**1. Introduction**

The linkage between the monetary sector and the real sector plays a huge role in addressing the ills of economies such as achieving the price stability goal of the country's monetary policy, boosting economic growth, and reducing unemployment among the others [1]. Understanding the link between these sectors is important for the general economies, policymakers, and even households. For example, the use of both monetary and fiscal policy affects interest rates and has been seen after the global financial crisis that developed economies reduced interest rates until short-term rates were almost zero as a way to ease monetary policy. This led to household borrowing more than they could afford and suddenly, most households were indebted [2]. Thus, the demand side of many of the world's largest economies was affected to the point that the International Monetary Fund (IMF) and the World Bank downgraded their economic growth forecasts twice during 2008, mid-year [3]. Monetary variables are not only important for price stability

only but also for influencing in various ways in the real economy, especially improving the level of investment activity [1].

Investment is very crucial in improving a country's productivity, growth and increasing its competitiveness in the long-run. To find the benefits of linking the monetary and real sector, it is imperative to investigate how monetary variables such as the lending rates, exchange rate and money supply can affect investment actions (a real sector variable). The investigation is conducted in a panel set-up of some selected Sub-Saharan African (SSA) countries such as Kenya, Mozambique, Nigeria, South Africa and Tanzania. The countries and study period are selected on the data availability basis. In Sub-Saharan Africa, there is limited literature addressing the linkage between the two sectors, as most studies stick to the relationship between variables of the same sector [4–6].

In the economic literature, one of the measures of investment activities is the gross fixed capital formation (GFCF) representing a total increase in fixed capital and is crucial to the economy because it builds an important part in gross domestic product. GFCF has always been identified as an important factor and an enhancer of economic growth in Sub-Saharan African countries [7–9]. It has three main components namely GFCF general government sector, GFCF private sector and GFCF public sector [10]. The GFCF government sector comprises of investment by the state; GFCF private sector includes investment by private enterprises; while GFCF public sector involves investment by public enterprises [11]. Ali [10] argues that because private investment is less associated with corruption, it has a more favorable effect on economic growth in comparison to public investment. Therefore, the investment needs to be handled carefully in that there are monetary policy instruments that assist in boosting investment, especially private investment. That is one of the reasons that a country's monetary policy should be designed in a manner that attracts investors. For example, in South Africa, business confidence and investment are mutually reinforcing, implying that for investment to take place business owners as investors must have the confidence to invest looking at policies adopted by the country and at the performance of the economy [12].

Business confidence is one of the factors that can contribute in boosting the economy in the sense that, owners have confidence and are certain about their growth and thus hire more staff, leading to increased employment and investment. However, it is distressing when Ndikumana [13] mentions that more than 30 of SSA countries experienced a decline in investment activities since the beginning of the 1980s. This has brought some concerns as an investment is a major enhancer of economic growth. For example, the Nigeria Bureau Statistics [14] report a yearly decline Nigeria's GCFC at the beginning of 2014. In the middle of 2015, Nigeria experienced negative growth in real terms which was for the first time since 2013 [13]. Changes in GCFC are regarded as a sign of economic incompetence. Thus, identifying how and to what extent monetary variables affect GCFC is of critical importance. This is because monetary variables are not only important for the attainment of stable inflation but also for exercising influences in various ways on the behavior of the real economy, including the level of investment activity.

The three monetary variables (exchange rates, money supply, and lending rates) selected for this study are crucial to explaining the link in the monetary-real sector nexus. The exchange rate is defined as a price relation of a country's currency to another country [14]. Its importance lies in the fact that they affect the relative prices of both the domestic and foreign countries. It is known that an appreciation in a country's currency leads to its goods abroad more expensive, and foreign goods in that country become cheaper, ceteris paribus [9]. Sub-Saharan African

**237**

**Figure 1.**

*Effects of Some Monetary Variables on Fixed Investment in Selected Sub-Saharan African...*

economies have at some point experienced appreciation in their currencies due to factors such as decreased trade barriers, decreased productivity and a rise in their

