Vol.9 Issue.

1 2024

The effect of remittances on economic growth of Nigeria

Eberechi Bernadine Ikwuagwu

Ph.D., Department of Banking and Finance, Michael Okpara University of Agriculture, Umudike, Abia State, Nigeria
ORCID ID: https://orcid.org/0000-0002-7199-7851
Email: ikwuagwu.eberechi@mouau.edu.ng

Kingsley Onyekachi Onyele

Ph.D., Department of Banking and Finance, Rhema University Nigeria, Aba, Abia State
ORCID ID: https://orcid.org/0000-0002-4731-6139
Email: kingsleyonyele@rhemauniversity.edu.ng

Charity Onyekachi Onyele

Directorate of Internal Audit, Michael Okpara University of Agriculture, Umudike, Abia State, Nigeria
ORCID ID: https://orcid.org/0000-0002-8086-1921
Email: onyele.kingsley@mouau.edu.ng

DOI: https://doi.org/10.19275/RSEP180

Article Type: Original/Research Paper

Article History
Received: 5 January 2024 Revised: 16 May 2024 Accepted: 5 June 2024 Available Online: 30 June 2024

Keywords: Remittances, Economic Growth, Nigeria, ARDL

JEL classification: C3, 01, F3

Citation: Ikwuakwu, E.B., Onyele, K.O., Onyele, C.O. (2024). The effect of remittances on economic growth of Nigeria, Review of Socio-
Economic Perspectives, 9(1), 121-134.

Copyright © The Author(s) 2024 This is an Open Access article distributed under the terms of the Creative Commons Attribution License
(https://creativecommons. org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, provided the
original work is properly cited.

Abstract
This study is conducted to investigate the impact of foreign remittances on economic growth of Nigeria using annual time
series data from 1981–2019. The data used for the study were collated from the World Development Indicators of the World
Bank. Economic growth was measured by real gross domestic product (RGDP) of Nigeria. In order to explore the effect of
remittances on economic growth, multiple regression analysis based on the Autoregressive Distributed Lag (ARDL) model
was utilized. From the ARDL bounds test, it was found that remittances and economic growth was bound by a long-run
relationship. The long-run and short-run estimates showed that remittances had a negative and significant effect on economic
growth in Nigeria after controlling for FDI, gross fixed capital formation, inflation and exchange rate. The study also
revealed that FDI and gross fixed capital formation had a positive and significant effect on economic growth while inflation
and exchange rate had a negative and significant effect on economic growth in the long-run. In the short-run, amidst negative
and significant effect of remittances, FDI had a positive and significant effect on economic growth while gross fixed capital
formation and inflation were found positive but insignificant and exchange rate having a negative and significant effect on
economic growth of Nigeria. So, it was concluded that the effect of remittances is, though negative but significant in
explaining the changes in economic growth of Nigeria.

