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SAVINGS AND FOREIGN EXCHANGE GAPS AND INDUSTRIALISATION IN NIGERIA

SAVINGS AND FOREIGN EXCHANGE GAPS AND INDUSTRIALISATION IN NIGERIA

 

Abstract: The progress of industrialization should be influenced by the level of savings and investment and should reflect on trade and influence the level of balance of payments. This paper examines the twin deficits, i.e., savings and foreign exchange gaps and their relationship with manufacturing output between 1981 and 2015. Hinged on the two-gap model, the study models the relationship within the vector autoregressive (VAR) model in evaluating the effect of these gaps on industrialization in Nigeria. Also, exploratory data analysis is used to assess the extent of disparities between savings-investment and exports-imports in Nigeria. The results reveal that both gaps are binding on the Nigerian economy. The effect of the foreign exchange gap is seen to be a stronger constraint on the manufacturing sector than the savings gap. Also, it is clear that foreign capital inflows have been high enough in the period to cover for the deficits, but the effect is still not satisfactory on industrial development. The study recommends an improvement on industrial policy for Nigeria in ways that seek to deliberately improve on domestic savings, strengthen the linkages of savings and investments, as well as organise foreign capital flows to deliberately support non-oil industrialization in Nigeria as a matter of urgency.

JEL Classification: E21, E22, F35, O14, F31

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