Abstract: The performance of the industrial sector in relation to financial development is examined in this study using manufacturing index as a major industrial sector development indicator. A structural variance autoregressive (SVAR) model with structural breaks was formulated and applied to Nigerian data spanning 1970 to 2015. The results from the analysis revealed that with the continuous upward swings in the official lending interest rates as expected theoretically, shocked off investment and ultimately manufacturing output. This phenomenon was not restricted to the conventional deposit money banks (DMB), but also to the Bank of Industry (BOI) and allied financial institutions whose loan processes are fraught with bureaucratic bottlenecks and political intrigues. The level of financial deepening (M2/GDP) positively influenced manufacturing output though not statistically significant. This calls for more concerted efforts on the part of the monetary authorities to implement the recent cashless monetary policy to the letter in order to reduce the liquidity ratio in deposit money banks and make investible funds available for the manufacturing and allied subsectors in Nigeria. The radioactive decay syndrome exhibited by a lag of the manufacturing index is novel and a sine qua non for policymakers and executors and is a factor that must be considered by policymakers and executors. It implies that manufacturing output will continue to accentuate as long as industrialization policies and strategies are initiated, implemented and sustained in Nigeria. Exchange rates misalignment has the least influence on manufacturing output as shown in the analysis. The paper further recommends that for industrialization to be achieved and sustained, the yawning gap between interest rates on savings and lending — interest rates spread should be bridged to stimulate credit for the private sector for maximum manufacturing output and the exchange rates misalignment currently experienced in Nigeria will ultimately fizzle out.

JEL classification: E44, O16
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