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1. Introduction
In recent years, remittances have been one of the largest sources of international capital inflows to developing
economies as they account for approximately 27 percent of the gross domestic product (Bellaqa & Jusufi, 2020).
The persistent increase in the flow of remittances to developing nations can be attributed to the improved
immigration between the developed and the developing countries as well as the technological advancement that
has enhanced the international transfer of payment between individuals at a low cost (Meyer & Shera, 2017).
According to the World Bank, foreign remittances are personal transfers or compensation of workers. Olayungbo
and Quadri (2019) noted that remittances constitute a prominent source of savings and capital for investments in
health, education, and entrepreneurship thereby enhancing productivity and employment, which culminate into
economic growth and poverty alleviation. Remittances can also aid the enhancement of financial sector growth
on the notion that some of the remittances are converted and deposited with banks thus making the funds
available for lending to the private sector and this, in turn, facilitate economic growth (Bashir, 2020).
Remittances provide support for the welfare of the relatives left behind thus contributing to the eradication of
poverty in the recipient country.
Inflow of remittances is an important source of foreign exchange earnings that affect economic growth positively
by reducing current account deficit, improving the balance of payment position and reducing dependence on
external borrowing (Meyer & Shera, 2017). Remittances can be transferred using two channels, namely formal
and informal. Formal Channel involves major money transfer operators and banks. Some migrants use formal
channels, but languages barriers and related costs for these services both deter migrant workers from using them.
Hence, most remittances occur in informal channels (Chowdhury, 2015). The informal channels including
Hawala or Hundi for money transfer or carrying cash home, tend to operate physical cash and is less expensive,
it is swifter, more reliable and is more convenient than the formal channel. This reveals that the actual inflows of
remittances are considerably more than those registered in official data sources. Remittance flows have proven to
be a stable source of capital for developing countries because they are reliable source since they do not depend
on the same external factors as other private capital flows (Buhari, Muhlis & Osman, 2018).
The influence of remittances on economic growth can be directly and indirectly as well as negative or positive.
From the positive point of view, remittances increase the income and consumption of households and
subsequently affect aggregate demand as well as economic growth positively by multiplier mechanism (Dilshad,
2013). Also, investments made with remittances affect economic growth indirectly by eliminating the negative
impact of inadequate savings on economic growth partially. Moreover, remittances affect economic growth
indirectly by reducing the volatility, since they do not exhibit too much volatility against changes in the economy
relative to FDI inflows and portfolio investments. Furthermore, remittances affect economic growth indirectly by
contributing to the development of financial sector (Giuliano & Ruiz-Arranz, 2005). On the other hand,
remittances have had some negative effects on economic growth. The most accentuated negative effect of
remittances on economic growth is Dutch disease. The Dutch disease impact of remittances is arisen by
expenditure (Chowdhury, 2015).
The Nigerian economy is opened to the global space and to several sources of financial flows, which include
export revenue, capital flows, remittances, official development assistance (foreign aid), loans, grants, foreign
direct investment and so on. Among the developing countries, Nigeria receives reasonable amount of remittances
from her indigenes in diaspora, she received $17.57 billion in direct diaspora remittances between January and
November 2019 (Bamidele, 2020). This represents a 210% increase from $5.66 billion in 2010 to $17.57 billion
as at November 2019. Despite the large inflows of remittances into Nigeria, economic growth is still sluggish.
Nigeria is the leading recipient of remittances in Africa, with implications that more Nigerians are resident
outside the country compared to other African countries. This is an indication of the underdeveloped state of the
economy, the prevalent lack of opportunities and underemployment (Loto & Alao 2016). This is a situation
known as brain drain, involving the exodus of skilled/trained/professional manpower in search of greener
pastures. Could there be any appreciable gain from this phenomenon called brain drain? This can be asserted by
examining the impact of remittance inflows on the Nigerian economy. Despite huge remittances received by the
country, the problems of poverty, unemployment and inequality still persist and indication that Nigeria may not
have efficiently utilized the gain from brain drain in terms of remittances (Adeagbo & Ayansola, 2014).
Moreover, the bad economic situation of Nigerian citizens made most of the recipients of remittances to
consume instead of investing them.
Researchers have found both positive and negative impacts of remittances on economic growth (Ari, 2020;
Buhari, Muhils & Osman, 2018; Chowdhury, 2015). Also, there are studies that show that no impact of
remittances on economic growth (Barajas, Chami, Fullenkamp, Gapen & Montiel, 2009). So, there is no
conclusive answer regarding the impact of remittances on economic growth as the situation of contrasting
findings possibly results from multiple channels through which remittances can affect economic growth,

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geography and economic situations of different countries, methodology and time period. Studies by Ari (2020);
Olayungbo and Quadri (2019) stated that the impact of remittances depends on a country’s socioeconomic
conditions, and the channels through which this impact of remittances on economic growth manifests itself are
complex and are likely to be country-specific (Giuliano & Ruiz-Arranz, 2005). It is needful to find out which
factors shape this impact so that this process could be properly adjusted. Special attention is usually paid to the
financial development of the country (Chowdhury, 2015). This study provides insight about the effect of
remittances on long-run growth.
2. Literature Review
2.1. Linkages between Remittances and Economic Growth
The literature identifies various channels through which remittances have an impact on economic growth.
Remittances promote economic growth by increasing household income (Giuliano and Ruiz-Arranz, 2005).
Increasing income creates the opportunity to boost consumer spending, accumulation of assets, promotion of
self-employment, and investment in small business. Moreover, emigration and remittances contribute to human
capital accumulation (Karagoz, 2009). A positive impact of emigration on growth is more likely in developed
countries, which usually have a higher ability to transfer knowledge and skills when emigrants return to the
country of origin, or to divert remittances in order to create new opportunities in the private sector. A negative
impact of emigration results if the developing countries of origin suffer from brain drain and start to depend on
remittances (Fayissa, 2014). There are some studies that analyze whether the level (measured as remittances-to-
GDP ratio) and growth of remittances are related to a higher level of economic growth (Bashir, 2020).
Estimations of economic relationships in a non-remittance-dependent setting model show that remittances have a
positive impact on GDP growth, but these results are sensitive to the selection of explanatory variables.
At the macroeconomic level, the impact of remittances occurs within the multiplier effect through a household’s
consumption of goods and services; investment in human capital, which improves labour productivity; and
investment in gross capital formation. Despite the positive impact of remittances, they cannot ensure long-run
economic growth or solve structural economic problems, such as unstable political climate and economic
policies, or corruption, which is common in developing countries (de Haas, 2007). Some studies found that
remittances influence economic growth in less developed countries because they fill the gap of foreign currency
shortage (Javid, Arif & Qayyum, 2012). The other reason for a positive impact is that remittances provide an
alternative way to finance investments and help overcome liquidity constraints (Fayissa, 2014).
Only by ensuring the stable political and economic environment of the receiving country can remittances ensure
economic growth, because this money will be used not for personal consumption, but for investment in
productive activities or business. The impact of remittances on the country’s economic growth depends on the
financial system and the financial market development, as well as on the specific economic conditions in the
receiving country. Remittances may affect economic growth by decreasing volatility, because remittances do not
exhibit too much volatility against changes in the economy. Giuliano and Ruiz-Arranz (2005) found that
remittances are typically pro-cyclical for the remittance-receiving country, while de Haas (2007) found that they
are typically countercyclical.
Remittances promote additional expenditures in the country, and this influences the opportunity to invest more
(Cornnel & Conway, 2000). Remittances are the source of foreign currency, encouraging higher savings and
economic growth (Dilshad, 2013). If remittances create a higher demand than the country is able to meet, they
also increase imports, which create a variety of goods and services. In this case, it worsens the prosperity of
households that do not receive remittances (Karagoz, 2009). The impact of remittances on economic growth is
relatively sensitive to country-specific conditions, through which the effects of remittances are differentiated in
size and possibly in nature. The impact of remittances depends highly on public policy, controlling the flow of
remittances and creating a favourable environment for the use of remittances in productive investment.
2.2. Theoretical Review
2.2.1. Developmental Pessimistic View
In the late 1960s a new viewpoint regarding remittances, migration and development emerged; the pessimistic
view. The theory arose from a shift in social science towards more structural views (de Haas, 2007).
Furthermore, empirical studies from that time showed results that gave support for the pessimistic view (Taylor,
1999). This theory suggests that the net effect of migration and remittances does not foster sustainable
development (Adenutsi, 2010). The brain drain is one of the aspects considered, where emigration of the
educated leads to a loss that is not offset by the benefits associated with remittances. The developing countries
are drained of their human capital resources when educated inhabitants emigrate.

