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IMPACT OF INFLATION ON ECONOMIC GROWTH OF NIGERIA. (1980-2012)

 IMPACT OF INFLATION ON ECONOMIC GROWTH OF NIGERIA. (1980-2012)

CHAPTER ONE

INTRODUCTION

  • Background of the Study

       Inflation has become a leading topic of discussion in Nigeria families and other countries of the world. The press as its effect penetrates more deeply into the nation’s life. It has become something of a platitude to say that sharp continuous increase in price is among the serious economic problem of our time. Indeed, the problem is so great that unless it is brought under control, inflation will destroy the very fabric of our societies.

Inflation is a highly controversial term which has undergone modification by it a galloping rise in prices as a result of the excessive increase in the quantity of money. They regarded inflation “as a destroying disease born out of lack of monetary control whose results undermined the rules of financial ruin of even the prudent” Jhingan (2003).

Inflation is generally used to describe a situation of high and sustained increase in general price level of an economy. It is a social malady as well as a pervasive economic phenomenon. Besides distorting prices, it erodes savings, discourages investment, stimulates capital flight, inhibits growth and makes economic planning a night mare and political unrest. Guy et al (1998). Government consequently regent inflation as a plaque and try to squelch it, by adopting sustained and consistent fiscal and monitory policies.

However, maintenance of price stability continues to be over ridding objective of monetary policy for most countries in the world today. The emphasis given to stability in conduct of monetary policy is with a view to promoting sustainable growth and development as well as strengthening the purchasing power of the domestic currency amongst others. The central bank of Nigeria (CBN) employs the monetary targeting framework in the conduct of its monetary policy. This is based on the assumption of a stable and predictable relationship between money supply and inflation. Ojo (2000) shared on the need to understand the relationship between inflation and economic growth in the Nigeria economy become imperative and the dynamics of inflation become central to the success of monetary policy to ensure the achievement of price stability. The effect of inflation (price instability) in the growth and development of the Nigerian economy cannot be over- emphasized.

Today we commonly hear about different kinds of inflation. Indeed the world inflation is often used synonymously with “price increase”. But there is also different more specific definition of inflation-arise in the general price level caused by an imbalance between the quantity of money and trade needs, this “inflation” has but one origin, the central bank and one solution-a less expensive money growth rate. But as a condition of the price level which may have originated from a variety of things (including a depreciating dollar, rising labor costs, bad wealth or a number of factors other than “too much money”). The solution to and the prudence of eliminating inflation is much less clear, Jhngan (20003).

Inflation can have positive and negative impact on the performance of an economy. Positively, inflation can head to a higher sustained growth due to the effect it has on capital allocution. Also through its negative impact on productivity in an economy, inflation results in adverse effects on economic growth, Sarel (1996).

According to Khan (2002), some researchers advocated that inflation can lead to uncertainly about the future profitability of investment strategies than would otherwise by the case, ultimately leading to lower levels of investment and economic growth. He also concur that Inflation may also reduce a country’s international competitiveness by making its exports relatively more expensive, thus impacting negatively on the balance of payment. In addition budget deficits also reduce both capital accumulation and productively growth. On the contrary, some theories advocated that there is a positive relationship between inflation and economic growth.

One of the macro-economic goals in the society is economic growth as defined by Kuznet (1973) as a long term rise in the capacity to supply increasingly diverse economic goals to its population and this growing capacity is based on advanced technology, industry and the institutional and ideological adjustment that it demands, it therefore, implies that increase in the value of goods and services produced by an economy. Economic growth is conveniently measured as the percentage rate of increase in real Gross Domestic Product (GDP) and it is adjusted calculated in real terms, i.e. inflation adjusted terms in order to net out the effect of inflation on price of goods and services produced.

Burro and Grille (1994), posit that mainstream economists believe that high rates of inflation are caused by high rate of growth of the money supply. They are of the view that changes in inflation are sometimes attributed to fluctuations in real demand for goods and services or in available supplies (i.e. changes in scarcity) and sometimes to change in the supply and demand for money.

In Nigeria, one of the major problem facing the economy is inflation, the country registered low inflation in the years immediately after independence. However, the country experienced double digit inflation rate in the 1970s. This was mainly as a result of civil war. Other era of high inflation was 1984, 1992 and 1995. Debelle (1998).

