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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