The following are the trends of the currencies in selected countries against the United States dollar; the Nigerian Naira has been reported to have reached an alltime high of 380 in March of 2020 [13]. The drop on oil prices in Nigeria put pressure on the monetary authorities to devalue the Naira to protect foreign exchange reserves. The Kenyan Shilling reached an all-time high of 106.80 in October of 2011, which might be due to the 2011 terrorist attacks in Kenya [15]. The Mozambique Metical reached an all-time high of 81.50 in October of 2016. The International Monetary Fund (IMF) discover that Mozambique has hidden some loans in three state-owned companies and this resulted in the IMF stopping its support [15]. Due to the declaration of a lockdown in South Africa as a way of preventing Corona Virus disease 2019 (COVID-19), the South African Rand reached an all-time high of

One of the ways used by central banks to control the money supply is through the required reserves the banks ought to keep. For example, in South Africa, the South African Reserve Bank requires commercial banks to keep 2% of their total liabilities; the Bank of Ghana requires 10%; the Central bank of Kenya requires 5.25% and the Bank of Tanzania 7% [15, 16]. Reserve ratios in SSA have been accelerating since the mid-1990s and are quite high. In many SSA countries, the cash reserve requirements are accompanied by a liquid asset requirement (LAR) to finance the costs of deficits in banks. It should be noted that when central banks undertake policy decisions, expected inflation plays a huge role than the current rate of inflation. Inflation forecasting can be considered a comparative advantage of a central bank as it maintains information about the state of the economy over the

It had been argued that higher lending rates distort a country's level of investment, reduce the rate of economic growth and are an obstacle to smooth transmission of monetary policy impulse [18, 19]. Altman et al. [20] support this argument by adding that in response to a country's high lending rates, foreign investors reduce their investments. This is because consumer and business confidence in taking out risky investments is discouraged. Therefore, maintaining lower levels of lending rates will improve a country's investment levels. Comparing lending rates with an investment of 2008 in the selected countries, it can be seen in **Figure 1** that Mozambique is the only country that had lending rates exceeding gross fixed capital formation in 2008. Kenya, Nigeria and South Africa all have gross fixed capital formation levels higher than lending rates. In SSA, generally, this can be due to the stock of bank credit to the private sector that remains very low [21]. Several studies suggest that among others, monetary policy actions and macroeconomic uncer-

*DOI: http://dx.doi.org/10.5772/intechopen.93656*

price levels.

public [17].

19.35 in April of 2020 [16].

tainty constrain bank lending rates [21–23].

*Gross fixed capital formation (GFCF)-lending rate nexus, 2008.*

*Effects of Some Monetary Variables on Fixed Investment in Selected Sub-Saharan African... DOI: http://dx.doi.org/10.5772/intechopen.93656*

economies have at some point experienced appreciation in their currencies due to factors such as decreased trade barriers, decreased productivity and a rise in their price levels.

The following are the trends of the currencies in selected countries against the United States dollar; the Nigerian Naira has been reported to have reached an alltime high of 380 in March of 2020 [13]. The drop on oil prices in Nigeria put pressure on the monetary authorities to devalue the Naira to protect foreign exchange reserves. The Kenyan Shilling reached an all-time high of 106.80 in October of 2011, which might be due to the 2011 terrorist attacks in Kenya [15]. The Mozambique Metical reached an all-time high of 81.50 in October of 2016. The International Monetary Fund (IMF) discover that Mozambique has hidden some loans in three state-owned companies and this resulted in the IMF stopping its support [15]. Due to the declaration of a lockdown in South Africa as a way of preventing Corona Virus disease 2019 (COVID-19), the South African Rand reached an all-time high of 19.35 in April of 2020 [16].

One of the ways used by central banks to control the money supply is through the required reserves the banks ought to keep. For example, in South Africa, the South African Reserve Bank requires commercial banks to keep 2% of their total liabilities; the Bank of Ghana requires 10%; the Central bank of Kenya requires 5.25% and the Bank of Tanzania 7% [15, 16]. Reserve ratios in SSA have been accelerating since the mid-1990s and are quite high. In many SSA countries, the cash reserve requirements are accompanied by a liquid asset requirement (LAR) to finance the costs of deficits in banks. It should be noted that when central banks undertake policy decisions, expected inflation plays a huge role than the current rate of inflation. Inflation forecasting can be considered a comparative advantage of a central bank as it maintains information about the state of the economy over the public [17].

