CAUSES AND EFFECT AND SOLUTION TO INFLATION IN NIGERIA

CHAPETR ONE

INTRODUCTION 

1.1        Background of the study

1.2        Statement of problem

1.3        Objective of the study

1.4        Research Hypotheses

1.5        Significance of the study

1.6        Scope and limitation of the study

1.7       Definition of terms

1.8       Organization of the study

CHAPETR TWO

2.0   LITERATURE REVIEW

CHAPETR THREE

3.0        Research methodology

3.1    sources of data collection

3.3        Population of the study

3.4        Sampling and sampling distribution

3.5        Validation of research instrument

3.6        Method of data analysis

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS AND INTERPRETATION

4.1 Introductions

4.2 Data analysis

CHAPTER FIVE

5.1 Introduction

5.2 Summary

5.3 Conclusion

5.4 Recommendation

Appendix

 

Abstract

The study examines the impact of inflation on economic growth of Nigeria. Other micro economic variable tested along with inflation in this study are Agriculture, manufacturing, and trade. In analyzing the data the simple percentage method was applied the empirical results demonstrated that there is a positive relationship between the dependent variable (agriculture and trade) and explanatory variable except in manufacturing.
The relationship between inflation and economic growth is one, which many economists have watched with keen interest. Producers in the production sector cash on this phenomenon to make a brisk business sat the expense of fixed income earners. This informs the increase in turnover in inflationary periods. Money economy gave rise to inflation, which reduces the living standard of the people and the level of saving dwindles in turn. The effect on economic growth is dependent on the level of economic activity going on. If there are more producers, there are likely to be an increase in the level of economic growth vice versa.
In all, inflation do not wish any economy well, so should be eradicated by a deliberate effort. Nigeria has intellectuals that are capable of formulating good monetary and fiscal policies that will benefit her.

CHAPTER ONE

INTRODUCTION

• Background of the study

The word inflation rings a bell in the market economics of the world. It is a monster that threatens all economics because of its undesirable effects. The problem of inflation surely is not a new phenomenon. It has been a major problem in the country over the years. Inflation is a problem in all facets of life and in all economic entities. The government of any nation is concerned with the responsibility of ensuring that her plans and programme are not frustrated by unpredictable and galloping prices. Every firm desires a stable macro-economic environment that is devoid of unrepentant price change that can bring about reliable forecast and planning. An individual also strives that he is not worse off by unexpected price increase. All these bring home the need to explore the study of inflation so as to form a timeless and dependable model of its tendency (Taiwo, 2011). Inflation is a household word, but few give attention to the dimension of causes and impact of its effects. It is undoubtedly one of the most highly treated subjects in economic researches and literature. Its effects and causes are many, vary and well treated in literature. See Okpara and Nwaoha (2010), Fullerton and Ikhide (1998), Odusunya and Atanda (2010), Egwaikhide et al (1994), Jhingan (2004), Batini (2004), Owoye (2007),Asogu (1999) among others. This study investigated the major causes, effects of inflation and the model that best explains the uniqueness of Nigerian inflationary tendency and develops a tool for forecasting its behavioiur. Besides, we also examined the nature of relationship that exists between inflation and some other economic variables such as government spending, money supply, expectations, exchange rate, gross domestic products, exchange rate of dollar to naira and expenditure to income ratio among others. This work is significant and elaborate because it covered a period of 40 years (1969-2009), a period that has not been covered in the nearest past. It also examined inflation in terms of growth rate and not in absolute value. The significance of the study could also be traced to the exclusion of the inflationary data before 1970. This is premised on the fact that past research on the subject has dealt extensively in this period, and in most cases included the ‘war dummy’ to show the impact the Nigerian civil war had on inflation. Inflation is defined as a generalized increase in the level of price sustained over a long period in an economy (Lipsey and Chrystal, 1995). Inflation is a household word in many market oriented economics. Although several people, producers, consumers, professionals, non-professionals, trade unionists, workers and the likes, talks frequently about inflationparticularly if the malady has assumed a chronic character, yet only selected few knows or even bother to know about the mechanics and consequences of inflation.
One of the fundamental goals of a modern economic system is to keep prices of goods and services stable at rates that would not be detrimental to the economic system. The attainment of this goal, of ensuring that prices do not rise continuously, is very crucial in that non-attainment of the goal carries with it dire micro and macroeconomic consequences. At the microeconomic level, the unfair wealth redistribution that may accompany an upward movement of prices could encourage hoarding of unspent income, increase the cost of borrowing and therefore constrain investment spending by businessmen. At the macroeconomic level, an upward inflationary pressure may make the export of goods and services in an economy to dwindle because the prices of tradables may become less competitive in the international markets thereby discouraging foreign purchases and consumption of such tradables. An offshoot of this is that the national income of the economy may fall with attendant adverse consequences on the economy’s employment (increased unemployment), economic growth and possibly development. Plausibly, it is for these reasons that managers of economies around the world strive strenuously to keep inflation rates at low and stable levels. The managers of the Nigerian economy are not without the fervour to have a low and stable inflation environment. But a retrospective look at the performance of the economy, for example, from 1974 which was the year the country’s monetary policy regime changed from exchange rate targeting to the direct monetary targeting framework in response to the inflationary pressure resulting from increased public expenditure as a result of the reconstruction works after the civil war (CBN, 2014) and the monetisation of the petrodollars, to 2013 shows that the Nigerian economic environment may be anything but a low and stable inflation one. During this 40-year observation period, for instance, the average annual rate of headline inflation (inflation rate estimates based on the price movements of all essential commodities including food and energy) was a double-digit rate of 20. 47 percent (CBN, 2008; CBN, 2010; CBN, 2011 and CBN, 2013).  After an appreciable economic performance in the early 1970s, the Nigeria economy witnessed some anxious moment in the late 1970s to mid-1980s. Severe pressures built up in the economy mainly because of the expansionary fiscal policy of the federal government during these years. This was accompanied by high monetary expansion as the huge government deficit was financed largely by the Central Bank of Nigeria. This was exacerbated by the transfer of government sector deposits to the banks and the resultant increase in their free reserves with adverse consequences on the general price level. The inflationary pressure was further aggravated by high demand for imports of both intermediate inputs and consumer goods due to over valuation of the naira which made imports relatively cheaper than locally manufactured goods. In this case, the impediments to development may be referred to as cost. Economics theory, however, postulates that for the profit to be maximised, cost should be minimised. One of the main cost is inflation, which has turned into a canker worm eating deep into the nation’s path of economic progress. However, as fiscal discipline was restored in the second half of 1999, the pressures on the exchange rate and domestic prices moderated significantly. The economy faced renewed pressures and some uncertainty towards the end of the year as the C.B.N gradually relaxed its tight monetary policy.

