THE RELATIONSHIP BETWEEN INFLATION AND ECONOMIC GROWTH IN NIGERIAN, 1986-2012

ABSTRACT

This thesis investigates the relationship between inflation and economic growth in Nigeria between 1986-2012 through the application of Ordinary Least Square (OLS) technique in estimating the effects of and inflation on growth, Augmented Dickey-Fuller test and Phillip‟s-Perron test statistics were employed to test the presence of unit root in the series, after which Johansen cointegration test was employed to test the existence of long-run relationship between economic growth and the independent variables. The results of unit root suggest that all the variables in the model were stationary. The Johansen cointegration result shows that there exist 2 cointegrating equations, implying the existence of long run relationship between economic growth, and inflation. The results also reveal that unemployment impacts negatively on economic growth while inflation rate impacts positively on economic growth. However,, only the coefficient of unemployment was found to be significant. The hypothesis test result using f-statistics reveals that and inflation jointly affect economic growth at 1 percent and 5 percent respectively, with values of 5.8900 in model II and 4.0637 in model III. This therefore, implies that a good performance of the Nigerian economy in terms of growth may be achieved with lows rate of and inflation in the country. Based on the coefficients of unemployment -4.6727 and inflation 0.0246 in model III, it follows that 1 percent reduction in unemployment would increase economic growth by 4.6727 percent, while 1 percent increase in inflation would increase economic growth by 0.0246 percent; hence a major policy implication is that concerted effort should be made to reduce unemployment and stabilize the prices of goods and services (inflation) so as to achieve high, rapid and sustained economic growth rate in Nigeria. 

CHAPTER ONE

                       INTRODUCTION

1.1       BACKGROUND TO THE STUDY

Gross domestic product growth rate is used as proxy for economic growth in this study and it is generally perceived that when economic growth takes place in the country, it increases the pace of economic activity in the country, due to the employment increases. The increase in employment opportunities will enhance the purchasing power of the people in the country and as a result, consumption increases which leads to raise aggregate demand and hence inflation in the country (Thayaparan, 2014). 
The inflation, economic growth and unemployment in Nigeria had been unstable for the period under review. The highest growth rate of GDP was recorded in 1990 follow by 2003 with the growth rate of 11.6% and 10.2% respectively; while the least rate was recorded in 1987 with the growth rate of -0.69%, which shows negative growth rate of GDP in Nigeria. The growth rate of the GDP was positive from 1986, negative in 1987, positive again from 1988 to 2016 (CBN, 2016).
According to Emeka (2013) Nigeria’s economy is churning along after the problems of liquidity and banking sector meltdown that nearly crushed the financial market. The economy is progressively in recovery and it looks like the confidence of Nigerian consumer is gradually rebounding. But we cannot say for sure the exact figure because quantification of confidence has not been documented nor recorded. According to him, without doubt the monetary policy coming from the Central Bank of Nigeria (CBN) has a positive outlook on the economy which has been growing at the rate 7.3% and attracting investments mostly in petroleum sector. The revised estimate for real Gross Domestic Product (GDP) by the National Bureau of Statistics (NBS) indicates that the economy grew by 7.23% first quarter of 2010 as against 6.7% it had earlier projected for the quarter; at the end of 2010 the economy was growing at the rate of 7.6%. This is impressive compared to the world economy that has been expected to be growing at the rate
3.9% in 2010 as result of the global recession.
Nigerian economy dip from 7.44% recorded in the fourth quarter of 2009 however, it is an increase from 4.50% in the corresponding quarter of last year. NBS attributes the 2.73% increase in real GDP to expansion in oil production following relative peace in the Niger Delta region, although the non-oil sector remained key driver of growth. The Bureau in the latest report on GDP estimates that the economy on nominal basis expanded to N6,399,716.09 first quarter of 2010 up from N5,004,850.00 recorded during the corresponding quarter 2009, indicating an increase of N994,866.09. Nigerian government can greatly strengthen the impressive growth by provision of social infrastructures particularly social security and steady electric power.
The structural imbalance of Nigerian economy is still a major concern. Nigeria’s economy is wholly one commodity based economy which is based on the export of crude oil. The lack of diversification of the economy hampers the flourishing of domestic economy, together with enhance specialization can transform an economy to arrays of commodities exporting economy other than oil. The export of crude of provides foreign reserve that has become a war chest in the maintenance of fairly and relatively strong naira. With diversified economy the problem of unemployment in Nigeria can be ameliorated. The greatest threat to Nigeria standard of living other than inflation is unemployment; even with progressively growing economy at the rate of 7.3% the economy is not producing enough jobs to make a reasonable impact on employment.
However, throughout this period, the gross domestic product of Nigeria has been on a constant rise, despite the persistent inflation and unemployment crisis. Therefore, it is against this background this study seeks to investigate the validity of the trade-off thesis in the Nigerian economy and also access the impact of domestic output and inflation on the reduction of unemployment in the country.  