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Moreover, this theory implies that the poorest do not have enough money to emigrate because of the costs
associated with emigration, such as traveling costs (de Haas, 2007). This would mean that remittances could
increase the income gap in developing countries even further. Also, it is argued that remittances would not be
spent on developing enhancing investment, as the optimistic view would imply. If the aim, when remitting, is to
invest in the receiving country it means that the recipients makes the investment decisions on behalf of the
sender. The recipient might not be as skilled as domestic financial intermediaries; therefore, the investment is
less likely to be successful. Money would rather be spent on consumption or non-productive investments such as
real estate and rarely in productive enterprises (Adenutsi, 2010).
2.2.2. Developmental Optimistic View
The Developmental Optimistic view dominated during the 1950s and 1960s. According to this view migration
leads to “North-South” transfers of investment capital and means an acceleration of the labour exporting
countries exposure to “liberal, rational and democratic ideas, modern knowledge and education” (Adenutsi,
2010). The general assumption the followers of this theory make is that flows of remittances as well as
experience, skills and knowledge that migrants acquire abroad will enhance development in the recipient
countries (de Haas, 2007). Especially the take-off in economic sense is expected to thrive because migrants
would be expected to invest great capital into enterprises in the countries of origin.
The Neoclassical economists also put migration into a positive light. In the Neoclassical model of balanced
growth, migration is a process contributing to optimal allocation of production factors, which benefit all equally,
both the countries of origin and the recipients. In an unconstrained market environment, free labour mobility will
lead to scarcity of labour, and hence the marginal productivity of labour will increase and lead to higher wages in
the migrant sending countries. Moreover, this would mean that the marginal productivity of capital would go
down and capital flows are thereby expected to move in the opposite direction as migration. The core of this
theory is that the developmental role of migration depends strictly on the process of factor price equalization.
However, de Haas (2007) points out that the neoclassical migration theory does not include remittances in their
analysis.
2.2.3. The Developmental Pluralistic View
The Developmental Pluralistic View arose in the 1980s and 1990s. This theory holds the view that both above
theories are too static (Adenutsi, 2010; de Haas, 2007). According to this approach there are not strictly negative
nor positive outcomes of remittances in the remittance receiving countries, the issue is more complex. There is a
need for new theories regarding the multiple ways, in which remittances could affect the recipient economies, to
be able to understand the complex relationship between migration and development (Taylor, 1999). The
pluralistic view aims to link causes and consequences of migration more explicitly, in which both positive and
negative effects on development are possible. They argue that because of the complexity of remittances and
development, there is a need of more dynamic understanding of the relationship between them. Neither the
optimistic nor the pessimistic view provides this (Adenutsi, 2010). According to this theory the fundamental
question is not whether migration has a strictly negative or positive impact on development, the effects of
remittances are thus context-dependent (Taylor, 1999). No overarching theory can be applied to, and explain,
every outcome.
2.3. Empirical Review
Bellaqa and Jusufi (2020) carried out a study on management of remittances and their role in Economic
development in Kosovo (2009-2018). The study’s main objective was to analyze the impact of remittances on
economic growth. Correlational analyses were used to measure the strength of the relationship between
remittance and Gross Domestic product and the findings revealed the existence of positive average correlation
between remittances and Gross Domestic product of Kosovo.
Ari (2020) carried out a study on the impact of remittances on economic growth in developing countries:
Empirical evidence from Turkey using data from 1994 to 2018. The data were analyzed using Johansen
cointegration and Granger causality test. The findings showed that there is a unidirectional relationship from
economic growth to remittances. Also, remittance flows into Turkey did not cause economic growth.
Samuel and Pierre (2020) used ARDL bound test estimation techniques annual time series of Senegal from
1980-2018 to explore the nexus between migrant remittances and Economic Growth in Senegal. The estimates
show a negative relationship between remittances and economic growth and an insignificant effect in the long
run, while the nexus between economic growth and investment is positive in the long term.
Sutradhar (2020) investigated the impact of workers’ remittances on economic growth of four South Asian
emerging countries by employing balanced panel data from 1977 to 2016. Pooled OLS, fixed effects, random
effects and dummy variable interaction models were used to estimate the impact of remittances. The empirical