 

Undoubtedly one of the macroeconomic goals which the government strives to achieve is the maintenance of stable domestic price level. This goal is pursued in order to avoid cost of inflation or deflation and the uncertainty that follows where there is price instability (Salam et al, 2006). The effects of inflation on economic growth will be examined bearing in mind that a country will grow faster in real terms if inflation is reduced to a barest minimum. Perhaps it should be mentioned here that inflation is not incompatible with growth. Infact, it reached an all-time high of almost 80% in 1994.The story is not any different when core inflation (a more restrictive measure of inflation which excludes food and energy price movements) is considered. Figure 1 also shows that in 11 out of the 18 years of observation of this measure, the Nigerian economy experienced double-digit inflation with the highest figure recorded at about 35% in 2003. Based on the foregoing, it could be reasonably deduced that the Nigerian economic environment has been and probably is still experiencing inflationary episodes and this may tempt one to call into question the credibility and efficacy of the country’s monetary policy. It has been argued in some literature that inflationary episodes can emanate from three major sources. They can arise out of the ability of labour unions to use market power to demand for wage increases which are in excess of productivity gains in order to appropriate part of the profits accruable to entrepreneurs (often referred to as distributional conflict cause of inflation). Inflationary episodes can also be brought about by developments in the product markets where because of the existence of oligopolistic and/or monopolistic market structures (concentration of capital or high concentration ratio in the product market) firms may wield the market power that allows them to practice markup pricing. Lastly, inflationary episodes may occur as a result of some form of exogenous or endogenous shocks that may be driven by either exchange rate depreciation (pass-through effect) or an upward surge or spike in the price of a commodity like crude oil. In either case, shocks may adversely affect costs of production which firms can pass on to domestic prices. This depends though on the pricing power of firms, elasticity’s of the demand curves of consumer durables and nondurables and on how persistent inflation is in the economy

STATEMENT OF THE PROBLEM

There is almost a universal consensus that macroeconomic stability, specifically defined as low inflation, is positively related to economic growth. Over the years the question of the existence and nature of the link between inflation and growth has been the subject of considerable interest and debate (Erbaykal and Okuyan, 2008). Although the debate about the precise relationship between these two variables is still open, the continuing research on this issue has uncovered some important results. In particular, it is generally accepted thatinflation has a negative effect on medium and long-term growth (Bruno and Easterly, 1998). Inflation impedes efficient resource allocation by obscuring the signalling role of relative price changes, the most important guide to efficient economic decision-making (Fischer, 1993).