1.1. STATEMENT OF THE PROBLEM

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% in 1990 to 57.0% in 1994 (Itua, 2000). In 1995, inflation rate rose to 72.9% due to increased lending rate, the policy of guided deregulation, and the lagged impact of fiscal indiscipline.
The trends in economic growth rates, inflation rates in Nigeria from  1986-2012 have been puzzling. The data obtained from the Central Bank of Nigeria (CBN), 2013 Statistical bulletin revealed that by 1986 economic growth rate stood at 3.1 percent, in 1987 the value became negative -0.69 implying retrogression and was the least ever achieved for the period under review; the highest economic growth rates achieved was 11.36 in 1990 after which the rates has been abysmally until in 2003 when the growth rates hits 10.2 percent; from 2003 economic growth rate has been less than 10 percent, in 2012 the growth  rate recorded was 6.58. The trend in economic growth has been fluctuating over the years under review. 
The trends in and inflation rates in Nigeria from 1986-2012 was also puzzling. The trend revealed that by 1986 unemployment rate was 5.3 percent while inflation rate was 5.4 percent. Both unemployment rates and inflation rates were not stable but fluctuating over time. The lowest rates of and inflation recorded were 1.8
percent and 0.2 percent in 1995 and 1990 respectively. Unemployment reaches 24.7 percent by 2012 while inflation reaches the highest in 1999.
The main goals of macroeconomic policies were the achievement of high, rapid and sustained economic growth, stable low unemployment and relative price stability but the trends above shows the contrary. Among the main and major problems of policy makers were how to achieved and maintain low and stable unemployment rate as well as relatively low prices so as to achieve high economic growth.
Studies by (Garba, 2010, and Olowononi and Audu (2012), have examined the nature and causes of unemployment in Nigeria and found disturbing trends. There are very few studies which have been undertaken regarding the effect of and inflation on economic growth in Nigeria. Some of the existing studies used basically descriptive statistics (see Olowononi and Audu (2012). Aminu and Anono, (2012), Bakare, (2012) and Rafindadi, (2012) conducted similar studies and their findings were controversial especially in the area of impact of the two twin‟s evils (and inflation) on the growth of the Nigerian economy. Bakare found negative relationship between unemployment, inflation and growth, Rafindadi (2012) found negative non-linear relationship between unemployment and output growth while Aminu and Anono found positive relationship between inflation and economic growth in Nigeria. Another study was also conducted in the same vein in China by ChangShuai Li and ZI-Juan Liu (2012) on unemployment rate, economic growth and inflation. The results revealed that unemployment impacted negatively on growth while inflation impacted positively on growth in China. The puzzling trends of economic growth rate, unemployment rate, and inflation rates in Nigeria and the controversial results obtained in the empirical results provide the need to examine the relationship between inflation and economic growth in Nigeria.

1.3 Research questions

Arising from the research problems are the following questions:
i.        What is the relationship between economic growth, and inflation?
ii.      What is the causes, effects and trends of inflation in Nigeria?

