Inflation – Impacts On The Economic Growth Of Nigeria

Inflation – Impacts  On The Economic Growth Of Nigeria

Inflation – Impacts  On The Economic Growth Of Nigeria

A macroeconomics problem facing Nigeria, and the most disturbing, is the problem of inflation. As a result of its growing rate, Nigerian government is concerned about its impacts on her economic growth.

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Many authors have written on Impacts of inflation on Nigerian economy, but the authors have different views because inflation analysis, nevertheless, one thing common is that all the authors agree that inflation has Impact on Nigerian economic growth.

Samuelson (1973), defines inflation as “a general rising prices for breeds, cars, haircut, rising wages, rent etc. Onwukwe (2003), on his side defines inflation as “a significant and sustained rise in the general price level or a declining value of the monetary units.

The problem created by the rising prices of goods and services has become two difficult for government to solve. During inflationary period, fixed amounts of money buy less quantity of goods and services. The real value of money is drastically reduced i.e the purchasing power of consumers are reduced.

The Impact of rapid inflation growth has led the federal government of Nigeria to adopt several sexual measures of inflation control. Paramount among these measures are monetary and credit policies formulated restore balance of payment to a health; position price and way policies formulated to check the growth of price and income.

Inflation growth became more intensified since later eighty’s, inflation rate was 9.9 percent in 1980, in 1981 it rise to 21.0 percent and 7.6 percent, in 1982. In 1988 it increased to 56.1 percent, and 1989, it was at 42.6 percent in 1992; 57.2 percent in 1993; 55.3 in 2000; it reduced to 27.2 percent and 18.9 percent in 2001 (CBN Bulletin, 2003).

The researcher feels that the Nigerian economy is under surge until adequate measures are adopted to arrest the Impact of inflation on the economy:

Having a view on the Impact of inflation on Nigeria economy and realizing that the problems caused by the Impacts of inflationary growth is becoming unbearable to the citizens and the entire economy, of becomes necessary to critically analyzed the impact of inflation on Nigerian economic growth (1980-2006).

1.2 STATEMENT OF THE PROBLEMS

Inflation growth has been the macroeconomic problem in Nigeria that seems to be intractable over the years, Nigeria government has adopted various measures (both monetary and fiscal policies) to curb or reduce inflation growth to an acceptable level but all these policies seem to have no effects. This gave rise to the following research question:

 Why have all the policies used unable to reduce inflation rate to an acceptable level?

 What is the Impact of inflation on Nigerian economic growth?

These are the research questions that will guild me in this study.

1.3 OBJECTIVES OF THE STUDY

The study is aimed at achieving the following objectives:

1. To determine the Impact of inflation on Nigerian economic growth.

2. To identify how money supply affects Nigerian economy

3. To recommend to the monetary authorities and the government on how inflation should be reduced an acceptable level

1.4 RESEARCH HYPOTHESIS

To carryout the study effectively, the following hypothesis have been formulated as a guild:

Hypothesis I

Ho: inflation has no significant Impact on Nigeria economy growth.

H1: inflation has significant Impact on Nigeria economic growth.

 

Hypothesis II

H0: money supply has no significant Impact on Nigerian economy.

H1: money supply has significant Impact on Nigeria economy.

1.5 SIGNIFICANCE OF THE STUDY

The importance of these study are so numerous to mention. It will be useful to policy makers especially in formulating policy that will reduce inflation growth rate. It will be useful to monetary houses like central and commercial banks.

It will also be of importance to students of economics and other related fields. It will be useful to the general public.

1.6 SCOPE/LIMITATIONS OF THE STUDY

To get real picture of the Impacts of inflation on an economy, the study will cover the whole Nigeria economy between 1980 and 2006.

1.7 LIMITATION OF THE STUDY

This study suffered some limitations. The limitation are:

1. Dearth of data and other related materials.

2. Time do for the completion of this study posses a constraint to the study.

3. There is also inadequate finance to run the study.
2.0 LITERATURE REVIEW

2.1 THEORITICAL LITERATURE

2.1.1 CONCEPT OF INFLATION

Inflation is a social malady as well as a pervasive economic process whose effects are felt by all and sundry in all sectors of the economy.

