MODERATING EFFECT OF LOCAL RAW MATERIALS ON THE RELATIONSHIP BETWEEN INTEREST RATE AND MANUFACTURING OUTPUT IN NIGERIA (1981–2024)
Keywords:
Interest Rate, Local raw materials, Manufacturing output, NigeriaAbstract
The manufacturing sector in Nigeria has persistently underperformed despite its recognized potential as a driver of economic growth, with the sector contributing only 9.7% to GDP in 2024 substantially below comparable African economies. While high interest rates have been identified as a major constraint on manufacturing output, existing empirical studies have yielded mixed findings and overlooked the potential buffering role of local raw material utilization. This study investigated the moderating effect of local raw materials on the relationship between interest rate and manufacturing output in Nigeria from 1981 to 2024. Grounded in the Structuralist Theory of Development and the Resource-Based View of the firm, the study employs the Autoregressive Distributed Lag (ARDL) approach to analyze annual time-series data sourced from the Central Bank of Nigeria, National Bureau of Statistics, and World Bank. The findings reveal that interest rate exerts a negative and significant effect on manufacturing output in both the short run (-24.00) and long run (-64.24), confirming that higher borrowing costs suppress industrial production. However, local raw material utilization demonstrates a positive direct effect (2.85 short-run; 7.64 long-run) and significantly moderates the interest rate-output relationship, as evidenced by the positive and significant interaction term (0.36 short-run; 0.97 long-run). The error correction coefficient (-0.37) indicates that 37% of short-run disequilibrium is corrected annually, with full equilibrium achieved in approximately 2 years and 7 months. The model exhibits strong explanatory power (R²=0.91), with diagnostic tests confirming robustness. The study concludes that strategic utilization of local raw materials buffers manufacturing firms against interest rate shocks by reducing foreign exchange exposure and import financing costs. Policy recommendations include implementing differentiated interest rate frameworks and establishing transition incentive programmes to accelerate local raw material integration.
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