The Impact Of Inflation In Nigeria Economic Development

Project and Seminar Material for Accountancy / Accounting

Abstract

The study assessed the impact of inflation in Nigeria economic development for the period of 1982-2017. Data was obtained from CBN statistical bulletin. Cointegration approach, vector error correction model (VECM) and Granger causality test were employed in the analysis. Variables engaged in the study involve real gross domestic product (RGDP), inflation rate (INFR), government investment expenditure (GINVXP), private investment expenditure (PINVXP) and total export (TEXP). The results of cointegration test showed evidence of long-run relationship among the selected variables. The VECM results demonstrated that inflation affect Nigeria’s economic development negatively and insignificantly. More so, it was shown in the results that GINVXP and TEXP have significant and negative effect on RGDP. The results also indicate that PINVXP has significant and positive influence on RGDP. Similarly, the results of the Granger causality test revealed no causation between inflation rate and real GDP. The implication of these results is that while government economic measures aimed at improving public spending on both private and public investments leads to increase real GDP, such measure does not lead to solving Nigeria’s inflation problems. In view of the above, the study therefore recommends as follows: that government may reconsider the over reliance in its spending on public and private investments in solving inflation problems in Nigeria, as there are other factors responsible for high inflation in the economy. To mention but a few.

Table of Content

Title Page
Certification
Dedication
Acknowledgement
Table of Content
List of Tables
Abstract

Chapter One:

Introduction

1.1 Background of the Study
1.2 Statement of the Problem
1.3 Objective of the Study
1.4 Research Questions
1.5 Research Hypothesis
1.6 Significance of the Study
1.7 Scope of the Study
1.8 Limitation of the Study
1.9 Definition of Terms
1.10 Organisations of the Study

Chapter Two:

Review of Literature

2.1 Conceptual Framework
2.2 Theoretical Framework
2.3 Empirical Review

Chapter Three:

Research Methodology

3.1 Research Design
3.2 Population of the Study
3.3 Sample Size Determination
3.4 Sample Size Selection Technique and Procedure
3.5 Research Instrument and Administration
3.6 Method of Data Collection
3.7 Method of Data Analysis
3.8 Validity of the Study
3.9 Reliability of the Study
3.10 Ethical Consideration

Chapter Four:

Result and Discussion

4.0 Introduction
4.1 Unit Root Test
4.2 Johansen Cointegration Test
4.3 Vector Error Correction Model (VECM)
4.4 Granger Causality Test
4.5 Summary of the Findings

Chapter Five:

Summary, Conclusion and Recommendation

5.1 Summary
5.2 Conclusion
5.3 Recommendation
References
APPENDIX
QUESTIONNAIRE

Chapter One

Introduction

1.1 Background of the Study

To achieve rapid economic growth, as well as low inflation rate are the main goals of macroeconomic policies in any economy. According to Bill & Khan (2008), most researchers, policymakers and economists have agreed that zero inflation is not healthy for an economy and as a result should be discouraged. This is because; deflation has serious effects on economic growth and development of a country. Thus, moderate inflation enhances nation’s domestic economy, while high inflation is inimical to the growth and development of the domestic economy (Mubarik, 2005). In view of the above, the policymakers, as well as the monetary authorities are advised to work toward achieving low rate of inflation in an economy, as that would help to maximize the overall economic well-being of citizens in their countries.

Generally, high inflation imposes welfare costs on a nation, hinders efficient allocation of resources by affecting the role of changes in the relative price level, and as well discourages investments and savings in an economy as it creates unpredictable future prices. The situation also affects financial development because it makes financial intermediation more costly, and the poor are mostly affected because they rescind in holding financial assets that provides a hedge against high inflation and decreases a country’s international competitiveness by making exports more expensive. It also has negative effect on payments balance, and reduces long-term growth of a country. Business and households perform poorly during the period of high inflation (Frimpong & Oteng-Abayie, 2010).
In Nigeria, high inflation has been one of the major challenges facing the nation’s economy. The inability of the government to proffer a lasting solution to this problem indicates the inevitability of inflation in the economy; hence, it shows that government lacks the power to eliminate the persistent rising prices of goods and services in the domestic economy (Taiwo, 2011). Inflation in Nigeria can be traced to 1950s, though not prevalent then. Scholars have argued that during an inflationary period, domestic currency finds it difficult to act as medium of exchange and a store of value without adversely affecting output level, income distribution and employment level of the country (CBN, 1984). Inflation leads to currency depreciation and a rise in foreign exchange rate. This is obviously the case of the Naira as it has depreciated overtime against US dollar and other major foreign currencies. For example, naira exchange rate was ₦0.61 per US dollar in 1981, and depreciated to ₦2.0206 to a dollar in 1986. In 1991, the exchange rate depreciated to ₦9.9095 per dollar, and further depreciated to ₦21.886, ₦111.9433, ₦128.6516, ₦153.8616 and ₦199.268 in 1996, 2001, 2006, 2011 and 2015 respectively. However, the corresponding rate of inflation in 1981 stood at 20.8% in Nigeria; and in 1986, the inflation rate declined to 5.7%, and increased to 13.0% in 1990. By 1996, the rate of inflation again rose to 29.3%; in 2001 and 2006, the rates of inflation were 18.9% and 8.2% respectively; and it was 10.8% and 9.0% in 2011 and 2015 respectively (CBN, 2015). More so, the growth rate of real gross domestic product (RGDP) in 1981 was -20.4%; in 1986, the growth rate of RGDP rose to 1.9%, and declined to 0.01% in 1991. By 1996, 2001, 2006, 2011 and 2015, the growth rates of the RGDP were 4.1%, 9.8%, 6.0%, 7.4% and 3.9% respectively (CBN, 2015).

