Impact of Money Supply on Nigeria Economic Growth 1981-2015

Impact of Money Supply on Nigeria Economic Growth 1981-2015 PDF. Download the full project from chapter one to five with reference and abstract. The relationship between money supply and economic growth has been receiving increasing attention than any subject matter in the field of monetary economics in recent years. Let discuss it in full.

CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

Nigeria economy is characterized as a middle income, mixed economy and emerging market with expanding financial service communications, technology and entertainment sectors. As at 2015, it was ranked 26th in the world in terms of GDP and is the largest economy in Africa (based on rebased figures announced in April 2014) (Anyanwu and Kalu, 2014). It is also on track to become one of the 20 largest economics in the world by 2020. Economic growth can be regarded as an important macroeconomic objective of the government given the fact that it visibly impacts on the standard of living. The price level in Nigeria has witnessed profound fluctuations since 1970 which cause inflation. Persistent inflation and limited bank credit have been held responsible for the systemic crisis in the banking sector, slow growth of manufacturing and agricultural sectors, reduced productivity and generally low and slow economic progress (Missibau and Muhammed, 2011).

The relationship between money supply and economic growth has been receiving increasing attention than any subject matter in the field of monetary economics in recent years. Economists differ on the effect of money supply on economic growth. while some agreed that variations in the quantity of money is the most important determinant of economic growth and that countries that devote more time to studying the behavior of aggregate money supply experiences much variations in their economic activities (Handle 1997),others are skeptical about the role of money on gross national income (Robinson, 1952).

Evidence has shown that since 1981 till now some relationship exist between the stock of money and economic growth or economic activity in Nigeria. Over the years, Nigeria has been controlling her economy through variations in her stock of money. Consequent upon the effect of the collapse of oil price in 1981 and the balance of payment (BOP) deficit experienced during this period, various methods of stabilization ranging from fiscal to monetary policy were used. Ikhide and Alwoda (1993) concluded that reducing money stock of money through increased interest rates would lower gross national product (GNP). Thus the notion that stock of money varies with economic activities applies to the Nigerian economy. As already explained money supply exerts considerable influence on economic activity in both developed and developing economics. The low level of supply of monetary aggregates in general and money stock in particular had been responsible for the fundamental failure of many African countries to attain growth and development. Various scholars have laid much of the blame for the failure of monetary policies to translate into economic growth on the government and its agencies as a result of poor implementation and sincerity on the part of policy executors.

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 (Okwu, Obiakor, Falaiye and Owolabi, 2011; Adesoye, Maku and Atanda, 2012; Baghedo and Ebibai, 2014). For most economies, the objects of monetary policy include price stability, maintenance of balance of payments equilibrium, promotion of employment and output growth, and sustainable development (Folawewo and Osinubi, 2006). These objectives are necessary for the attainment of internal and external balance, and the promotion of long-run economic growth (Imoughele, 2014).

The importance of price stability derives from the harmful effects of price volatility, which undermines the ability of policy makers to achieve other laudable macroeconomic objectives. There is indeed a general consensus that domestic price fluctuation undermines the role of money as a store of value, and frustrates investments and growth (Fischer, 1994). With the achievement of price stability, the conditions in the financial market and institutions would create a high degree of confidence, such that the financial infrastructure of the economy is able to meet the requirements of market participants. Indeed, an unstable or crisis-ridden financial sector will render the transmission mechanism of monetary policy less effective, making the achievement and maintenance of strong macroeconomic fundamental difficult. This is because it is only in a period of price stability that investors and consumers can interpret market signals correctly.

In discussing the concept of money supply and its impacts, two issues often come to our mind which is the state of inflationary pressure and the unemployment rate. According to the monetarist, an increase in money supply in an economy causes an increase in general price level of commodities which brings about inflationary in the country (Uzougu, 1981). Also related to the issue of inflation is the issue of unemployment which is the primary goal of any economy so as to produce as many goods and services as possible while maintaining an acceptable level of price stability, but this major goal will be very difficult to attain at high inflation rate and price instabilities due to excess money supply in the economy. It is on this background that this study would investigate the impact of money supply on Nigeria’s economy and the technicalities involved in the control of money supply in Nigeria.

1.2       Statement of Problem

A study of this nature is always necessitated by the existence of certain problems. The major problem that trigged off this work is the recurrence of general feeling that a continuous annual rate of money increases will adversely increase the rate of price level which will directly lead to inflation, and may deny the intended effects of use of monetary policy measure to influence economic growth thus, requiring a policy response. Recently, these inflationary pressures have succeeded in bringing about devaluation in Nigeria’s value as a result of expansionary measures of money supply. According to Kaufman (1978), money is more closely related to aggregate level of spending, prices, income, production and employment than any other single economic variable. An excess supply of money which will result in an excess demand for goods and services and in return lead to increase prices and or a deterioration of the balance of payment position. Typically, in periods of high inflation, the horizon of the investor is very short, and resources are diverted from long term investment to those with immediate returns and inflation hedges, including real estate and currency speculation. In the light of the foregoing, all modern economies now consider monetary management as an integral part of their responsibilities. The question is how effective is the monetary policy in Nigeria?

1.3       Research Questions

From the above issues, this research work will address the following pertinent questions:

  1. What is the impact of money supply on Nigeria economic growth ?
  2. Is there any causal relationship between money supply and economic growth in Nigeria?

1.4       Objectives of the Study

As a result of the problems highlighted above, the researcher desires to achieve the following objectives;

  1. To determine the impact of money supply on Nigeria economic growth.
  2. To verify if there is a causal relationship between money supply and economic growth.

 

1.5       Research Hypotheses

The hypothesis is built around objective 1 because it probes into what can be revealed through statistical means while objective 2 involves only making recommendations, this work is interested in testing the hypothesis below;

H0: Money Supply has no impact on economic growth in Nigeria.

H0: There is no significant causal relationship between money supply and economic growth in Nigeria.

  • Significance of the Study

This research work will help us to investigate into the beneficial effects of the control of money supply especially its impacts on economic growth in Nigeria. The Government: The government that make both fiscal and monetary policies would find the study very important as it would guide its choice of policy option especially as it work towards achieving its vision of becoming one of the best twenty economies of the world in the year 2020.

The Central Bank: The Central Bank of Nigeria whose duty among others, is to assist government in the implementation of its monetary policy will find the study relevant as it shall for the bases for valuable pieces of advice to government on some of the dangers that may be identified by the study.

The Academia: Members of the academia will find the study relevant as it will also form basis for further research and a reference tool for academic works. The Private Sector: This study shall also be significant to the private sector especially those who may have research interest as it shall guide their private investment decisions. The study shall also form reasonable tool for the private sector’s contribution to National debates.

The implication of this is not farfetched as research in the field could lead to a proper and more focused policy formulation, which would yield much better results.

1.7       Scope and Limitations of the Study

The research work centers on the impact of money supply on Nigeria economic growth 1981 to 2015. It is expected in course of this study that the researcher will examine and appraise the stock of money supply and its impacts with regards to growth in the Nigerian economy.

The success of this research work was hindered by several factors; financially independence as a student, the need for material trips and logistics needed for this research was not adequately provided, time constraint since the researcher had to make decision on how best to allocate her limited time among numerous engagements seeking her attention like her academic works. In spite of these problems and limitation, a lot of efforts were put in place to enhance the quality of the study.

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