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regression analysis confirms a negative effect of remittances on economic growth in Bangladesh, Pakistan and
Sri Lanka. Conversely, remittances have a positive impact on economic growth in India. This study also
indicated a joint significant and negative relationship between remittances and economic growth in four
countries.
Uddin, Uddin, Uddin and Ahmmed (2020) used a panel data of five (5) South Asian countries from 1975-2017
they carried out a study on Remittances and Economic Growth Tie in Selected South Asian Countries: The data
were analyzed using Panel Data Analysis, Granger-causality tests and Dumitrescu Hurlin Causality tests. The
findings revealed that remittances have significant positive impact on GDP per capita of the countries.
Mehedintu, Soava and Sterpu (2019) analyzed the evolution and trends of the share of remittances in gross
domestic product (GDP) and the influence of migration on remittances in Romania. The analysis on data from
Eurostat over 2008–2017 has three components: a statistical analysis, an estimation of evolution of indicators,
and an estimation of impact of migration on remittances, using polynomial-time regression and difference
equation models, respectively. The results showed that GDP and GDP/capita had a permanent increase, meaning
an improvement in the standard of living in Romania, while the other indicators had an evolution with a period
of sharp decline triggered by the global crisis, followed by a slow growth.
Morad and Adel (2019) carried out a study on remittances and economic growth in a Small and Volatile
Economy using data from 1976-2016. The data were analyzes using ARDL and the findings revealed that
Jordanian workers; remittances had no significant impact on economic growth nor financial development,
because large portion of the remittances was channeled towards consumption instead of savings and investment.
Olayungbo and Quadri (2019) investigated the relationship among remittances, financial development and
economic growth in a panel of 20 sub-Saharan African countries over the period of 2000 and 2015. The study
used both Pooled Mean Group and Mean Group/ARDL estimations with panel unit root and cointegration tests.
After establishing cointegration, remittances and financial development were found to have positive effects on
economic growth both in the short and the long run. The interactive term showed that financial development
acted as a substitute in the remittances-growth relationship. Finally, unidirectional causal relationships were
found to exist from GDP to remittances and from financial development to GDP.
Anetor (2019) examined the relationship between remittances, financial sector development, and economic
growth in Nigeria over the period 1981 to 2017. The study used the autoregressive distributed lag (ARDL)
model to analyze the long-run and short-run relationships between the variables. The outcome of the study
revealed that the variables are bound together in the long-run. The results also showed that remittances had a
negative and significant effect on economic growth both in the long-run and short-run.
Khan, Teng and Khan (2019) used ARDL to study the effect of remittance inflow on Pakistan’s economy over
the period 1976–2016. The results indicated that remittance inflow, foreign direct investment, and the gross
domestic saving have a positive effect on the economic growth of Pakistan in the long-term, while inflation and
consumption have a negative effect on the economic growth of Pakistan in the long-term.
Buhari, Muhils and Osman (2018) studied the nexus between income inequality, remittances and economic
growth in Turkey using the annual data for 1977-2014. The ARDL method and Granger causality tests were used
for analysis. The empirical findings of the research suggested that the series were cointegrated and they move
together in long-term. Also, income inequality and international remittances contribute to economic growth both
in the long and short-term. The results of the Granger causality test showed that there was a unidirectional
causality running from economic growth to remittances and from remittances to income inequality.
Meyer and Shera (2017) observed the impacts of remittances on economic growth, using panel data set of six
high remittances receiving countries, Albania, Bulgaria, Macedonia, Moldova, Romania and Bosnia
Herzegovina during the period 1999–2013. These countries have experienced a major increase in remittance
inflows, and at this time accounts for the bulk of total remittance receipts, compared with other regions. Most
countries, remittances represent the largest source of foreign exchange earnings and represent more than10
percent of GDP. In other words, the econometric analysis was based on those six remittances receiving countries.
The paper was then to review the empirical literature devoted to the impact of remittances on economic growth,
in order, to identify empirically if there are significant relationships between remittances and growth in these
countries. The results suggested that remittances had a positive impact on growth and that this impact increases
at higher levels of remittances relative to GDP.
Matuzeviciute and Butkus (2016) used an unbalanced panel data covering a sample of 116 countries with
different development levels over the period 1990–2014, we studied the interaction between remittances and the
level of economic development, as well as its impact on long-run economic growth—because the impact of
remittances could be influenced by the development level of the receiving countries. In parallel, we explored the
hypothesis about diminishing a country’s capacity to use remittances for promoting long-run economic growth

