Causes, Effect And Solution To Inflation In Nigeria: A Case Study Of Edo State

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Causes, Effect And Solution To Inflation In Nigeria: A Case Study Of Edo State


Abstract


The study examines the impact of inflation on economic growth of Nigeria. Other micro economic variable tested along with inflation in this study are Agriculture, manufacturing, and trade. In analyzing the data the simple percentage method was applied the empirical results demonstrated that there is a positive relationship between the dependent variable (agriculture and trade) and explanatory variable except in manufacturing.

The relationship between inflation and economic growth is one, which many economists have watched with keen interest. Producers in the production sector cash on this phenomenon to make a brisk business sat the expense of fixed income earners. This informs the increase in turnover in inflationary periods. Money economy gave rise to inflation, which reduces the living standard of the people and the level of saving dwindles in turn. The effect on economic growth is dependent on the level of economic activity going on. If there are more producers, there are likely to be an increase in the level of economic growth vice versa.

In all, inflation do not wish any economy well, so should be eradicated by a deliberate effort. Nigeria has intellectuals that are capable of formulating good monetary and fiscal policies that will benefit her. Aside economic viewpoint, inflation devastates social, health and educational, infrastructure, it should be discouraged in our system.


Chapter One


Introduction

1.1 Background To The Study

The word inflation rings a bell in the market economics of the world. It is a monster that threatens all economics because of its undesirable effects. The problem of inflation surely is not a new phenomenon. It has been a major problem in the country over the years. Inflation is defined as a generalised increase in the level of price sustained over a long period in an economy (Lipsey and Chrystal, 1995). Inflation is a household word in many market oriented economics. Although several people, producers, consumers, professionals, non-professionals, trade unionists, workers and the likes, talks frequently about inflation particularly if the malady has assumed a chronic character, yet only selected few knows or even bother to know about the mechanics and consequences of inflation.

After an appreciable economic performance in the early 1970s, the Nigeria economy witnessed some anxious moment in the late 1970s to mid 1980s. Severe pressures built up in the economy mainly because of the expansionary fiscal policy of the federal government during these years. This was accompanied by high monetary expansion as the huge government deficit was financed largely by the Central Bank of Nigeria. This was exacerbated by the transfer of government sector deposits to the banks and the resultant increase in their free reserves with adverse consequences on the general price level. The inflationary pressure was further aggravated by high demand for imports of both intermediate inputs and consumer goods due to over valuation of the naira which made imports relatively cheaper than locally manufactured goods. In this case, the impediments to development may be referred to as cost. Economics theory, however, postulates that for the profit to be maximised, cost should be minimised. One of the main cost is inflation, which has turned into a canker worm eating deep into the nation’s path of economic progress. However, as fiscal discipline was restored in the second half of 1999, the pressures on the exchange rate and domestic prices moderated significantly. The economy faced renewed pressures and some uncertainty towards the end of the year as the C.B.N gradually relaxed its tight monetary policy.

Undoubtedly one of the macroeconomic goals which the government strives to achieve is the maintenance of stable domestic price level. This goal is pursued in order to avoid cost of inflation or deflation and the uncertainty that follows where there is price instability (Salam et al, 2006). The effects of inflation on economic growth will be examined bearing in mind that a country will grow faster in real terms if inflation is reduced to a barest minimum. Perhaps it should be mentioned here that inflation is not incompatable with growth.


1.2 Statement Of The Problem

There is almost a universal consensus that macroeconomic stability, specifically defined as low inflation, is positively related to economic growth. Over the years the question of the existence and nature of the link between inflation and growth has been the subject of considerable interest and debate (Erbaykal and Okuyan, 2008). Although the debate about the precise relationship between these two variables is still open, the continuing research on this issue has uncovered some important results. In particular, it is generally accepted that inflation has a negative effect on medium and long-term growth (Bruno and Easterly, 1998). Inflation impedes efficient resource allocation by obscuring the signalling role of relative price changes, the most important guide to efficient economic decision-making (Fischer, 1993).

If inflation is inimical to growth, it obviously follows that policymakers should aim at a low rate of inflation. But how low should inflation be? Should it be 10 percent, 5 percent, or for that matter, zero percent? Or put in other words, is there a level of inflation at which the relationship between inflation and growth become negative? The empirical test of the impact of inflation on the Nigerian economy which is the subject matter of this study shall provide precise answer to the relationship between inflation and growth and how the problem could be tackled.


1.3 Objectives Of The Study

The broad objective of this study is to examine inflation in developing countries with the view of ascertaining the effect of inflation on economic growth.

The specific objectives of this study are to:

  1. Examine the trend of inflation in Nigeria over the years;
  2. Investigate the impact of inflation on the economic growth of Nigeria;
  3. Explore the effect of inflation on capital formation in Nigeria;
  4. Examine the influence of inflation on peoples’ consumption;
  5. Suggest visible solutions to the problem of inflation in the country.

1.4 Research Questions

This study would be guided by the following research questions:

  1. What is the trend of inflation in Nigeria?
  2. How does Inflation impact on economic growth in Nigeria?
  3. What is the effect of inflation on the level of capital formation in Nigeria?
  4. How does inflation affect the consumption expenditure of Nigerian households?

1.5 Statement Of Hypotheses

The hypotheses to be tested in the course of this study are stated below:

Hypothesis I
  • Ho: Inflation does not affect significantly the economic growth of Nigeria.
  • H1: Inflation affect significantly the economic growth of Nigeria.
Hypothesis II
  • Ho: Inflation does not affect significantly capital formation in Nigeria.
  • H1: Inflation affect significantly capital formation in Nigeria.
Hypothesis III
  • Ho: there is no significant relationship between inflation and consumption expenditure of people in Nigeria.
  • H1: there is relationship significant between inflation and consumption expenditure of people in Nigeria.

1.6 The Significance Of Study

The effect of inflation on the economic development of Edo state cannot be over emphasized; therefore, this research work is designed to find out the problem facing the inflation, causes, effect and solutions.


1.7 Scope Of The Study

This work is to cover the effects of inflation and economic development in Edo state between 1993 to 2003 (a decade) and also various ways in which the scourge has been controlled by the various administration and relevance of control model or methods.


1.8 Definition Of Terms

Inflation:

Inflation can be defined as any increase in the money supply; however this can be regarded as inflation. This can also be seen as persistent in average price level of goods and services resulting in diminishing purchasing power of a governmental sum of money. Also when the volume of money in circulation is greater than the available goods and services so that there is a continuous tendency for average price level rise.


Causes, Effect And Solution To Inflation In Nigeria: A Case Study Of Edo State


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