According to Taiwo (2011), inflation in Nigeria has become a major threat to economic activities, especially on workers whose standard of living declines continuously. The inflationary factors traced to Nigeria’s high inflation include continuous hike in petroleum price and exchange rate depreciation/devaluation. These increases in the two variables (price of petroleum and exchange rate depreciation) have been blamed for the increases in the transportation costs, input materials, foodstuffs, rents, and goods and services coupled with the exchange rate depreciation in Nigeria. Inflation in an economy can be measured using consumer price index approach and wholesale or producer price index approach. The period to period changes in wholesale or producer price index are used as direct measures of inflation, though not the best measure of inflation in Nigeria. The consumer price index (CPI) approach on the other hand, is the least efficient of the approaches used in measuring inflation rates in Nigeria, yet it is the most used measure of inflation, because it is easily and currently available on monthly, quarterly and annual basis (CBN, 1991). To control inflation in the country, the Central Bank of Nigeria (CBN) often adopts monetary policies with the aim of achieving price stability, as well as sustainable economic growth. The monetary authorities in an attempt to achieve the overall inflation objective of the government via effective monetary management, sets intermediate and operating targets that is in line with the targets for GDP growth, inflation rate and balance of payments (Sani & Abdullahi, 2011). Despite all the monetary policies adopted by the monetary authorities to reduce high inflation in Nigeria, the rate of inflation in the country is still high with the standard of living of the citizens decreasing continuously. It is against this background that the study investigates the effect of inflation on economic growth of Nigeria for the period of 1982-2017.

1.2 Statement of the Problem

Inflation ups and downs in the Nigeria economy as makes the economic growth in the country to continues faces dilemma. Considerable previous research efforts seem to either support or invalidate the assumption that inflation exerts significant positive influence of economic growth. Therefore, the question of whether any or all macroeconomic variables is inimical to economic growth has in recent times been an issue of great interest to policymakers and macro economists (Kassidy and Nacirema, 2013). Nevertheless, Chagatai, Malik and Aftab (2015) identify some primary causes of unsustainable growth to include: (I) high inflation, (ii) rising foreign debt, (iii) currency exchange rate volatility (iv) propensity to consume more and save less (v) poor governance and policy implications, (vi) trade imbalance, (vii) spend more earn less, (viii) energy and water shortages, and (ix) political instability, among others. The scholars contend that the connection between basic macroeconomic indicators such as gross domestic product (GDP), consumer price index (CPI), producer price index (PPI), current employment statistics (CES), inflation rate (INFR), currency exchange rate (CEXR), and interest rate (INTR. In the same vein, Samuel & Nuria (2015) posit that a high or low economic growth can be determined by calculating the GDP of the country in question.

Stockman (1981) developed a model in which an increase in the inflation rate results in a lower steady state level of output and people’s welfare declines. In stockman’s model, money is a compliment to capital, accounting for a negative relationship between the steady-state level of output and the inflation rate. Stockman’s insight is prompted by the fact that firms put up some cash in financing their investment projects. Sometimes, the cash is directly part of the financing package, whereas other times, banks require compensating balances. Stockman models this cash investment as a cash-in-advance restriction on both consumption and capital purchases. Since inflation erodes the purchasing power of money balances, people reduce their purchases of both cash goods and capital when the inflation rate rises. Correspondingly, the steady-state level of output falls in response to an increase in the inflation rate. This theoretical review demonstrates that models in the Neo-classical framework can yield very different results with regards to inflation and growth. An increase in inflation can result in higher output (Tobin Effect) or lower output (stockman effect or no change in output (Sidekick). In view of the above, this study seek to examine the impact of inflation in Nigeria economic development.