An attempt to solve inflation problems has been so difficult, because any attempt to solving the economic problem would entail a trade off among other completing macroeconomic and social variables such as employment, economic growth, balance of payment, social safely nets.

Jean Bodin first attributed inflation in the Western Europe to the abundance of monetary metal imported from the nines of the Spanish colonies in South Africa. This theory came into the mainstream of the orthodox monetary tradition after a through research made by John Locla, David Hume and Richard Contillon in the 18th century. Quantity theory of money is the main contention of this theory. It says that changes in the general level of commodity prices are primarily determined by changes in the quantity of money in circulation as was modified by an American economist professor Ivring fisher. The theory implies that the value of money in an economy is determined by the total quantity of money (m1, m3, and m3¬) in that economy. According to the theory, when money becomes abundant, its purchasing power (value) falls and consequently, the average of commodity price rises. Conversely, if money becomes scare, purchasing power rises and the general price level falls. The equation of the theory is stated thus:

MV=PT

Where m=the strick of money in circulation

V=commodity prices

T=The volume of Trade.

The equation means that the velocity of money circulation determines the prices of commodity (volume of trade) In support of the theory, Wyoming (1984) on the paper presented on a symposium sponsored by the federal preserve Bank of Kanses city, stresses that when a country inflation is high for any sustained period of time, it’s rate of money supply growth is also high. Hence inflation is a monetary phenomenon.

2.1.2 EXPECTATION THEORY

The theory according to Shiller holds that if investors expect that the prices of commodities will rise, the will go into investing, today since its return tomorrow will be higher. He continued that if wealth holders know that inflation rate will rise next year, they will know how to adjust their wealth portfolio positively and negatively when they anticipate a fall in price level next year (Anyanwu, 2003).

2.1.3 MARKUP THEORY

The theory is associated with professor Adey the theory assumed that both wages and prices are “administered” and are settled by workers and business firms. Firms fix administrative prices for their goods by adding to their direct material and labour costs some standard markup on its cost of hiring, (Ihingan, 1997).

This model can lead to either a stable, arising or a falling price level depending on the markups which firm and workers respectively use (Ihingan 1997:452). If either or both use a percentage markup, inflation will progress faster than if either or both fix the markups in money firms.

Ihinagan continued by explaining that if each participant fix prices on the basis of prices he pays, the inflation will be high and of low direction.

2.1.4 STRUCTURAL INFLATION THEORY

The structuralist school of South America stresses structural rigidities as the principal cause of inflation in such developing countries as Argentina, Brazil and chile. This type of inflation is also to be found in other developing countries like Nigeria.

The structuralist holds the view that inflation is necessary with growth. According to this view, as the economy develops, rigidities arises which lead to structural inflation. As the demand for agricultural goods rise their domestic supply being inelastic, the prices of agricultural goods rise. The output of these goods does not increase when their prices rise because their production is inelastic do to defective system of land tenure and other rigidities (Ihingan 1997). To prevent the rise, the products can be imported. The prices of imported products are relatively higher than their domestic price. This tense raise the price level further within the economy. When the prices of good and other products rises, wage corners press for increase in wage rate to compensate for the fall in their real incomes, with this, cost of industrial products will rise and the inflation cuts across the whole economy.

2.1.5 DEMAND PULL THEORY

Demand pull inflation theory is the tradition and most common type. It takes places when aggregate demand is rising while the variable supply is decreasing. The decrease in supply may be that either resources are fully utilizes or production cannot be increased rapidly to meet the increasing demand. As a result, prices begin to rise in response to a situation often described as ‘too much money chasing too few goods.

Keynes and his followers emphasise the increase in aggregate demand as the source of demand pull inflation. Consumers demand more goods, government demand more goods and service to meet civil and military requirements of the country, business firms demand more inputs for investment. This the aggregate demand exceeds the value of aggregate supply at full employment level the inflationary gap arises, Iyoha (2004). The gap between aggregate demand and aggregate supply, the more rapid the inflation.

Uylase (1990), attributes growth in inflation to the excess demand and not supply. Therefore, in controlling the aggregate demand variable; it is like controlling the aggregate variables without adequate giving incentives for more production of goods and services. He (Uylase) stresses that monetary policy will always be inappropriate policy for inflation model.