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as the abundance of remittances increases. To control the endogeneity while estimating the impact of remittances
on long-run economic growth, OLS (ordinary least squares) was used with FD (first differences) transformation
and FE (fixed effects) approaches and other controls of long-run growth. The results showed that in general
remittances have a positive impact on long-run economic growth, but the impact differs based on the country’s
economic development level and the abundance of remittances in the economy.
Loto and Alao (2016) investigated the contributions of foreign remittances on economic growth in Nigeria from
1980 to 2016, using the Vector error correction modelling (VECM) technique to analyze the data. The findings
revealed that migrant remittances had positive and significant impact on economic growth while workers
remittances had negative and significant impact on economic growth.
Karamelikli and Bayar (2015) carried out a study on the relationship between economic growth, remittances,
foreign direct investment inflows and gross domestic savings in Turkey during the period 1974-2013 by
employing cointegration test based on ARDL approach. The findings showed that remittances, foreign direct
investment and gross domestic savings had positive impact on economic growth.
Chowdhury (2015) used pooled cross-country times series for the time period 1981-2010 to investigate the
impacts of remittances and other economic growth determinants on economic growth of low-income, lower-
middle income, and upper-middle income economies. This study divided this 30-year period into six non-
overlapping five-year periods. The research found that remittances are not associated with the economic growth
of low-income economies.
3. Methodology
The research used ex-post facto research design approach. This is because, the researcher does not aim to control
any of the variables under investigation and pre-disposition is to observe occurrence over a period of time (1981-
2019). Another justification for the research design is the desire of the researcher to use secondary data to
analyze the relationship existing between the variables under consideration. These are already existing data,
thus, cannot be manipulated by the researcher. The data used for this study are secondary comprising annual
times series sourced from World development indicators.
This study adapted the econometric model of Khan et al. (2019) to explore the effect of remittances on economic
growth of Nigeria. The model is stated, thus;

(3.1)
Where,
GDP is the nominal gross domestic product,
FDI is foreign direct investment,
EXC represents exchange rate,
INF denotes inflation,
REM is remittances,
GDS is the gross domestic saving, and
CONS represent consumption
The above model was modified by replacing nominal GDP with real GDP because real GDP measures the extent
of economic growth and stability since it represents the inflation adjusted gross domestic product. Also, CONS
and GDS were replaced with gross fixed capital formation (GFCF) to capture the level of investments in the
Nigerian economy. Consequently, the model applied in this study is as specified in equation (3.2) below:

(3.2)
Where,
REM = Remittances
FDI = Foreign direct investments
INF = Inflation
GFCF = Gross fixed capital formation
EXR = Exchange rate

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is the constant

- = coefficients

is an indicator for the period

is the error term

The model variables were selected based on established theoretical relationships among them, their use in
previous studies and availability of data. These variables have been described below as follows:
Real GDP (RGDP): This is the dependent variable. It is a measurement of economic output that accounts for the
effects of inflation. Hence, it provides a more realistic assessment of growth than nominal GDP. Without RGDP,
it could seem like a country is producing more when it is only that prices are rising.
Remittances (REM): REM is the major independent variables used for the study. It refers to a transfer of money
from a foreign worker to their family or other individuals in their home countries. In many countries, especially
low-income countries, remittances constitute a significant driver of economic growth.
Foreign direct investment (FDI): This is another independent variable included in the model. It is an investment
made by a firm or individual in one country into business interests located in another country. FDI takes place
when an investor establishes foreign business operations or acquires foreign business assets in a foreign country.
Inflation (INF): INF refers to the rise in prices of goods and services. It measures the average price change in a
basket of commodities and services overtime.
Gross fixed capital formation (GFCF): GFCF consists of resident producers' investments, deducting disposals,
in fixed assets during a given period. It also includes certain additions to the value of non-produced assets
realized by producers.
Exchange rate (EXR): EXR is the rate at which one currency is exchanged for another. It is also regarded as the
value of one country's currency in relation to another currency. A fall in the value of a country’s currency in
terms of the US Dollar could reduce its demand, hence decline in economic growth.
The study used autoregressive distributed lag (ARDL) bounds test approach for the study. The bounds testing
was used to determine if the long-run relationship between the variables in the model. If the variables are
cointegrated, the long-run ARDL model will be estimated and also the speed of adjustment will be found. In
ARDL analysis, long-run and short-run coefficients are estimated simultaneously, and model could be developed
and utilized for cointegration test even if all the variables were not stationary after first differencing 1(1), or at
level i.e. 1(0). ARDL model is used when the variables are of mixed integration at order one, 1(1) and at level,
1(0), but none is integrated at second differencing, 1(2) (Pesaran et al., 2001). The ARDL bounds testing
specification of equation (3.2) was expressed as error correction mechanism (ECM) to test for cointegration
between the variables in view:

= δo + + + + + +
+ + + + + + +
(3.3)
After cointegration is established, the estimation of the long-run relationship would follow, thus:

= + + + + + +
(3.4)
The short-run relationship is estimated using an error correction mechanism as shown in equation (3.5):

= δo + + + + +
+ + (3.5)
Where,

= Constant

- = short-run elasticities (coefficients of the first-differenced explanatory variables)

- = long-run elasticites (coefficients of the explanatory variables)

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θ = Speed of adjustment

= Error correction term lagged for one period

Δ = First difference operator
p = Lag length
Prior to ARDL estimation, the time series data was tested for stationarty. The test for stationarity of data was
carried with Augmented Dickey Fuller (ADF) unit root test (Dickey and Fuller, 1979). This particular stage is
very necessary, because most macroeconomic time series contains unit root and any regression involving non-
stationary series almost always produce significant relation where in fact no relationship exist between the
variables. The general model for Augmented Dickey-Fuller unit root test could be represented, thus:

= + t+ + + (3.6)
Where,

= Lagged value of at first difference

= A change in lagged value

δ = Measure of lag length

= First difference of

= Error term
4. Analysis and Discussion
4.1. Unit Root Test
Before analyzing the estimation, there is need to check the time series properties of the variables. This was done
in order to correctly apply the ARDL which is suitable for purely I(0) and purely I(1) variables and not for I(2)
variables (Pesaran, Shin and Smith, 2001). In other words, Augmented Dickey-Fuller (ADF) and Philip-Perron
(PP) tests for unit root were performed. The unit root test results are presented in Table 4.1:
Table 4.1. Unit root test results

Variable ADF @ PP @ ADF PP Remark

level level @ I(1) @ I(1)

Log(RGDP) -3.174547 -3.089470 -4.592025 -4.559618 I(1)

{0.1047} {0.1233} {0.0039}*** {0.0043}***

Log(REM) -1.981511 -2.179227 -6.233173 -6.233173 I(1)

{0.5924} {0.4870} {0.0000}*** {0.0000}***

Log(FDI) -3.242786 -3.331293 -10.11383 -10.12774 I(1)

{0.0916} {0.0766} {0.0000}*** {0.0000}***

Log(INF) -4.436434 -3.271640 -- -- I(0)

{0.0059}*** {0.0234}**

Log(GFCF) -0.662057 -1.121646 -3.931283 -3.813819 I(1)

{0.9688} {0.9119} {0.0205}** {0.0269}**

Log(EXR) -1.252519 -1.251678 -5.608917 -5.808089 I(1)

{0.8845} {0.8847} {0.0003}*** {0.0001}***

Source: EViews 10.0

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Note: Figures in brackets “{ }” are the p-values while *** and *** denote significance at 1% and 5%
respectively.

Table 4.1 shows the outcome of the Augmented Dickey-Fuller (ADF) and the Phillip-Peron (PP) unit root tests.
From the results, it can be seen that the p-values of INF for both the ADF and PP tests were less than 0.05 at
level while other were less than 0.05 at first difference. This implies that the null hypothesis of “no unit root”
was rejected for INF at level while the other variables achieved stationarity at first difference. Thus, the results
indicate that the variables are stationary at level and first difference; hence, the ARDL method of estimation
becomes more appropriate for the estimation of the long-run and short-run relationship between remittances and
economic growth.
4.2. ARDL Estimation
Table 4.2 indicates the outcome of the ARDL bounds test. The significance of the test is to determine whether
there is a long-run relationship between the variables. The result of the test indicates that the F-statistic
(9.577671) and it is larger than the upper bound critical value at 1 per cent (4.15) and 5 per cent (3.38) levels of
significance. Hence, the null hypothesis of “no cointegration” is rejected while the alternate hypothesis of the
presence of cointegration cannot be rejected. This suggests that a long-run relationship exists between the
variables understudy.
Table 4.2. ARDL bounds test results

Test Statistic Value Signif. I(0) I(1)

F-statistic 9.577671 10% 2.08 3

k 5 5% 2.39 3.38

2.5% 2.7 3.73

1% 3.06 4.15

Source: EViews 10.0

The long-run estimates of the ARDL model are reported in Table 4.3 below. The long-run coefficients indicate
that remittances (REM), inflation (INF) and exchange rate (EXR) exerted negative and significant effect on real
GDP (RGDP) while foreign direct investment (FDI) and gross fixed capital formation (GFCF) has positive and
significant effect on RGDP. The significance of the coefficients was adjudged based on the respective p-values
that are less than 5 per cent (0.05) level. As a result, the null hypothesis , which states that remittances, FDI,
INF, GFCF and EXR do not have a significant effect on economic growth, is rejected. In simple words, this
means that increase in the flow of remittances in Nigeria, inflation and exchange rate will cause RGDP will
decrease while increase in FDI and GFCF helped RGDP to increase.
Table 4.3. Long-run coefficients of estimated ARDL model

Variable Coefficient Std. Error t-Statistic Prob.

