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EFFECT OF
INFLATION ON CONSUMPTION PATTERN OF FARMING HOUSEHOLD IN NIGERIA
Abstract
This study investigates the effect of
inflation on consumption pattern on farming household in Nigeria. The Nigerian
economy had faced with inflationary trends over the years and the various
government policies to deal with it eluded long- term solution needed to bring
about increased living standard of the Nigerian citizenry. Hence, the need for
an investigation into the multi-dimensional and dynamic factors that affect
inflation with the view to make appropriate recommendations to curbing it. From
the study, it was revealed that all explanatory variables (fiscal deficits,
money supply, interest and exchange rates) significantly and positively
impacted on the rate of inflation in Nigeria during the period under review.
The explanatory variables accounted for 72% of the variation in inflation
during the period with the error terms capturing 28% of the variation. This
research contributes to the idea that the causes of inflation in Nigeria are
multi-dimensional and dynamic, requiring full knowledge at any point in time to
be able to proffer solutions to the inflationary trends in the country to lead
to high productivity and increased living standard of the citizenry.
CHAPTER ONE:
INTRODUCTION
1.1
BACKGROUND TO THE STUDY
Increase in
price level has always been compelling problem to both policy makers and the
entire Nigerian citizenry. There is perhaps more debate on the question of
prices than any other issue these days. This is not surprising since depending
on which side of transaction an individual is on he/ she finds his welfare
adversely or beneficially affected by a movement in one or more prices. The
fact that price level leads to a fall in the standard of living,
unpredictability of government policy actions and of macroeconomic
relationships is no more an issue of dispute.
Adejoke
(2013) opined that ’’the consequence of inflation can easily be inferred. Given
constant set of prices today, a situation of relatively much more chasing the
same bundle of goods and services tomorrow with constant real wage income
simply implies adjustment in consumption patterns. The same bundle of goods and
services consumed today cannot therefore be consumed tomorrow. Hence a decrease
in consumption capacity and standard of living is imminent’’.
A great deal
of evidence suggests that inflation is detrimental in the long run to economic
growth. Specifically, the interest in understanding the inflation process
across countries and how to control it derives mainly from its key economic
costs that include: erosion of standard of living, distortion of the economic
decision-making of private agent with regard to investment, saving and
production that ultimately leads to slower economic growth Oluwaseyi (2013).
Price can be
observed as an aggregate that has close interface and a continuous relation
with real macroeconomic aggregate. Also, price increase in one sector of an
economy can easily be transmitted to other sectors. And most often, the
responsiveness of other sector may not be entirely proportionate. Given this
inter-relationship therefore, an accurate evaluation of effects of government
policy measures on diverse sectors and aggregate vis-à-vis inflationary
consequences cannot be adequately and readily ascertained. It is within this
context that the present study becomes highly important.
The
persistent increase in general price level in Nigeria in the last two decades
has posed a major challenge on monetary management yet a systematic
macroeconomic account of the underlying shocks has attracted scant attention in
the empirical literature. In addition, to achieve and maintain low inflation,
Central Banks need to understand the dynamic nature of inflationary processes
in their respective countries. These include the type of shocks that cause
inflationary impulses and the nature of propagation mechanism.
Also, the
persistent poor performance of the Nigerian economy as captured by the growth
rate of real Gross Domestic Product (GDP) in the presence of high inflationary
levels provides another key justification for this study. Therefore, there is
need to assess the dynamics of inflation rate relative to real output growth
rate in Nigeria.
There is no
doubt that the past Jonathan administration has scored good marks in the area
of agriculture. Former Minister of Agriculture and Rural development, Dr.
Akinwumi Adesina, who superintends the sector at the national level, has driven
the Federal Government’s transformation policy in the sector.
However,
recent developments, especially the frequent clashes between herdsmen and farmers
in the predominantly farming areas of the Middle Belt region which has resulted
in the destruction of lives and farmlands, have become a major threat to
efforts to boost food production. From Benue to Taraba, Nasarawa and Plateau in
the North Central region and Zamfara and Kaduna States in the North West,
clashes between farmers and herdsmen have left in its trail heavy losses of
lives and property.
These losses
of lives have adversely affected farming activities and other related
businesses. This has resulted in a drastic reduction in farm outputs, a
development that has heightened the fear of hunger. Already most farmers in the
affected states have abandoned farms for fear of being attacked by the
herdsmen.
