PROJECT TOPIC- INFLATION RATE AND THE NIGERIAN ECONOMIC GROWTH TRENDS AND EFFECTS WITHIN THE PERIOD OF 1980 TO 2011
1.1 Background of the Study
Increased national output and low inflation are the most common objectives of the macroeconomic policy makers in both developed and developing economies.
In Nigeria, the formulation and implementation of monetary policy by the Central Bank of Nigeria (CBN) is aimed at maintaining price stability which is consistent with the achievement of sustainable economic growth. The monetary authority strives to achieve the government’s overall inflation objective through effective monetary management, which entails setting intermediate and operating targets in tandem with the assumed targets for GDP growth, inflation rate and balance of payments.
The growing interest in price stability as a major goal of monetary policy is an acknowledgement of the observed phenomenon that high inflation disrupts the smooth functioning of a market economy. High inflation is known to have many adverse effects: it imposes welfare costs on the society; impedes efficient resource allocation by obscuring the signaling role of relative price changes, discourages savings and investments by creating uncertainty about future prices, inhibits financial development by making intermediation more costly; hits the poor excessively, because the do not hold financial assets that provides a hedge against inflation; and reduces a countries international competitiveness by making by making its exports relative more expensive, thus impacting negatively on the balance of payments, and perhaps more importantly, reduces long-term economic growth (Ghosh and Phillips,1998: Khan and Senhdi, 2001; Billi and Khan, 2008; Frimpong and Oteng, (2010).
Overall, businesses and households are thought to perform poorly in periods of high and unpredictable inflation, Barro (1996).Most policy makers, however, agree that they should not allow inflation to fall below zero because the cost of deflation is thought to be high, Billi and Khan (2008). Even though some evidence suggests that moderate inflation helps in economic growth, Muarik (2205), the overall weight of evidence so far clearly indicated that inflation is inimical to growth. Consequently, policy makers should aim at a low rate of inflation that maximizes general economic well-being
The maintenance of price stability is one of the macroeconomic challenges facing the Nigerian government in our economic history. By definition, inflation is a persistent and appreciable rise in the general level of prices (Jhingan, 2002). Not every rise in the price level is termed inflation. Therefore, for a rise in the general price level to be considered inflation, such a rise must be constant, enduring and sustained.
The rise in the price should affect almost every commodity and should not be temporal. But Demberg and McDougall are more explicit referring to inflation as a continuing rise in prices as measured by an index such as the Consumer Price Index (CPI) or by the implicit price deflator for Gross National Product (Jhingan 2002). In an inflationary economy, it is difficult for the national currency to act as medium of exchange and a store of value without having an adverse effect on income distribution, output and employment (CBN, 1984).
Inflation is characterized by a fall in the value of the country’s currency and a rise in her exchange rate with other nation’s currencies. This is quite obvious in the case of the value of the Naira (N), which was N1 to $1 (one US Dollar) in 1981, average of N100 to $1 in year 2000 (Okeke, 2000) and over N128 to $1 in 2003. This decline in the value of the Naira coincides with the period of inflationary growth in Nigeria, and is an unwholesome development that has led to a drastic decline in the living standard of the average Nigerian.
To measure inflation are three approaches. These are the Gross National Product (GNP) implicit deflator, the Consumer Price Index (CPI) and the wholesome or producer price index (WPI or PPI). The period to period changes in these two latter approaches (CPI and WPI) are regarded as direct measures of inflation. There is no single one of the three that rather uniquely best measure inflation.
The Consumer Price Index (CPI) approach, though it is the least efficient of the three is used to measure inflation rates in Nigeria as it is easily and currently available on monthly, quarterly and annual basis (CBN, 1991) Existence of excess aggregate demand can cause inflation (demand pull inflation). Cost-push inflation arises from upward pressure of production costs, while structural inflation arises from constraints such as inefficient production, marketing and distribution systems in the productive sectors of the economy (CBN, 1996).
Inflation has been apparent in Nigeria from the outset of our national life. This was propelled in the 1960s through the “cheap money policy” adopted by the government to stimulate development after independence. Interest rates were lowered and targeted at the preferred sectors of the economy, and was meant to facilitate the implementation of the First National Development Plan and subsequently the prosecution of the civil war.
This led to rapid monetary expansion with the narrow and broad measures of money stock (M1 and M2 respectively) rising at annual rates of 29.7% (1961) and 44% (1969). Consequently, inflation increased from 6.4% (1961) to 12.1% (1969) The oil boom era of the 1979s was characterized by fiscal dominance and severe macroeconomic misbalances as the period witnessed a sharp increase of government revenue in foreign exchange from oil exports.
In 1971, the revenue rose from six hundred and three million naira (N603.0M) to Ten billion, four hundred and thirty three million, one hundred thousand naira (N10,433.1M) with a share in the total revenue of 52.46% (1971 and 88.89% (Suleiman, 1998). Reluctantly, the government injected massive private and public expenditure into the economy through the enormous post war reconstruction of the early 1970s and expenditures on the gigantic capital embarked upon by all the governments under the third national development plan (Suleiman 1998).