If inflation is inimical to growth, it obviously follows that policymakers should aim at a low rate of inflation. But how low should inflation be? Should it be 10 percent, 5 percent, or for that matter, zero percent? Or put in other words, is there a level of inflation at which the relationship between inflation and growth become negative? The empirical test of the impact of inflation on the Nigerian economy which is the subject matter of this study shall provide precise answer to the relationship between inflation and growth and how the problem could be tackled.

OBJECTIVES OF THE STUDY

The broad objective of this study is to examine inflation in developing countries with the view of ascertaining the effect of inflation on economic growth. The specific objectives of this study are to:
(i) examine the trend of inflation in Nigeria over the years;
(ii) investigate the impact of inflation on the economic growth of Nigeria;
(iii) Explore the effect of inflation on capital formation in Nigeria;
(iv) Examine the influence of inflation on peoples’ consumption;
(v) Suggest visible solutions to the problem of inflation in the country.

RESEARCH QUESTIONS

This study would be guided by the following research questions:
1. What is the trend of inflation in Nigeria?
2. How does Inflation impact on economic growth in Nigeria?
3. What is the effect of inflation on the level of capital formation in Nigeria?
4. How does inflation affect the consumption expenditure of Nigerian households?

STATEMENT OF HYPOTHESES

The hypotheses to be tested in the course of this study are stated below:
Hypothesis I
Ho : Inflation does not affect significantly the economic growth of Nigeria.
H1 : Inflation affect significantly the economic growth of Nigeria.
Hypothesis II
Ho :Inflation does not affect significantly capital formation in Nigeria.
H1 : Inflation affect significantly capital formation in Nigeria.
Hypothesis III
Ho : there is no significant relationship between inflation and consumption expenditure of people in Nigeria.
H1 : there is relationship significant between inflation and
consumption expenditure of people in Nigeria.

THE SIGNIFICACE OF STUDY

The effect of inflation on the economic development of Edo state cannot be over emphasized; therefore, this research work is designed to find out the problem facing the inflation, causes, effect and solutions.

SCOPE OF THE STUDY

This work is to cover the effects of inflation and economic development in Edo state between 1993 to 2003 (a decade) and also various ways in which the scourge has been controlled by the various administration and relevance of control model or methods.

DEFINITION OF TERMS

Inflation can be defined as any increase in the money supply; however this can be regarded as inflation. This can also be seen as persistent in average price level of goods and services resulting in diminishing purchasing power of a governmental sum of money. Also when the volume of money in circulation is greater than the available goods and services so that there is a continuous tendency for average price level rise.

Open And Suppressed Inflation: Open inflation is the result of the uninterrupted operation of the market mechanism. There are no controls on the distribution of commodities by the government imposes fiscal and monetary controls to check open inflation.

Stag inflation: This is a situation whereby recession is accompanied by a high rate of inflation also called inflationary recessing. This type of inflation is caused by the excessive demand in commodity market and decrease in the demand for labor thereby causing prices to rise and creating unemployment in the economy.

Edmand –Pulll Inflation: This is a situation offer described as ‘too much money chasing few goods”, this arises as a result of increase in demand with a corresponding decrease/increase in the supply of goods and as a result the prices of these goods will rise.

ARTIFICIALLY CREATED INFLATION: This is a situation whereby traders sometimes create artificial scarcity by heading the commodities with the main aim of increasing the prices of their commodities.

COST-PUSH INFLATION: This is a situation where money wages rises more rapidly than the productivity of labour, cost-push inflation is caused by continues rise in the prices of factors of production, land, Labour, capital and entrepreneurship.

MAKE-UP INFLATION: This take of inflation is closely related to the price-push problem, modern labour organization set prices and wages on the basis mark-up over cost and relative income, firm possessing monopoly power have control over the prices and so level administered price, when strong trade unions are successfully in raising the wages of worker, it contribute to inflation. Having considered the types and cause of inflations it then lead to consideration of the effects of inflation in Nigeria Economy.

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study. Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study.

 

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