It had been argued that higher lending rates distort a country's level of investment, reduce the rate of economic growth and are an obstacle to smooth transmission of monetary policy impulse [18, 19]. Altman et al. [20] support this argument by adding that in response to a country's high lending rates, foreign investors reduce their investments. This is because consumer and business confidence in taking out risky investments is discouraged. Therefore, maintaining lower levels of lending rates will improve a country's investment levels. Comparing lending rates with an investment of 2008 in the selected countries, it can be seen in **Figure 1** that Mozambique is the only country that had lending rates exceeding gross fixed capital formation in 2008. Kenya, Nigeria and South Africa all have gross fixed capital formation levels higher than lending rates. In SSA, generally, this can be due to the stock of bank credit to the private sector that remains very low [21]. Several studies suggest that among others, monetary policy actions and macroeconomic uncertainty constrain bank lending rates [21–23].

**Figure 1.** *Gross fixed capital formation (GFCF)-lending rate nexus, 2008.*

*Linear and Non-Linear Financial Econometrics - Theory and Practice*

improving the level of investment activity [1].

tionship between variables of the same sector [4–6].

economy, including the level of investment activity.

only but also for influencing in various ways in the real economy, especially

Investment is very crucial in improving a country's productivity, growth and increasing its competitiveness in the long-run. To find the benefits of linking the monetary and real sector, it is imperative to investigate how monetary variables such as the lending rates, exchange rate and money supply can affect investment actions (a real sector variable). The investigation is conducted in a panel set-up of some selected Sub-Saharan African (SSA) countries such as Kenya, Mozambique, Nigeria, South Africa and Tanzania. The countries and study period are selected on the data availability basis. In Sub-Saharan Africa, there is limited literature addressing the linkage between the two sectors, as most studies stick to the rela-

In the economic literature, one of the measures of investment activities is the gross fixed capital formation (GFCF) representing a total increase in fixed capital and is crucial to the economy because it builds an important part in gross domestic product. GFCF has always been identified as an important factor and an enhancer of economic growth in Sub-Saharan African countries [7–9]. It has three main components namely GFCF general government sector, GFCF private sector and GFCF public sector [10]. The GFCF government sector comprises of investment by the state; GFCF private sector includes investment by private enterprises; while GFCF public sector involves investment by public enterprises [11]. Ali [10] argues that because private investment is less associated with corruption, it has a more favorable effect on economic growth in comparison to public investment. Therefore, the investment needs to be handled carefully in that there are monetary policy instruments that assist in boosting investment, especially private investment. That is one of the reasons that a country's monetary policy should be designed in a manner that attracts investors. For example, in South Africa, business confidence and investment are mutually reinforcing, implying that for investment to take place business owners as investors must have the confidence to invest looking at policies adopted by the country and at the performance of the

Business confidence is one of the factors that can contribute in boosting the economy in the sense that, owners have confidence and are certain about their growth and thus hire more staff, leading to increased employment and investment. However, it is distressing when Ndikumana [13] mentions that more than 30 of SSA countries experienced a decline in investment activities since the beginning of the 1980s. This has brought some concerns as an investment is a major enhancer of economic growth. For example, the Nigeria Bureau Statistics [14] report a yearly decline Nigeria's GCFC at the beginning of 2014. In the middle of 2015, Nigeria experienced negative growth in real terms which was for the first time since 2013 [13]. Changes in GCFC are regarded as a sign of economic incompetence. Thus, identifying how and to what extent monetary variables affect GCFC is of critical importance. This is because monetary variables are not only important for the attainment of stable inflation but also for exercising influences in various ways on the behavior of the real

The three monetary variables (exchange rates, money supply, and lending rates) selected for this study are crucial to explaining the link in the monetary-real sector nexus. The exchange rate is defined as a price relation of a country's currency to another country [14]. Its importance lies in the fact that they affect the relative prices of both the domestic and foreign countries. It is known that an appreciation in a country's currency leads to its goods abroad more expensive, and foreign goods in that country become cheaper, ceteris paribus [9]. Sub-Saharan African

**236**

economy [12].
