Financial Development, Exchange Rate Volatility and Cross-Border Economic Activity in the Nigeria, Niger and Benin Corridor: A Panel ARDL Approach in the 14th Century

Abstract

This study investigates the relationship between financial development, exchange rate volatility, cross-border economic activity, and economic growth within the Nigeria, Niger and Benin border corridor, with particular focus on North-Western Nigeria's frontier states of Jigawa, Katsina, Kebbi, Sokoto and Zamfara. Motivated by the persistent underperformance of financial intermediation, currency instability, and largely informal cross-border commerce in the region despite its strategic economic position, the research pursues three specific objectives: (i) to assess the state of financial development and the pattern of cross-border activities in North-Western Nigeria; (ii) to examine the linkages among financial development, exchange rate volatility, cross-border activities and economic growth in the zone; and (iii) to determine the direction and magnitude of the influence that financial development, exchange rate volatility and cross-border activities exert on economic growth. The study is envisaged to contribute to knowledge in three respects: by supplying empirical evidence from an under-researched but strategically important border corridor; by applying a rigorous dynamic panel methodology validated through first- and second-generation stationarity diagnostics; and by extending the finance–growth and exchange-rate literature through treating the exchange rate level and its volatility as analytically distinct constructs, and by offering a structural explanation for the muted growth contribution of cross-border remittance flows. Methodologically, the study adopts a quantitative panel research design covering Nigeria, Niger and Benin annually from 1999 to 2024 (78 observations), using GDP growth, the nominal exchange rate, exchange rate volatility, domestic credit to the private sector, and personal remittances received, sourced from the Central Bank of Nigeria, the World Bank's World Development Indicators, and Nigeria's National Bureau of Statistics. The analytical strategy proceeds in stages: descriptive and correlation analysis; panel unit root testing using first-generation (Levin–Lin–Chu, Im–Pesaran–Shin, Fisher-type) and second-generation (Pesaran CIPS/CADF) procedures to establish orders of integration and account for cross-sectional dependence; panel cointegration testing (Pedroni and Kao) to establish long-run equilibrium; and, given the mixed order of integration among the series, estimation of a Panel Autoregressive Distributed Lag model in error-correction form using the Dynamic Fixed Effects estimator, chosen for its suitability to a panel with a small cross-sectional dimension and moderate time span. The findings show that GDP growth and exchange rate volatility are stationary in levels, while the exchange rate, domestic credit and remittances are integrated of order one, and both cointegration tests confirm a robust long-run equilibrium relationship among the variables. The error-correction coefficient is negative, near unity, and highly significant, indicating rapid correction of disequilibrium. Domestic credit to the private sector exerts a positive and statistically significant long-run effect on growth, the study's strongest result. The exchange rate level exerts a negative and marginally significant long-run effect, indicating that sustained depreciation weakens growth, whereas exchange rate volatility and remittance inflows show no statistically significant long-run or short-run effects. These findings imply that financial deepening, rather than the mere presence of cross-border trade or currency fluctuation is the principal lever for sustainable growth in the corridor, and that persistent currency depreciation carries real developmental costs. The insignificance of remittances points to structural and institutional weaknesses, informality, limited financial inclusion, and weak regulatory infrastructure, that prevent cross-border flows from translating into productive investment, underscoring the need for policies that formalise remittance channels, deepen financial intermediation, and stabilise the exchange rate.