LOG(REM) -0.329689 0.083989 -3.925399 0.0005

LOG(FDI) 0.649880 0.097047 6.696547 0.0000

LOG(INF) -0.186355 0.089332 -2.086098 0.0459

LOG(GFCF) 1.190013 0.194495 6.118480 0.0000

LOG(EXR) -0.505732 0.116556 -4.338940 0.0002

C -12.54500 4.391957 -2.856358 0.0078

Source: EViews 10.0

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Having estimated the long-run relationship, Table 5 below shows the short-run relationship between the
variables and the speed of adjustment. The short-run coefficients reveal that remittances (REM) has a negative
and significant effect on RGDP. FDI has a positive and significant effect on RGDP in the short-run. INF and
GFCF exerts a positive and insignificant effect on RGDP in the short-run. On the other hand, EXR has a
negative and insignificant effect on RGDP. The results imply that increase in REM and EXR lowered economic
growth while FDI, INF and GFCF caused economic growth to increase in the short-run.
The ECM(-1), that is, the error correction term explains how quickly or slowly in which the relationship is
restored to its equilibrium path. The coefficient of the ECM(-1) is expected to be negative and must be
statistically significant. A significant error correction term proofs the existence of a stable long-run relationship.
Table 4.4 reveals that the ECM(-1) is -0.384089 and it is statistically significant. This indicates that deviation
from the long-run path is corrected by approximately 38 per cent over the following year. The Adjusted R-
squared of 0.672818 shows that the explanatory variables collectively explained approximately 67 per cent
changes of the total variations in RGDP. The F-statistic, which indicates the overall significance level of the
estimate, showed that the overall estimate is significant as the p-value is less than 5 per cent (0.05). The Durbin
Watson statistic of 2.113933 is approximately 2, thus indicating the absence of first-order serial autocorrelation.
Table 4.4. Error correction representation of the ARDL model

Variable Coefficient Std. Error t-Statistic Prob.

C -4.818400 0.547064 -8.807743 0.0000

DLOG(REM) -0.476604 0.175544 -2.715008 0.0188

DLOG(FDI) 0.165433 0.033897 4.880416 0.0000

DLOG(INF) 0.041102 0.026661 1.541637 0.1491

DLOG(GFCF) 0.081550 0.099769 0.817393 0.4204

DLOG(EXR) -0.719519 0.324340 -2.218412 0.0466

ECM(-1)* -0.384089 0.043442 -8.841441 0.0000

R-squared 0.699346

Adjusted R-squared 0.672818

F-statistic 26.36230

Prob(F-statistic) 0.000000

Durbin-Watson stat 2.113933

Source: EViews 10.0

The diagnostic tests of the ARDL estimates are reported in Table 4.5 and Figure 1. The purpose of the diagnostic
tests is to determine whether the underlying ARDL model fits very well and is well specified. For the Breusch–
Godfrey serial correlation and Breusch-Pagan -Godfrey heteroskedasticity tests, the following hypothesis were
stated:
Hypothesis:
Ho: There is no autocorrelation and heteroskedasticity problem.
H1: There is an autocorrelation and heteroskedasticity problem.
Significance Level: α = 5% or 0.05
Decision Rule: Reject Ho if the p-value is less than α. Otherwise, do not reject Ho

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The result indicates that the ARDL model passed all diagnostic tests of Breusch– Godfrey test serial correlation
and Breusch-Pagan -Godfrey heteroskedasticity test.
Table 4.5. Diagnostic tests

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 1.495133 Prob. F(2,27) 0.2422

Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic 1.318846 Prob. F(8,29) 0.2735

Source: EViews 10.0

The most widely used method for testing whether the distribution underlying a sample is normal is Jarque-Bera
Normality nest. The outcome of the normality test has been presented in Figure 1.
12
Series: Residuals
Sample 1982 2019
10
Observations 38

8 Mean 2.03e-15
Median 0.017361
6 Maximum 0.192827
Minimum -0.258149
Std. Dev. 0.106855
4
Skewness -0.560297
Kurtosis 2.917099
2
Jarque-Bera 1.999124
0 Probability 0.368041
-0.3 -0.2 -0.1 0.0 0.1 0.2

