Impact of Inflation on Nigeria Economic Growth 1981-2015. Download the project from chapter one to five with reference. Inflation on Nigeria economic growth is a trending issue in the lips of every actor in Nigeria given the current double digit inflation rate @ 18.63 in Nigeria. Thus literature on impact of inflation on Nigeria economic growth is justified.
1.1 Background of the Study
The word inflation ring bell in the market economy of the world, and has become a household name in most African countries today Nigeria inclusive. Inflation is a monster that threatens any economy although some author argues that it moderate is required for sustainable economic growth; however it is noted that inflation is inimical to economic growth. The problem of inflation surely is not a new phenomenon because it has remained a major problem in the country over the past few years. In the words of Adenuga, et al (2012), it is a monster which threatens all economies because of its undesirable effects. Inflation can be defined, as a significant and sustained increase in the general price level over a period of time.
According to Umaru and Zubairu, (2012), the concept of inflation can be defined as a persistence rise in the general price level spectrum of goods and services in the country over the long period of time.
Although several people, producers, consumers, professional, trade unionist, workers and the likes, talk frequently about inflation particularly if the malady has assumed a chronic character, yet only selected few knows or even bother to know about mechanics and consequences of inflation.
According to a report by Masha (CBN Economic and Financial Review, Vol. 28.no 2 2009), there have been four major episodes of high inflation in excess of 30 percent in Nigeria. The first period of inflation in the 30 percent range was in 1976 (CBN, 2009). This was attributed to the drought in northern Nigeria which destroyed agricultural production and pushed up the cost of agricultural food items coupled with excessive monetization of oil export revenue, which might have given the inflation a monetary character.
The period of Structural Adjustment Programme in the late 1980s, the effect of wage increases created cost push inflation. Hence, in 1985, inflation peaked at 40 percent at a time of relatively little growth in the economy. At that time, the government was under pressure from debtor groups to reach agreement with the International Monetary Fund (IMF), one of the conditions of which was the devaluation of the domestic currency. The expectation that devaluation was imminent fuelled inflation as prices adjusted to the parallel rate of exchange. Over the same period, excess money growth was about 43 percent (CBN, 2009)
The third high inflation episode started in the last quarter of 1987 and accelerated through 1988 to 1989. This episode is related to the fiscal expansion that accompanied in 1988 budget. However, with drastic monetary contraction initiated by the authorities in the middle of 1989, inflation fell, reaching one of its lowest points in 1991at 13% (CBN, 2009).
The fourth inflationary episode occurred in 1993, and persisted through the end of 1995. Though inflation gathered momentum towards the tail end of 1992, it reached 57 percent by the end of 1994, and by the end of 1995, it was 72.8 percent (CBN, 2009). This was equally attributed to a period of expansionary fiscal deficit and money supply growth. Between 1996 and 2011, inflation rate has fallen considerably though still in double digit.
There has been widespread debate between two schools of thought on the causes of inflation which led to different prescription about the appropriate policy response to be adopted. The traditional monetarists stress the importance of the link between money supply and inflation. They therefore emphasized measures such as reduction in government budget deficits and restraining credits to public enterprises as a panacea to inflation.
However, the structuralists school sees financial factors as forces propagating inflation rather than causing it. The structuralists’ are of the view that inflation can result from a number of special problems in developing countries, not just from excessive money growth, thus they favour income policies as a measure of controlling inflation.
According to Anyanwu and Oaikhenan (1995), the quasi competitive Keynesian theory of inflation states that at competitive equilibrium, “structural imperfections” inherent in a monetary economy generate upward pressure on the price level.
It is generally believed that the attainment of every other macroeconomics goals (full employment, economic growth etc) depends on the maintenance of a stable and low inflation environment.
It is on this background that this study would investigate the impact of monetary policy on inflation control in Nigeria.
1.2 Statement of the Problem
There is almost a universal consensus that macroeconomics stability specifically defined as low inflation, is positively related to economic growth. And a low inflation which is compatible with economic growth and theoretically can be achieved through monetary policy. In general terms, monetary policy refers to a combination of measures designed to regulate the value, supply and cost of money in an economy in consonance with the expected level of economic activity.