1.3 Objectives of the Study

The general aim of this study is focus on examining the impact of inflation in Nigeria economic development. Specifically, this study will;

Discuss the effect of inflation in Nigeria.
Identify the factors mitigating the impact of inflation on Nigeria economy.
Ascertain the impact of inflation on Nigeria economic development.

1.4 Research Question

What is the effect of inflation in Nigeria?
What are the factors mitigating the impact of inflation on Nigeria economy?
What is the impact of inflation on Nigeria economic development?

1.4 Research Hypotheses

Ho: There is no significant relationship between inflation and Nigeria economic development.
Ha: There is a significant relationship between inflation and Nigeria economic development.

1.6 Significance of the Study

The importance of this study is so numerous to mention. It will be useful to policy makers especially formulating policy that will reduce inflation growth rate. It will be useful to monetary houses like the Central Bank and Commercial Banks. It will also be useful to students of economics and other related fields. It will be useful to the general public.

1.7 Scope of the Study

This study is structured to generally examine the impact of inflation in Nigeria economic development. The study will focus on the following variables; real gross domestic product (RGDP), inflation rate (INFR), government investment expenditure (GINVXP), private investment expenditure (PINVXP) and total export (TEXP). A period of 35years – from 1982-2017 shall be covered in this study.

1.8 Limitation of the Study

The major limitations to this study were the unreliable data on inflation rates. Therefore, the interpretation of results obtained from any computations that uses the data must be done with caution. Sometimes there are conflicting data on the same variable from different sources.

1.9 Definition of Terms

Inflation:

This is rise in prices and ways caused by an increase in the money supply and demand for goods and resulting in a fall in the value of money. The problem possed by unemployment has given way to a concern over inflation. Most economic policy which are vibrant may be seen as a constant fight to sustain prices increase and the distortions created by them

Impact:

Impact is defined as the action of one object coming forcibly into contact with another or a marked effect or influence.

Economic Growth or Development:

Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.

1.10 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, definition of terms etc.
Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature.
Chapter three deals on the research design and methodology adopted in the study.
Chapter four concentrate on the data collection and analysis and presentation of finding.
Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five

Summary, Conclusions and Recommendations:

5.1 Introduction

This chapter summarizes the findings on the impact of inflation in Nigeria economic development. The chapter consists of summary of the study, conclusions, and recommendations.

5.2 Summary of the Study

In this study, our focus was on the impact of inflation in Nigeria economic development. The panel data used in this study were obtained from documentaries of the CBN Statistical Bulletins, monthly journals, etc. Cointegration approach, vector error correction model (VECM) and Granger causality test were employed in the analysis. Variables engaged in the study involve real gross domestic product (RGDP), inflation rate (INFR), government investment expenditure (GINVXP), private investment expenditure (PINVXP) and total export (TEXP).

5.3 Conclusion

The main objective of the study is to empirically examine the impact of inflation in Nigeria economic development for the period of 1982-2017. Cointegration approach, vector error correction model (VECM) and Granger causality technique were employed in the analysis. The variables used in the study involves real gross domestic product (RGDP) as the explained variable, while inflation rate (INFR), government investment expenditure (GINVXP), private investment expenditure (PINVXP) and total export (TEXP) were employed as the explanatory variables in the investigation. Stationarity test was conducted through the application of the Augmented Dickey-Fuller (ADF) unit root test; and the results indicated that all the variables were non- stationary at level; however, all the variables became stationary after first differencing. The results of the cointegration approach showed evidence of long run relationship among the variables of the study. Similarly, the results of the VECM revealed that inflation rate has negative and insignificant impact on real gross domestic product (RGDP) in Nigeria. Furthermore, the results indicated that government investment expenditure (GINVXP) and total export (TEXP) have negative and significant impact on real gross domestic product (RGDP) in the economy. The result also demonstrated that private investment expenditure (PINVXP) has positive and significant impact on real gross domestic product (RGDP) in Nigeria.

The results of the Granger causality test indicate no causation between inflation rate and real gross domestic product (RGDP). The results however, showed that unidirectional relationship exists between RGDP and GINVXP, PINVXP with causality running from GINVXP to RGDP and PINVXP to RGDP. The results further indicated that causality does not run between inflation rate (INFR) and government investment expenditure (GINVXP), as well as private investment expenditure (PINVXP) in the economy.

5.4 Recommendation

With respect to the findings and the aim of this study, the researchers therefore recommend that;

Government is advised to pursue vigorously those economic policies that are capable of promoting economic growth, as it will help to reduce inflation rate in the country. Similarly, government is also advised to expand its capital budget expenditures on public investment projects, and as well create a favourable business environment for private investment in Nigeria. It is only in this way that significant economic growth will be achieved and sustained in the economy. More so, government may reconsider its over reliance on its expenditures on government investment and private investment in solving inflation problems, as there are other variables responsible for high inflation in the economy.