a study where they investigated workers remittance and their effect on level of investment in Nigeria. Time series data was adopted for the period 1977 to 2010, they also employed the ADF and Phillip-Perron modified unit root test and based the analysis on dynamic ordinary least squares-two-stage instrumental variable approach. The result suggested that remittance boost stock of physical investment in Nigeria with a positive relationship with developed financial system.

Also in a study carried out by O.R. Iheke (2012) on the effect of remittances on the Nigerian economy. Trend and regression analysis were carried out for the period1980 to 2008. In the study, remittance was significant at 1 percent and also positively related to the economy’s output captured by real GDP per capita, this is in line with the findings in this study which also established a positive and significant relationship between remittance and economic growth. O.R Iheke’s (2012) study also revealed a positive and significant relationship between gross fixed capital formation and economic growth, which also is in line with the findings in this study. O.R. Iheke was able to provide empirical evidence that international remittance inflows are one of the major macro economic factors that significantly promotes economic growth in Nigeria. He further suggested that Nigeria needs to provide a friendly economic environment through sound macro-economic policies, including stable exchange rates, basic physical infrastructures, transparent legal system and good governance so Nigeria can benefit from this external stimulus called remittance, which should be used as development capital.

Similarly, in a stud carried out by Oshota and Badejo (2015) where they investigated the relationship between remittances and economic growth. An error correction modeling approach was used for the period which spanned from 1981 to 2011. They also employed the ADF and Phillip-Perron modified unit root test and based the analysis on dynamic ordinary least squares-two-stage instrumental variable approach. Similar variables were used in the modeling, their test for stationarity which revealed that gross fixed capital formation and foreign direct investment were stationary at first difference is very much in line with the findings in this study. However, they found out that remittances show a significant negative relationship with economic growth with is in contrast with the findings in this study. They found foreign direct investment and economic growth have an insignificant negative relationship which is also in line with the findings in this study. They suggested that Nigeria can sustain economic growth by strategically harnessing the contribution of remittances by ensuring efficient and reliable transfers, noting that remittance should not be seen as a substitute for a sustained and domestically engineered endeavor such as the development of infrastructure investments and openness to trade for curing problems of the country.

Therefore, the results of this research are in line with previous findings of past studies conducted on the similar variables albeit using different methodologies and varied data intermediaries.

CHAPTER FIVE SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of Findings

This study investigated the impact of remittance on economic growth in the Nigerian economy. The objectives were to examine the trend of remittance and economic growth over the period and also, to determine the impact of remittance on economic growth in Nigeria.

The study was based on annual secondary data which were collected from the World Development Indicators (WDI) 2016 of the World Bank, Central Bank of Nigeria (CBN) Statistical Bulletin. Ordinary Least Square Method was adopted in analyzing the data collected using Econometrics Views (E-views) as the tool. Estimation technique further encompasses unit root test, Durbin Watson statistics, coefficient of determination (R² ), student t-test, f-test (Anova) and adjusted coefficient of determination.

The analysis of the regression result shows that there exists a positive and significant effect between each of official remittances, gross fixed capital formation, exchange rate and economic growth, while foreign aid, official development assistance and foreign direct investment each had a negative and insignificant effect with economic growth.

5.2 Conclusion

Considering the findings from this study, it is evident that remittance has a positive impact on economic growth in Nigeria. The Ordinary Least Square estimates show that remittances positively impact the economic growth in Nigeria bringing to light that a 1 percent increase in official remittances will lead to a 0.2 percent increase in economic growth.

5.3 Recommendations

Sequel to the findings and careful investigation of the impact of remittances on economic growth in Nigeria, it is therefore pertinent to make the following policy recommendations to the Nigerian government and all the agencies in charge of economic growth in Nigeria, that;

1. Inflow of remittances should be increased by taking steps to develop the financial sector. Efficient and competitive financial sector will reduce the cost associated with the inflow of remittances, which will in return cause an increase in remittances.
2. Government should improve relation with foreign countries so as to reduce barriers of migration and more citizens can work abroad and send remittances back home.
3. Technical institutions should be established to train labour and send skilled labour to foreign countries rather than unskilled labour so that more foreign currency will flow into the economy.
4. Tax rate for transactions should be decreased so people will send money through appropriate channels which will give an account of actual data on remittances which can help policy makers make better policies as regards remittance inflows.

5.4 Suggestion for Further Studies

Although the stated objectives in this study have been addressed, there are still important areas for further research concerning the impact of remittances on economic growth in Nigeria. Other areas suggested for further studies include;

- Remittance as a source of capital for development
- Impact of remittance fees on remittance flows
- Impact of remittance on poverty reduction in developing countries
- Impact of remittance flows on food security in developing countries.