2.1.6 COST PULL THEORY

The theory is of the view that inflation is caused by wage increases enforced by unions and profit increases by employers. Hence, cost-pull inflation is the rise in money wages more rapidly than the productivity of labour.

Cost-push inflation may be further aggregated by upward adjustment of wages to compensate for rise in the cost of hiring.

2.1.7 INFLATION AND ECONOMIC GROWTH

The Impacts of inflation on economic activities cannot be overemphasized. Inflation effect on economic activities and ultimately on welfare is a primary concern of policy makers and has been the focus of much study. Analysts have questioned whether increase in the inflation rate rises or lesion the rate of economic growth.

Writing on inflation and economic growth, Kaldor (1961) in his endogenous growth model observes persistent difference across countries in terms of growth rate of per capital output.

His observations reviews that an increase in inflation rate retards economic growth.

Haslay (1997), senior economist and policy adviser federal Reserve Bank of Dallas, maintains that inflation has a positive correlation with economic growth. He further stress that the chief mechanism is a positive association between aggregate demand and the growth rate of money. Hence, inflation and faster output growth are jointly products of faster money growth.

Miktir (1980) on his own view opines that all social strake and growth in a capitalist economy focuses the attention on the problem of inflation. According to him, this is because under modern capitalist economy, inflation remains the central contradiction of economic growth.

A neoclassical economist Tobin (1965), on his own view holds that inflation effects the economic growth and performance. In his model “The portfolio mechanism, he describes how people move from money to capital when inflation rises.

Cooley and Hansen (1989), used the “Green- word. Human mechanism is explaining the relationship between inflation and economic growth. They came up with the view that inflation has a negative effect on economic growth. Hence, economic growth falls with an increasing inflation rate.

Onyeali (1997) has opposite view. According to him increase in inflation rate does not effect economic growth, he expresses that it might effect people’s real income without effecting nominal growth rate.

Gbosi and Omoke (2004) on their own view opines that in an inflationary economy, it is difficult for money to serve as a medium of exchange and store of value without adverse effects on outputs, employment and income distribution. Hence, inflation growth has negative Impact on the economic growth.

Levin and Renalt (1991), used standard neoclassical growth of the economy is exogenous and constant. In particular, the growth rate of income is not affected by inflation rate even though the level of income is effected thus, the absence of a significance correlation between inflation and the long-run growth rate of the economy does not necessarily imply that a particular level of inflation will fall reduce per capital below the level attainable at lower inflation rates.

INFLATION AND BALANCE OF PAYMENT

Ola (1993), in his paper titled “The Nigerian business environment” says that the inability of the industrial sector to import raw material spare part led to reduction in production, retrenchment of workers, rationing of scarce essential commodities and close down of many industries. This led the balance of payments to come under severe pressure swinging from a surplus of N2.4billion in 1990 to a large deficit of N3.0billion in 1992.

External debt increased as external borrowing was restored to-upaid trade bills were accumulated. As a result, domestic inflation and unemployment worsened causing an over valued naira exchange rate which favoured the propensity to import created price distortion, destroyed productive incentives and contribute largely in the decline of the economic activities in the country. It was keeping with the above situation that government introduced the structural Adjustment programme (SAP) in 1986 whose objective among others were (Gbosi and Omoke, 2004):

i. To restructure and diversify the productive base.

ii. To lay the basis for sustained growth.

iii. To improve fiscal and balance of payments stability.

Professor Ola went on to emphasize that as a result, the above inflationary pressures have gathered momentum mainly because of inadequate of goods and services. However, it was generally observed that the situation was not helped by the expansionary fiscal measures and the SAP programme.

Okeke (1986), emphasizes that inflation had adverse effects on the balance of payments. He says that prices of goods are high during inflation, as a result of money factors including high cost of production. He maintains that since the prices of commodities are high including of experts, this will discourage foreigners from buying from the country. He further expresses that since the demand for good at home is high and people have money to spend; this will attract foreign goods; imports will increase and foreign exchange reserve will be adversely affected, as more money will be withdrawn from it for importation. Thus, the balance of payment (BOP) will be adversely affected.