For the
predominantly farming communities of Benue and border communities of Nasarawa
and Taraba states, farming is no longer business as usual. Several farmers have
been displaced and dispossessed of their farms by armed men believed to be
Fulani herdsmen. Agricultural and development experts are unanimous in their
predictions that the gains recorded in the agricultural sector of the economy,
especially in the area of food production, may suffer a serious setback as a
result of the negative effects of terrorist activities on farmers in Benue and
neighbouring states. The effects of the sustained Fulani war in the affected
localities have led to farmers’ reluctance to go back to their farms even as
the current farming season is far gone. Osagie (2013)
Nowadays,
soaring food prices in major cities across the Nigerian states are being
reported with adverse impact on household budgets. The Boko Haram insurgency in
the North-east and pockets of conflicts in some states where basic food items
for the nation come from are making food commodity prices to rise for a range
of foodstuffs, from beef to fruits and vegetables, thus squeezing consumers
still struggling with modest wages.
It is
axiomatic to posit that the Northern region of the country has remained a major
source of food supply to other parts of the country, especially the South. To
be sure, about 90 percent of food items consumed in Lagos and other South-west
states come from the North. For example, Ketu, Mile 12 and Oyingbo markets in
Lagos, all get supplies from the North on a daily basis as countless trucks are
seen unloading quantities of onions, tomatoes, pepper, fruits, potatoes, yams,
vegetables and the likes at these markets.
But this is no longer the case as the general insecurity in the Northern
part of Nigeria is adversely affecting farmers in the area. Fewer trucks now
come down to the South these days, because of the crisis and this is having its
effects on prices of food. The effects of the crisis in the North is already
being felt, not only by the consumers but the traders as well who depend on
supplies from the North for their business.
Expectedly,
the cost of foodstuffs, especially pepper and tomatoes has hit the roof.
Housewives now complain that N500.00 worth of pepper for instance is no longer
enough for a pot of soup for a family of four. While transporters are afraid to
go to the North because of insecurity, Northern farmers are groaning too as
traders from the South have not been going up North to buy the produce. Most
crop farmers and those dealing in livestock in the North are fleeing their land
en masse and migrating to neighbouring countries because of the crisis Osagie
(2013). In September 2013, the Food and Agricultural Organisation of the United
Nations (FAO) had warned that Sahel States in Northern Nigeria as are faced
with severe food insecurity. The release mentions, “Poor families have used up
their food stocks and are facing high food prices awaiting the next harvest.”
Alarmingly, it points out that over 1.4 million children in the region are at
risk of severe malnutrition in 2013. In certain products regrettably, the country’s
ambitious Agricultural Transformation Agenda (ATA) seems to have been hijacked
by unscrupulous operators across the country’s borders.
Therefore,
this study is an effort to understand the possible effect of inflation on
consumption pattern of farming on household in Nigeria. However, the problem
that the research intends to study is to ascertain how inflation has affected
the consumption pattern of farming on household goods viz -a- viz trying to
proffer possible solutions to the problem of inflation.
1.2
STATEMENT OF THE PROBLEM
Since
mid-1960s, inflation has become so serious and contentions a problem so serious
and contentious a 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 (1981–2014), there has
been an upsurge in the inflationary rates leading to major economic
distortions. The continued over valuation of the naira in 1980, even after the
collapse of the oil boom engendered significant economic distortions in
production and consumption as there was a high rate of dependence on import
which led to balance of payment deficits. This resulted to taking loans to
finance such deficits. An example was the Paris Club loan, which was a mere
Five Billion, Thirty nine million dollars ($5.39billion) in 1983 rose to twenty
one billion, six million dollars ($21.6billion) in 1999 (CBN 2001) The oil glut from 1981, that resulted into
balance of payment deficits also led to foreign exchange crises that
necessitated various measures of import restrictions.
These
restrictions reduced raw materials for domestic production and spare parts for
machinery operation. The resultant shortage of goods and services for local
consumption spurred the inflation rate to rise from 20% in 1981 to 39.1% in
1984 (Itua, 2000). With the adoption of the Structural Adjustment Programme
(SAP) in 1986, there was a temporal reduction in fiscal deficits as government
removed subsidies and reduced her involvement in the economy. But as the
effects of the Structural Adjustment Programme (SAP) policies gathered
momentum, there was a fall in the growth rate of Gross Domestic Product (GDP)
in 1990 from 8.3% to 1.2% in 1994, with inflation rising from 7.5% (1990) to
57.0% (1994) Again, the devaluation of the naira by the Central Bank of Nigeria
(CBN) through the Second Tier Foreign Exchange Market (SFEM) led to a fall in
agricultural outputs as machines and raw materials (mostly imported) were out
of reach.
The devaluation reduced the aggregate real
income and aggregate demand and at the same time raised the naira prices of
goods whose production depended heavily on imported goods. Thus, unsold
inventories accumulated in the face of consumer revolt. In this circumstance,
the National Income (NI) fell and the price level rose (Osagie, 1989). In 1995,
inflation rate rose to 72.8% due to increased lending rate, the policy of
guided deregulation and the lagged impact of fiscal indiscipline. In addition
to her contemporary fiscal and monetary policies, the Nigerian government had
implemented various other policies aimed at curbing inflation in the country.
