The Effect of International Trade on Financial Depth in Nigeria 1986 – 2021

Abstract

This work examined the effect of international trade on financial depth in Nigeria. The study used total trade, trade openness, foreign exchange disbursement and inflation rate as proxies for international trade while the financial depth metric was broad money to GDP. It used econometric procedures in analysing the data particularly the unit root test, Johansen coinegration test, and Error correction model. The result indicated that foreign exchange disbursement and inflation rate significantly decreased the ratio of broad money to financial depth while total trade had a negative and insignificant effect on financial depth. Also total trade and foreign exchange disbursement increased financial depth. The study concluded that international trade has enhanced financial efficiency but the financial sector performance is being hindered by inflationary trends. Among other recommendations, the government should encourage local production in order to enhance exports, granting of license and foreign exchange to more international traders and as well unify exchange rates to cushion against the inflationary effect on the financial sector of Nigeria.