Figure 1. Jarque-Bera test for normality of errors

Hypothesis:
Ho: Error term is normally distributed.
H1: Error term is not normally distributed.
Significance Level: α = 5% or 0.05
Decision Rule: Reject Ho if p-value is less than α. Otherwise, do not reject Ho
The results of the normality test (see Figure 1) shows that p-value (0.368041) is greater than 5 per cent level of
significance. This implies that the null hypothesis that the error term is normally distributed is not rejected at 5
per cent significance level. Hence, it is concluded that the residuals of the ARDL model is normally distributed.
The CUSUM and CUSUMSQ tests were conducted as plotted in Figures 2 and 3 respectively. The essence of
these tests is to determine whether the ARDL estimates are stable. If the cumulative sums remain within the red
lines, it means that the model is fit for the data. Since, both graphs reveal that the cumulative sums are within the
red lines, it then implies that the data are fit for the ARDL model.

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16 1.4

12 1.2

8 1.0

0.8
4
0.6
0
0.4
-4
0.2
-8
0.0
-12 -0.2

-16 -0.4
92 94 96 98 00 02 04 06 08 10 12 14 16 18 92 94 96 98 00 02 04 06 08 10 12 14 16 18

CUSUM 5% Significance CUSUM of Squares 5% Significance

Figure 2. CUSUM test Figure 3. CUSUMSQ test

4.3.1 Discussion of Findings

An interesting finding from the analysis of data is that remittances (REM) exerted negative and significant
economic growth of Nigeria in both the long-run and short-run. This falls in line with Anetor (2019) who argued
that remittances undermine productivity in low-income countries because they are often spent on consumption
likely to be dominated by foreign goods than on productive investments. Similarly, Fayissa (2014) adduced the
negative effects of remittances on economic growth to the fact that a significant proportion of remittances are
spent on consumption; a smaller part of remittances goes into saving and/or investments; and that remittances are
typically saved or invested in housing, land and jewelry, etc. which are not necessarily productive to the overall
economy. From another perspective, the results that exchange rate had negative and significant effect on
economic growth can alter the domestic value of foreign remittances which further affect the growth rate of the
economy (Olayungbo & Quadri, 2019).
On the other hand, empirical studies abound that remittances still represent a relatively stable financial resource
in many countries. Mehedintu et al. (2019) concluded that remittances increased the consumption level of rural
households, which might have substantial multiplier effects on the economy, because they are more likely to be
spent on domestically produced goods emerging countries in Europe. Similarly, Chowdhury (2015) averred that
remittances are positively and significantly related to economic growth of Lower Middle-Income and Upper
Middle-Income Economies. Also, Bashir (2020) explained that remittances are likely to increase the quantity of
funds flowing through the banking system which may lead to enhanced financial development and thus high
economic growth through increased economies of scale in financial intermediation and political economy effect;
whereby a larger constituency (depositors) is able to pressure the government into undertaking beneficial
financial reform. This implies that remittances might ease the immediate budget constraint of families by
boosting crucial spending needs on food, healthcare and schooling.
5. Conclusion and Recommendations
This study focused on the effect of remittances in the economy of Nigeria from 1981 to 2019. To achieve this
objective, the ARDL technique was applied. From the results and findings, it was concluded that remittances do
significantly but negatively affect the economic growth of Nigeria. After further analysis, it was realized that that
the negative and significant effect of remittances persisted in the long-run and short-run. This implies that
remittances are neither a panacea for economic growth in Nigeria. Additionally, in the long-run, the results
showed that the conventional sources of economic growth such as FDI and capital formation can spur economic
growth in Nigeria while increase in exchange rate and inflation caused economic growth to decline.
Policy implications drawn from this study is as follows:
a) As remittances are yet to foster economic growth in Nigeria because a large fraction of them are spent
on consumption instead of economically productive investments, policy makers should create
investment vehicles like diaspora bonds among others, to encourage the citizens of Nigeria working
abroad to lend their hands to national development.
b) As effort is being made to harness the potentials of remittances in economic growth, Nigeria can
continue to improve its economy creating an attractive economic outlook that would appease foreign
investors. This will help generate investment inflows through FDI, hence higher economic growth.

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c) Also, the government should stimulate remittances by ensuring that funds transfers by nationals living
and working abroad does not lose its value to inflationary pressure in Nigeria. Consequently, monetary
authorities should strategically identify the underlying causes of such inflationary pressures and use the
appropriate policy to curtail it so as to foster price stability and economic growth in Nigeria.
d) Again, it is imperative for the Nigerian government, through the Central Bank, to develop a policy
framework that would foster capital formation thus making long-term funds available for economic
production since remittances are not to drive economic growth and development in Nigeria.
e) Since the effect of exchange rate on economic growth was negative and significant, it is needful that
monetary authorities sustain the utilization and management of floating exchange rate in Nigeria to
enhance economic activities which would also lead to higher economic growth.

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