1.4 Objectives of the study

The main objective of the study is: to examine the impact of and inflation on economic growth in Nigeria.
The specific objectives of this study include the following:-
(i)                 To estimate the relationship between economic growth, unemployment and
inflation.
(ii)               To analyse the causes, effects and trends of inflation in Nigeria.
1.5   The Hypothesis to be tested is as follows:
Null hypothesis (Ho)
Ho:     inflation have no effect on economic growth in Nigeria.

Alternative hypothesis (H1)

H1:       inflation have effect on economic growth in Nigeria.

1.6 Significance/justification of the study

The adverse effects of and inflation on economic growth has attracted the attention of government and researchers the world over. Among the main and major problems of policy makers are how to maintain low and stable unemployment as well as relatively stable prices so as to achieve high economic growth. Several studies were conducted on the impact of and inflation on economic growth in Nigeria.
Studies studies such as (Aminu and Anono, 2012, Bakare, 2012, Rafindadi, 2012 and Aminu, Manu and Salihu 2013) used econometric models. Their findings are controversial especially in the area of impact of the two twin‟s evils (and inflation) on the growth of the Nigerian economy.
Aminu and Anono 2012 investigated the effect of inflation on economic growth and development in Nigeria. They employed OLS, ADF and Granger causality and found that there is a positive correlation between inflation and economic growth in Nigeria, though the results revealed that the coefficient of inflation is not statistically significant, but is consistence with the theoretical expectation, causation runs from GDP to inflation implying that inflation does not Granger cause GDP but GDP does.
Bakere (2012) conducted a study on stabilization policy, unemployment crises and economic growth in Nigeria. He used OLS and found that the nexus between inflation, unemployment and economic growth in Nigeria were negative.
Rafindadi (2012) conducted a study on the relationship between output and unemployment dynamics in Nigeria; and used OLS and Threshold model. He found a negative nonlinear relationship between output and unemployment.
Aminu, Manu and Salihu 2013 investigated the effect of and inflation on economic growth in Nigeria; they employed OLS, Augmented Dickey-Fuller technique, Granger causality and Johansen cointegration test and found positive relationship between unemployment, inflation and economic growth in Nigeria. The weakness of the studies above apart from having controversial results also is that they failed to investigate the extent to which and inflation affects economic growth in Nigeria which this thesis is out to investigate and this justifies the study in this area. This thesis employed multidimensional analytical tools to investigate the relationship between unemployment, inflation and economic growth in Nigeria. This Thesis also employed double log model in estimating the elasticities coefficients of and inflation which help in solving the problem found in the previous studies reviewed. Elasticity coefficients show the extent to which and inflation affects economic growth in Nigeria form 1986-2012
The significance of this study lies on the fact that huge amount of resources (human and capital) are unemployed which could cause poor economic performance. This thesis will help policy makers to establish the extent of the effect of and inflation rates on economic growth. This thesis will improve the body of existing literature and also serve as a policy document. The problems of high level and inflation need to be addressed in order to improve economic growth.

1.7 Scope and limitation of the study

The thesis covers 1986 to 2012. This period is chosen because structural adjustment programme (SAP) began in 1986. In the course of the study, the major factors that were responsible for high and inflation were investigated. The major limitations to this study were the unreliable data on and inflation rates. Therefore, the interpretation of results obtained from any computations that uses the data must be done with caution. Sometimes there are conflicting data on the same variable from different sources.

1.8 Organization of the studies


This thesis is organized into five chapters. Chapter one which is the introduction started by providing a background of the subject matter, the problems and objectives follow. These are followed by hypotheses, rationale and scope of the study as well as the organization of the chapters. Chapter two presents related literature concerning conceptual literature, theoretical, and empirical literature. Chapter three contained the research methodology, which consist of the sources of data, model specification and methods of data analysis, while the results and discussion are presented in chapter four. Chapter five contains the summary, conclusions and recommendations of the study. They are followed by references.

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Item Type: Project Material  |  Attribute: 81 pages  |  Chapters: 1-5
Format: MS Word  |  Price: N3,000  |  Delivery: Within 30Mins.
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