One of such policies was the price policy (price control) in 1971 meant to
control the soaring prices of essential goods but abolished in 1980 for its
ineffectiveness resulting from the severe shortages witnessed during the oil
glut in Nigeria (Udu, 1989).
The Economic
Recovery Emergency Fund of 1986 where one percent (1%) of workers’ salaries was
deducted monthly to build the funds was meant to curb inflationary trends in
Nigeria. They gradually and greatly reduced the purchasing power of the working
class. But the policy measures failed as the prices of goods and the profits of
corporate bodies were not controlled. Therefore, as prices rose, the labour
unions agitated for higher wages resulting in further higher prices (Agba
1994).
More so,
various agricultural programmes like the “Operation Feed the Nation” and the
“Green Revolution” where implemented to boost output to reduce prices of food
items but yielded minimal results. 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).
The above
explanations raise some research questions: (i) do the inflationary trends in
Nigeria depend on the fiscal deficits? (ii) Is money supply a determinant of
inflation in Nigeria? (iii) Does the real exchange rate determine inflationary
trends in the Nigerian economy? and (iv) how does interest rate determine the
inflation rate in Nigeria?
This study
has been able to identify the fact that despite the various policies/programmes
of the present governments to curb the inflation menace in Nigeria, it has
continued to defile solution due to the fact that the sources of the
inflationary trends are multi-dimensional and dynamic. As such, to be able to
curb its menace, indebt knowledge of these multi-dimensional and dynamic
sources is required. Therefore, the study is intended to x-ray these
(multi-dimensional and dynamic) sources for a lasting solution to the
inflationary trends as it affect consumption pattern of farming household in
Nigeria nation.
1.4 RESEARCH
QUESTIONS
This study
provided answers to the following questions:
1. What is
the level of consumption pattern of farming household in Nigeria?
2. Is there
any correlation between inflation and consumptions of goods and services in
Nigeria?
3. How has
inflationary rate negatively impaired the Nigeria economy?
4. Is there
a general price increase on consumables in Nigeria?
1.5
OBJECTIVES OF THE STUDY
The major
objective of the study was to assess the effect of inflation on consumption
pattern of farming household in Nigeria. However, the specific objectives on
the other hand are:
a.
ascertainment of the level of consumption pattern of farming household items in
Nigeria.
b. determine
the extent to which inflation has affected consumption of farming household items.
c. to found
out the causes of inflation on the prices of goods and services in Nigeria.
d. identify
the challenges poses by the general increase in the prices household items.
1.6
HYPOTHESES OF THE STUDY
The relevant
research hypotheses for this study are specified in null forms as follow:
H01: There
is no significant partial adjustment process of the dynamics of inflation rate
in Nigeria.
H02: Broad
money supply growth rate does not significantly influence inflation rate in
Nigeria.
H03: There
is no relationship between inflation and consumption pattern of farming
household in Nigeria.
1.7
DEFINITION OF UNFAMILIAR TERMS
The
following unfamiliar terms are defined either as generically used in the field
of study:
Inflation –
it is a sustained increase in the general price of goods and services in an
economy over a period of time.
Consumption
pattern – is the combination of qualities, quantities, acts and tendencies
characterizing a community or a human group’s use of resources for survival,
comfort and enjoyment
Farming – is
growing crops or keeping animals by people for food and raw materials.
Household –
it consist of one or more people who live the same dwelling and also share at
meals or living accommodation and may consist of a single family or some other
grouping of people.
1.8
SIGNIFICANCE OF THE STUDY
Why has
inflation continued to rise despite the substantial increase in the nation’s
GDP? Is it that successive governments neglected the issue of unemployment and
inflation or has the problems defied all economic theories? These are questions
that need immediate answers, because inflation on consumption pattern of
farming of farming household in Nigeria is one of the current issues that is
affecting our country and which is being discussed by both experts and lay-men
alike.
Therefore,
this study will be of paramount importance to economic decision-makers, as it
will equip them with the knowledge and skills needed to tackle the pressing
issue of inflation in our country. Also, to those who would like to carry out
further research on this topic, it would be of valuable help in the course of
their research.
1.9
METHODOLOGY
The method
used to conduct this study was discussed under the following subheading: research
methodology, research design, research instruments, validity and reliability
test and method of data presentation and analysis
1.10 DATA
SOURCES
The time
series data required for this study (inflation rate, real Gross Domestic
Product (RGDP), broad money supply, fiscal deficit, interest rate, and exchange
rate of naira vis-à-vis U.S dollar) were sourced from the Central Bank of
Nigeria (CBN) Statistical Bulletin, December 2014 and Annual Abstract of
Statistics from National Bureau of Statistics (NBS).
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