Since its establishment in 1959, the Central Bank of Nigeria (CBN) inflation targeting and exchange rate policy have dominated its policy focus based on the assumption that these are essential tools of achieving macroeconomic stability (Aliyu and Englema, 2009).
During inflation, money losses value and people are discouraged from savings which ultimately affect the volume of money in the money market, as well as investment which in turn leads to economic growth at large. Various governments had introduced lots of policy measures in Nigeria prominent among which are fiscal and monetary policy. But despite the intensified use of these policies over the years, inflation still remains a major threat to Nigeria’s economic growth.
Despite the various policies that have been adopted by the monetary authority, inflation has remained the greatest to the economic growth of the nation. Inflation has remained at double digit not until 2013 that inflation has average 8.5% CBN annual report 2013. Hence, the main thrust of this study shall be to evaluate the impact of CBN’s monetary policy on inflation in Nigeria.
1.3 Research Questions
This research shall be guided by the following questions.
- What is the causal relationship between inflation and economic growth of Nigeria?
- Is there any observed long-run relationship between inflation and Nigeria economy?
- To what extent does inflation impacted on the economic growth of Nigeria?
1.4 Objectives of the Study
The main objective of this study is to examine the link between economic growth and inflation in Nigeria. However, the following specific objective would also be achieved:
- To examine the causal relationship between inflation and economic growth of Nigeria.
- To evaluate if there any observed long-run relationship between inflation and Nigeria economy.
- To examine the extent inflation impacted on the economic growth of Nigeria.
1.5 Hypothesis of the Study
H0 There is no significant impact of inflation on the economic growth of Nigeria.
H0 There exist no significant causal relationship between inflation and economic growth in Nigeria
H0 There is no long-run relationship existing between inflation and economic growth in Nigeria.
1.6 Significance of the Study
This study aims at making meaningful contribution to the general knowledge and understanding of the nature of inflation in Nigeria settings. The work also intend at arousing interest and to stimulate further research in the area of inflation.
Finally, it would provide policy recommendations to policymakers on measures to ensure price stability and basis for further research.
1.7 Scope and Limitation of the Study
This study aims at assessing the impact of inflation on economic growth of Nigeria, taking cognizance of the effect of each of the instrument on inflation between the periods under study. Data and information for this study shall be sourced from the CBN statistical bulletin, annual report and statement of account, books, internet among others.
The researcher encountered a number of constraints in the course of this work to include; data sourcing or data inconsistence due to poor nature of information management in Nigeria. In spite of these problems, efforts were put in place to enhance the quality of this study.
1.8 Definition of the Terms
Money Supply: The term Money supply refers to the amount of money in the hands of the non-bank public at a point in time and the some balances in commercial banks. Money supply is the amount of money within a specific economy available for purchasing goods or services. The broad definition of money supply (M2) is adopted which includes currency in circulation, demand deposits, quasi-money and foreign currency deposits.
Inflation: Simply define, inflation means an economic situation where there is a general and persistent rise in prices of goods and services. It could be said to be a continuous rise in prices as measured by the Consumer Price Index (CPI). People describe inflation as a situation where too much money is chasing too few goods. During inflation in an economy, the currency loses purchasing power.
Monetary Policy: In general terms, monetary policy refers to a combination of measures designed to regulate the value, supply and cost of money in an economy; in consonance with the expected level of economic activities. It mean all the measure adopt by the monetary authority to control the flow of money towards achieving some macroeconomic objectives such as price stability, full employment, balance of payment equilibrium among others.
Economic Growth: Economic growth in the increases in the market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate4 of increase in real gross domestic products or real GDP.
Interest Rate: This is the rate at which interest is paid by a borrower (debtor) for the use of money that they borrows from a lender (creditor).
Gross Domestic Product: (GDP). this is the market value of all officially recognized final goods and services produced within a country in a year , or other given period of time . GDP per capital is often considered an indicator of a country’s standard of living.
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