Various macro-economic policies notably fiscal, monetary and exchange rate had from time to time been adopted to address this problem of inflation, unfortunately, these measures have met with little or no success and this has hindered the achievement of other macro-economic objectives such as economic growth, increase in employment, satisfactory balance of payment and equitable income distribution, Agenor et al.(1997).

It is in this light that this study is deviled to identify the impact and the rate of inflation that is acceptable to achieve economic growth in Nigeria in order to attain a more balanced economic growth.

  • Statement of the Problem

Since the attainment of independence in 1960, economic policies have been concerned basically with anti-inflationary measures aimed at achieving price stability. Indeed the monetary policy framework adopted by Nigeria since 1963 has an overriding objective and that is the achievement of single digit inflation (Essien and Eziocha, 2002). Monetary and fiscal policies as well as wage Freeze, price control, exchange rate and other measures have been employed from time to time to stem the tide of sustained increase in the general price level. In retrospect, it appears that insipite of these efforts; the achievement of price stability objective has been limited.

Inflation undermines the role of money as a store of value. It also frustrates investments and growth. Empirical studies (Ajayi and Ojo, (1981); Fisher,( 1993) on inflation, growth and productivity confirm the long term inverse relationship between inflation and economic growth. The negative relationship between inflation and growth has been attributed to the strong negative association between inflation, capital accumulation and productively growth. Consequently, high inflation is said to be harmful to both investment and hence real output.

Though most countries aim at keeping inflation low it has been relative in Nigeria in spite of the consistent effort of the central bank of Nigeria through its monetary policy that is geared towards achieving a single-digit inflation rate for instance within the last thirty years (1982-2012), inflation rate has fluctuated widely. It assumed single digit only in seven years and double it twenty three years reaching a peak of 72.8% in 1994 from 75.2% in 1993. Consequently, some economic analysts (Adeyeye and Fakiyesi,(1980), Osakwe,(1993) and Asogil,(1991), in recent time have sought explanation for this worrisome trend that has evidently been impeding economic growth in the country.

However, most previous studies have focused on the impact of inflation on economic growth in developing countries while little attention has been paid to developing countries, it is therefore imperative to conduct a research into the impact of inflation on economic growth in developing countries with special focus on Nigeria, which is the main thrust of this study.

  • Research Questions

The following research questions shall be raised

  1. Does inflation impact on Nigeria economic growth?
  2. Is there any long run relationship between inflation and economic growth?

1.3 Objective of the Study

This study focuses attention on the effect of inflation on economic growth in Nigeria over the years. The study has the subsequent objectives.

  1. To examine the impact of inflation on the economic growth of Nigeria.
  2. To investigate if there is any long run relationship between inflation and economic growth in Nigeria.

1.4 Significance of the Study

This study is of significance in three respects namely.

It would assist monetary authorities to appreciate variables that impact on Nigeria inflation, with a view to managing such variables appropriately and effectively.

The recommendations, based on the findings are expected to assist the government in finding a lasting solution to the problem of inflation in Nigeria.

It would provide guide and a reference material for other researcher who might be interested in conducting researches related to this area.

  • Research Hypothesis

The hypothesis which arises from our research question shall be tested

  1. H0: Inflation does not impact on Nigeria economic growth.
  2. H0: There is no long run relationship between inflation and economic in Nigeria
  • Scope of the Study

This study covers a period of 32 years, that is; from 1980-2012. It seeks to discuss theories on inflation and economic growth. In taking an over-view of inflation, the study will critically examine the impact of inflation on economic growth.

1.7 Limitation of the Study

This work, like any other work especially in the social sciences has its own limitation. In the first place, this study will be constrained by the amount of relevant research materials and data that are available to the researcher at the time of conducting this study. More so, the paucity of official data, their reliability whenever available as well as the inconsistencies in the data published by different source on the same item, the time available to carry out this study might be too small. All pose a serious challenge in the conduct of this study.

Therefore, in spite of these constraints, attempt shall be made to ensure that these draw backs do not in anyway, significantly affect the findings of this study or hinder this research.

 

 

 

 

 

 

 

 

 

 

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