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APPENDIX

Null Hypothesis: D(LREM,2) has a unit root Exogenous: Constant, Linear Trend Lag Length: 0 (Automatic - based on SIC, maxlag=4)

Abbildung in dieser Leseprobe nicht enthalten

*MacKinnon (1996) one-sided p-values.

Warning: Probabilities and critical values calculated for 20 observations and may not be accurate for a sample size of 17

Augmented Dickey-Fuller Test Equation Dependent Variable: D(LREM,3) Method: Least Squares

Date: 08/01/17 Time: 20:23 Sample (adjusted): 1999 2015

Included observations: 17 after adjustments

Abbildung in dieser Leseprobe nicht enthalten

Null Hypothesis: D(LGCF,2) has a unit root Exogenous: Constant, Linear Trend

Lag Length: 1 (Automatic - based on SIC, maxlag=4)

Abbildung in dieser Leseprobe nicht enthalten

*MacKinnon (1996) one-sided p-values.

Warning: Probabilities and critical values calculated for 20 observations and may not be accurate for a sample size of 16

Augmented Dickey-Fuller Test Equation Dependent Variable: D(LGCF,3) Method: Least Squares

Date: 08/01/17 Time: 20:24 Sample (adjusted): 2000 2015

Included observations: 16 after adjustments

Abbildung in dieser Leseprobe nicht enthalten

Null Hypothesis: D(LAID) has a unit root Exogenous: Constant, Linear Trend

Lag Length: 0 (Automatic - based on SIC, maxlag=4)

Abbildung in dieser Leseprobe nicht enthalten

*MacKinnon (1996) one-sided p-values.

Warning: Probabilities and critical values calculated for 20 observations and may not be accurate for a sample size of 18

Augmented Dickey-Fuller Test Equation Dependent Variable: D(LAID,2) Method: Least Squares

Date: 08/01/17 Time: 20:25 Sample (adjusted): 1998 2015

Included observations: 18 after adjustments

Abbildung in dieser Leseprobe nicht enthalten

Null Hypothesis: D(LODA) has a unit root Exogenous: Constant, Linear Trend

Lag Length: 1 (Automatic - based on SIC, maxlag=4)

Abbildung in dieser Leseprobe nicht enthalten

*MacKinnon (1996) one-sided p-values.

Warning: Probabilities and critical values calculated for 20 observations and may not be accurate for a sample size of 17

Augmented Dickey-Fuller Test Equation Dependent Variable: D(LODA,2) Method: Least Squares

Date: 08/01/17 Time: 20:27 Sample (adjusted): 1999 2015

Included observations: 17 after adjustments

Abbildung in dieser Leseprobe nicht enthalten

Null Hypothesis: D(LFDI,2) has a unit root Exogenous: Constant, Linear Trend

Lag Length: 2 (Automatic - based on SIC, maxlag=4)

Abbildung in dieser Leseprobe nicht enthalten

*MacKinnon (1996) one-sided p-values.

Warning: Probabilities and critical values calculated for 20 observations and may not be accurate for a sample size of 15

Augmented Dickey-Fuller Test Equation Dependent Variable: D(LFDI,3) Method: Least Squares Date: 08/01/17 Time: 20:28 Sample (adjusted): 2001 2015

Included observations: 15 after adjustments

Abbildung in dieser Leseprobe nicht enthalten

Null Hypothesis: D(EXR) has a unit root Exogenous: Constant, Linear Trend

Lag Length: 0 (Automatic - based on SIC, maxlag=4)

Abbildung in dieser Leseprobe nicht enthalten

*MacKinnon (1996) one-sided p-values.

Warning: Probabilities and critical values calculated for 20 observations and may not be accurate for a sample size of 18

Augmented Dickey-Fuller Test Equation Dependent Variable: D(EXR,2) Method: Least Squares Date: 08/01/17 Time: 20:29 Sample (adjusted): 1998 2015

Included observations: 18 after adjustments

Abbildung in dieser Leseprobe nicht enthalten

Co Integration Test

Null Hypothesis: ECM has a unit root Exogenous: Constant, Linear Trend

Lag Length: 0 (Automatic - based on SIC, maxlag=3)

Abbildung in dieser Leseprobe nicht enthalten

*MacKinnon (1996) one-sided p-values.

Warning: Probabilities and critical values calculated for 20 observations and may not be accurate for a sample size of 16

Augmented Dickey-Fuller Test Equation Dependent Variable: D(ECM)

Method: Least Squares

Date: 08/01/17 Time: 19:39 Sample (adjusted): 2000 2015

Included observations: 16 after adjustments

Abbildung in dieser Leseprobe nicht enthalten