This increased the entire currency in circulation with businessmen calling and withdrawing money from the banks. As a result, the annual growth rate in money supply escalated from 56.6% to 91.3% in January and April 1975 (CBN, 1982). However, the Udoji Committee which doubled the basic minimum wage in the public sector in 1975 represented a climax in inflationary tendencies that led to the widespread strikes and unrest in the private sector on which the Udoji recommendations were not binding.
This cost push factor further crippled productivity and enhanced inflation as the increased money supply and increased aggregate demand was not matched by an increased productivity. The resultant structural rigidities hampering productivity, especially agricultural productivity led to the appointment of an Anti-Inflation Task Force in 1975 to recommend the liberalization of imports that resulted in the massive inflow of food, raw materials and other consumer goods.
Furthermore the hosting of FESTAC in 1977 help in compounding the problem of macroeconomic stability whereas the accelerated growth in money supply and aggregate demand between 1970 and 1974 was attributed to monetization of crude oil exports earnings through government spending, the main expansionary factor in 1975 to 1979 was the explosive growth in bank credit, especially to the government sector.
Consequently, inflation rates increased from 13.8% in 1970 to 33.9% in 1975 but fell to 11.8% in 1979. This fall was due to the direct credit allocation policy by government productive investments to generate output and employment growth. Again, the imposition of special deposits, especially on import demand helped to contain the growth in aggregate demand (CBN, 2001). Over the years, various governments have adopted various policies to controlling inflation. Hence, this work seeks to find the effect of inflation on the Nigeria’s economic growth.
PROJECT TOPIC- INFLATION RATE AND THE NIGERIAN ECONOMIC GROWTH TRENDS AND EFFECTS WITHIN THE PERIOD OF 1980 TO 2011
1.2 Statement of the Problem
Since mid 1960s, inflation has become so serious and contentious problem in Nigeria. Though inflation rate is not new in the Nigerian economic history, the recent rates of inflation have been a cause of great concern to many. During the period under review (1980–2011), there has been an ups and down in the inflationary trend leading to economic distortions. An increase in the general level of prices implies a decrease in the purchasing power of the currency.
That is, when the general levels of prices rise, each monetary unit buys fewer goods and services. The effect of inflation is not distributed evenly in the economy, and as a consequence there are hidden costs to some and benefits to others from this decrease in the purchasing power of money. For example, with inflation, those segments in society which own physical assets, such as property, stock and so on benefit from the price/value of their holdings going up, while those who seek to acquire them will need to pay more for them.
Their ability to do so will depend on the degree to which their income is fixed. For example, increases in payments to workers and pensioners often lag behind inflation, and for some peoples income is fixed. Also, individuals or institutions with cash assets will experience a decline in the purchasing power of the cash. Increases in the price level (inflation) erode the real value of money (the functional currency) and other items with an underlying monetary nature.
Debtors who have debts with a fixed nominal rate of interest will see a reduction in the “real” interest rate as the inflation rate rises. The real interest on a loan is the nominal rate minus the inflation rate. The formula R = N-I approximates the correct answer as long as both the nominal interest rate and the inflation rate are small. The correct equation is r = n/i where r, n and i are expressed as ratios (e.g. 1.2 for +20%, 0.8 for −20%).
As an example, when the inflation rate is 3%, a loan with a nominal interest rate of 5% would have a real interest rate of approximately 2%. Any unexpected increase in the inflation rate would decrease the real interest rate. Banks and other lenders adjust for this inflation risk either by including an inflation risk premium to fixed interest rate loans, or lending at an adjustable rate.
Notwithstanding the various efforts of the Nigerian government to curb the inflationary trend, inflation continued to cause setback in the growth rate of the living standard of most Nigerians who are fixed income earners or unemployed (Agba, 1994). Inflation has had adverse effects on savings, investment,productivity and balance of payment in the Nigerian economy, hence the fall in the growth rate of the Gross Domestic Product (GDP) from 26.8% (1981) to 5.4% (2000) and 3.5% (2002).
1.3 Research Question
Because of the above observed problems and trends we have come to ask the following questions:
- Does inflation has a significant impact on the Nigeria economic growth?
- Is there any relationship between inflation and economic growth?
1.4 Objectives of the Study
1. To investigate if inflation has a significant impacted on the Nigeria economic growth.
2. To investigate if there is a long run relationship between inflation and economic growth.
1.5 Hypothesis of the Study
In the cause of this study, the researchers developed the following hypothesis:
- There is no significant impact of the inflation on the Nigeria economic growth.
- There is no long run relationship between inflation and economic growth.
1.6 Significance of the Study
This research work is a source of information, answers to many questions and will also clear existing controversies on the impact of inflation on the Nigeria economic growth. This work will be a point of reference for under graduates, post graduate students, individuals, policy makers and governmental agencies. It will also be a guild to other researchers. Also it will help in immense way to the policy makers of most developing nations, example sub-Saharan African nations. It will equally proffer solution for a sustained economic growth in Nigeria. This work is a source for answers to both developed and under developed countries on issues that has to do with inflation.
1.7 Scope / Limitations of the Study
This research covered the period of 1980 to 2011. The work did not equally consider all the variables in the monetary sector. Serial data were used.
The limitations uncounted while writing the work includes among others: Insufficiency of fund for moving around in search of journals in various libraries of the nation. The availability of data equally contributed in making the a challenging one.