2.1.8 INFLATION VERSUS WELFARE

Commenting on the impact of inflation on welfare like (consumption, salaries, wages etc) Ewa and Agu (1993), expresses that inflation effect welfare most especially people who lives on fixed. They assert that apart from the fact that it leads to under redistribution of income, it also reduces the hiring standard of the fixed income earners.

Haslay (1997), senior economists and policy Adviser federal Reserve Bank of Dallas in an article “output, growth, welfare and inflation. “A survey”, maintains that inflation has drastic effect on welfare. According to him, the composition of total output shifts away from the consumption goods and towards financial services as the inflation rate rises. Since people’s happiness is directly related to the quantity of the consumption goods, welfare is lowered when the inflation rate goes up.

Supporting Haslay, freeman, Huftman and Ireland in a model they presented indicated that an increase in inflation rate reduces welfare. According to freeman and Huftman, all money holders suffers when the inflation rate rises because the return to money falls. Thus, with lower real return less savings are available to acquire the consumption goods. Ireand in line with this says that people’s consumption saving decision is distorted by inflation. People save more to avoid the increased cost associated with either financial services with lower yielding money.

2.1.9 CAUSES OF INFLATION

Delivering a paper at a symposium sponsored by the Federal Reserve Bank of Kansas City; He explains that government in trying to achieve other goods, and up with a high money growth rate and thus a higher inflation rate. He expresses that high employment rate and increase in government expenditure, with low taxes are two goods that may led to high inflation rate.

The research conducted by CBN (1996) “on inflation on Nigeria economy” is in line with Mishkin Postulation. According to the report, the government is the major source of inflation any pressures. It emphasizes that some most contributory factors to the sharp increase in the general price level are the substant ial depreciation of the Naira at the Autonomous foreign exchange market (AFEM). The lagged Effect of upward Adjustment in petroleum products price in 1994, the Impact of Value Added Tax (VAT), and seasonal storage in the supply of some food items.

Akenele and Ekpe (1988), attributes the causes of inflation on infection of bank’s credit to the domestic economy. According to them, this led to unbearable economic condition whereby the prices of consumable items have continued to rise persistently.

Udo and Agu (1998) noted that Nigerian inflationary trend is not only monetary issue but also as a result of government action of devaluation of Naira.

2.1.10 THE EVILS OF INFLATION

According to fisher (1984), the famous American monetarist maintains that inflation undermines the foundation of a free society like Buchanan and Wanger, it is disappointing to him. He stress that reducing inflation is important because inflation according to him is costly.

Inflation discourages savings; and investment by creating uncertaintly about future prices. He further emphasizes that through it’s inflation with the tax system, it can increase tax burdens by artificially arising income and profits. All of these cause the economy to operate less officially hampering economic growth and standard of hiring.

Gbosi and Omoke 92004:129) says that when prices rise, the value of real income always declines even though money income may rise.

They further explained that inflation is bad because it hints those in fixed income the most by reducing the value of their real income.

Onwuke (2003:105) notes that creditors lose during a period of inflation because they will receive back money with reduced purchasing power. Debtors gain during inflation because they will pay back their debts with cheap money.

2.1.11 POLICY MEASURES OF GOVERNMENT

According to Iyoha (2004), fiscal policy would be the most effective tool for closing inflationary gap. The policy recommendation is to reduce government spending and/or raise taxes.

Famoyin (1980), government can reduce drastically inflation rate by policy embargo on call for more wage increases for workers and also discourage commercial banks from giving out loans indiscriminately.

Commenting on the policy measures by the government to reduce the inflation rate; Ani (1997) says that he is going to strengthen the exchange rate of Nigeria so that it will measure favourably with U.S dollar and other major currencies.

Oniyinwa (1993) commenting on government policy response in reducing inflation rate recommends monetary policy. This is in line with the postulation that high inflation rate is monetary phenomenon.

2.2 EMPIRICAL LITERATURE

In a cross-sectional analysis of the origin and the development of inflationary in some selected African country including Nigeria, carried out by the research department, central bank of Nigeria (1974), covering the period (1960-1972), their empirical investigations were limited only to six countries and the explanatory variables they used are money supply, deficit financing and real Gross Domestic Product (Real GDP).

