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The Impact
Of Inflation On Economic Growth In Nigeria
ABSTRACT
The study
seeks to present an empirical analysis of the impact of inflation on economic
growth in Nigeria, using annual time-series dataset for the period 1979-2008.
It has been argued that inflation is an unavoidable phenomenon in the face of
economic growth. That is why, over the years there had been a long standing
conventional wisdom that inflation impedes economic growth. The stationarity
and co-integration techniques were adopted to examine the data in order to
determine if there exists a long-run relationship among the variables. Also,
using OLS regression technique, our empirical findings revealed an inverse
significance relationship between inflation and economic growth in Nigeria. These
findings revealed an inverse significant relationship between inflation and
economic growth in Nigeria. These findings recommend among others, inflation
targeting in controlling inflation in Nigeria.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Inflation
has become a leading topic of discussion in Nigerian 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 problems 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
generally used to describe a situation of high and sustained increase in the
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 nightmare and political unrest (Guy, Debelle et al, 1998).
Governments consequently regard inflation as a plague and try to squelch it, by
adopting sustained and consistent fiscal and monetary policies.
Today, we
commonly hear about different kinds of inflation. Indeed, the word inflation is
often used synonymously with “price increase”. But there is also a different,
more specific definition of inflation – a rise 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
expansive 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 weather, or a number of factors other than “too much
money”), the solution to- and the prudence of eliminating inflation is much
less clear.
Inflation
can have positive and negative impact on the economic performance of an economy.
Positively, inflation can lead to a higher sustained growth due to the effect
it has on capital accumulation. Also, through its negative impact on
productivity in an economy, inflation results in adverse effects on economic
growth.
Some
researchers advocated that, inflation can lead to uncertainty about the future
profitability of investment project. Hence this lead to more conservative
investment strategies than would otherwise by the case, ultimately leading to
lower levels of investment and economic growth. Khan (2002), concurs that
inflation may also reduce a country’s international competitiveness, by making
its exports relatively more expensive, thus impacting negatively on the balance
of payments. In addition, budget deficits also reduce both capital accumulation
and productivity growth. On the contrary, some theories advocated that there is
a positive relationship between inflation and economic growth.
One of
macro-economic goals in a 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 adjustments, that is
demands. It therefore, implies the 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 and it is usually
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.
Barro and
Grilli (1994), posit that, mainstream economists believe that high rates of
inflation are caused by high rates 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, 1988,
1992 and 1995.
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 payments and equitable income
distribution.
It is in
this light that this study is devoted 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.
1.2 STATEMENT OF THE PROBLEM
Since the
attainment of independence of 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 1993 has an
overriding objective and that is the achievement of single digit inflation
(Essien and Eziocha 2002). Monetary and fiscal polices 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 inspite 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 growth. The negative relationship between
inflation and growth has been attributed to the strong negative association
between inflation, capital accumulation and productivity 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 volatile 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 (1970 - 2000), inflation rate has
fluctuated widely. It assumed single-digit only in seven years and double in
twenty-three years reaching a peak of 72.8% in 1994 from 57.2% in 1993.
Consequently, some economic analysts (Adeyeye and Fakiyesi 1980, Osakwe 1993
and Asogu 1991), in recent time have sought explanation for this worrisome
trend that has evidently been impeding economic growth in the country.
Against this background, this
policy is poised to investigate and identify the extent of the effect of
inflation on economic growth with a view to proffering suggestion on ways for
its control.
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 effect of inflation on the
economic growth of Nigeria.
2). To find out whether inflation targeting
would achieve a better economic growth of Nigeria.
3). To
investigate the relationship between inflation and economic growth in Nigeria.
4). To analyze the trend of inflation and
economic growth in the country over the years.
5). Suggest, on the basis of the
findings, policy recommendation for effective control of inflation in Nigeria.
1.4 SIGNIFICANCE OF THE STUDY
This study is of significance in three
respects, namely;
1). It would assist monetary authorities to
appreciate variables that impact on Nigeria inflation, with a view to managing
such variables appropriately and effective;
2). The recommendations, based on the finds
are expected to assist the government in finding a lasting solution to the
problem of inflation in Nigeria.
3). It would provide guide and a reference
material for other researchers who might be interested in conducting research
similar or related area of study.
1.5 RESEARCH HYPOTHESIS
The hypothesis which arises from our
research question shall be tested.
Ho: There is no significance relationship
between inflation and
economic
growth in Nigeria.
1.6 SCOPE AND LIMITATION OF THE STUDY
This study covers a period of 30
years, that is, from 1979-2008. It seeks to discuss theories on inflation and
economic growth. In taking an over-view of inflation, the study will critically
examine the effect of inflation on economic growth.
More so, it will take an
extensive review of the history of economic growth and review empirical works
on inflation and economic growth using obtained data from Nigeria.
However, this work, like any
other work especially in the social sciences, has its own limitation. In the
first instance, 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 sources on the same item, 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.
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