The result with respect to Nigeria shows that changes in money supply and domestic credit had no significant Impact on inflation rate.

Asogu (1991) on an extensive review of the literature on inflation in Nigeria with an empirical analysis covering the period (1960-1959); came up with result which is in line with Bodin and Mishkin. He expresses that inflation rate is a function of money supply and it’s togged values, changes in domestic credit, real output, net export and net government expenditure. He maintains that real output especially industrial outputs, current money supply, domestic food prices and exchange rate changes were the major determinants of inflation to Nigeria.

Delivery a paper at the meeting of the secretary to he government of the federation, with…Ogwuma 91986), hold a contrary view the Bodin and Mishkin, He said that experience in many countries including Nigeria shows that fiscal policies in particular, intended primarily to stimulate output growth and enhance real income often end up as a major source of financial imbalances and macroeconomic instability.

Nsiegbunam (1996) carried out an empirical test on “The Impact of monetary measures on inflation.” He used money supply, interest rate, high powered money as well as tagged money supply. He regressed these variables against inflation and came up with low result with R2 of 44.93 percent. It means that 44.95 percent variation in inflation is explained through the variations in the five explanatory variables. His findings attributes hindering the effective monetary measures. His reason, he continued, was that inflation cannot be linked to just one cause but to complex of independent variables.

Aso (2004) carried out an empirical test on “An evaluation of the effect of inflation on the Nigeria economy covering the period (1980-2002). She used inflation rate and money supply as explanatory variables using OLS regression techniques. She concludes that inflation has significantly affected Nigerian economy.

Udabah (1998) on “The evaluation of the effectiveness of monetary policy in the Nigeria economy” covering the period (1995-97) came up with the result that monetary policy instrument used by the central bank contributed significantly in achieving some degree of macroeconomic stability.

He concludes that for a more effective result, the central Bank should “fine turn” these instruments. Using data from the information financial statistics, Gomme (1997), reports that 62 out of 82 counties exhibits a negative correlation between inflation and per capital real output growth. The negative correlation means that there is opposite relationship between inflation and economic growth.

5.0 SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 SUMMARY OF FINDINGS

Before summarizing the findings of this study proper, it should be noted that these findings were made in relation to the scope of the study and the result of the regression analysis. Thus, based on the regression result, the following findings were made:

The joint influence of the explanatory variables on the dependent variables is significant between 1980 to 2006.

The student-test used shows that the individual variable is statistically significant.

The computed coefficient of multiple determination shows that 98.9343% of the total changes in the dependent variable (GDP) is explained by the changes in the independent variables (money supply inflation). This shows that the model is a good fit.

It was found from related views and opinion that relates to the study that inflation has more negative impact on Nigerian economy than positive impact.

5.2 CONCLUSION

Having considered the present state of the impact of inflation on Nigerian economy growth for the period 1980 to 2006, a tight monetary and fiscal measures are vital to Nigeria’s development process.

In an era of ever-changing global economic environment especially now that the current economic approach of most countries is towards price stability and welfare maximization, Nigeria cannot afford to be lest behind.

Inflation was significantly affected Nigeria economic growth. The persistent increase in prices of goods and services has affected the economy tremendously.

Nigeria government have been trying through various policy measures such as monetary and fiscal policies to reduce drastically high rate of inflation to an acceptable level, but these policies have failed to achieve its desired goals.

However, the failure of these policies to achieve the desired goal can be attributed to the myriad of problems, which have characterized the Nigerian economy such as corruption, political instability poor management, policy inconsistency and the problem of implementation. It is also pertinent to say that there has been enough effort by the government as to warrant a far-reaching impact on the economic.

Finally, inflation has done more than good in Nigeria economy since 1980 to 2006. Hence, good polices that will revive the trend is urgently needed.

Inflation – Impacts  On The Economic Growth Of Nigeria

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Comments

  1. I need more implications of inflation to the economic of nigeria thanks for caryin out a good research lyk dis

  2. Martinz okoi says:

    Am greatfull for your impact growth on the economic inflation.

  3. Ajayi Olajide Emmanu says:

    i am so gratefully for your help, am so happy. thanks

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