THE IMPACT OF INFLATION ON ECONOMIC GROWTH IN NIGERIA

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY: The issue of inflation has gained significant attention among Nigerian families and in various countries worldwide. As the press continues to have a greater impact on the nation's society. The sharp and continuous increase in price is widely recognised as a significant economic issue in our current era. The problem at hand is of significant magnitude, as it has the potential to cause severe damage to our societies if left unaddressed. Inflation, if not effectively managed, poses a serious threat to the fundamental structure of our communities.

Inflation refers to a condition characterised by a significant and consistent rise in the overall price level within an economy. The issue at hand is both a social problem and a widespread economic occurrence. In addition to distorting prices, the phenomenon described also has negative effects on savings, investment, capital flight, economic growth, and the ability to effectively plan and manage the economy. These consequences have been highlighted by Guy, Debelle, et al. in 1998. Governments view inflation as a significant issue and make efforts to control it by implementing long-term and consistent fiscal and monetary measures.

In the present day, there is frequent mention of various types of inflation. The term inflation is commonly used interchangeably with the concept of a rise in prices. In addition to the general understanding of inflation, there exists a more precise definition. This definition refers to an increase in the overall price level resulting from an imbalance between the amount of money in circulation and the demands of trade. The cause of this "inflation" can be traced back to the central bank, and the most effective solution would be to implement a more conservative approach to money growth. However, when considering the factors influencing the price level, such as a depreciating dollar, increasing labour costs, adverse weather conditions, or various other factors besides excessive money supply, the resolution and wisdom of eradicating inflation become less evident.

Inflation can both positively and negatively affect the economic performance of an economy. Inflation can potentially have a positive impact on sustained growth by influencing capital accumulation. Inflation has a negative impact on productivity in an economy, which in turn leads to adverse effects on economic growth.

According to certain researchers, inflation has the potential to create uncertainty regarding the future profitability of investment projects. As a result, the conservative investment strategies that were adopted had a significant impact on the overall levels of investment and economic growth, resulting in lower outcomes than what would have been expected otherwise. According to Khan (2002), inflation can have a negative impact on a country's international competitiveness. This is because it can lead to an increase in the prices of exports, making them relatively more expensive compared to other countries. As a result, the balance of payments may be adversely affected. Furthermore, it is worth noting that budget deficits have a negative impact on both capital accumulation and productivity growth. Contrary to this viewpoint, certain theories propose a positive correlation between inflation and economic growth.

One of the key macroeconomic objectives in a society is achieving economic growth. Kuznet (1973) defines economic growth as a sustained increase in the ability to provide a wider range of economic opportunities to the population. This growth is driven by advancements in technology, industry, and the necessary institutional and ideological adaptations. This suggests that there has been a rise in the overall value of goods and services that have been produced by an economy. Economic growth is commonly quantified by calculating the percentage rate of increase in real Gross Domestic Product (GDP). This measurement is typically done in real terms, meaning it is adjusted for inflation. This adjustment allows for the removal of the impact of inflation on the prices of goods and services produced.

According to Barro and Grilli (1994), mainstream economists argue that there is a causal relationship between high rates of inflation and high rates of growth of the money supply. According to their perspective, fluctuations in inflation can be attributed to changes in the real demand for goods and services or in the availability of supplies (such as changes in scarcity). Additionally, they believe that changes in the supply and demand for money can also contribute to changes in inflation.

In Nigeria, the economy is currently grappling with a significant challenge, namely inflation. It is worth noting that in the years following independence, the country experienced relatively low levels of inflation. The country encountered a significant inflation rate in the 1970s, reaching double digits. The main cause of this was primarily the civil war. The years 1984, 1988, 1992, and 1995 were also characterised by high inflation.

Different macroeconomic policies, such as fiscal, monetary, and exchange rate policies, have been implemented at different times to tackle the issue of inflation. Regrettably, the effectiveness of these measures has been limited or nonexistent, impeding the attainment of broader macroeconomic goals such as economic growth, employment expansion, favourable balance of payments, and equitable income distribution.

This study aims to analyse the impact and acceptable rate of inflation in Nigeria, with the goal of achieving economic growth and fostering a more balanced economy.

1.2   STATEMENT OF THE PROBLEM

Since gaining independence in 1960, the focus of economic policies has primarily been on implementing measures to combat inflation and achieve price stability. The monetary policy framework implemented by Nigeria since 1993 has been primarily focused on achieving single-digit inflation, as stated by Essien and Eziocha in 2002. Various economic policies, such as monetary and fiscal measures, wage freezes, price controls, and exchange rate adjustments, have been implemented periodically to address the persistent rise in overall prices. Upon reflection, it is evident that despite the efforts made, the attainment of the price stability objective has been somewhat restricted. The presence of inflation weakens the ability of money to serve as a reliable store of value. The presence of frustration negatively impacts investments and growth. Empirical studies conducted by Ajayi and Ojo (1981) and Fisher (1993) have confirmed the existence of a long-term inverse relationship between inflation and growth. The negative correlation between inflation and growth is often explained by the significant negative link between inflation, capital accumulation, and productivity growth. High inflation is widely believed to have negative effects on investment and, as a result, on real output.

Most countries prioritise maintaining low inflation rates, but Nigeria has experienced volatility in its inflation despite the central bank's consistent efforts to achieve a single-digit inflation rate through monetary policy. The inflation rate has experienced significant fluctuations over the past three decades (1970 - 2000). The data suggests that there was a consistent increase in the percentage over a span of seven years, followed by a doubling of that percentage over a period of twenty-three years. The peak was observed in 1994, with a percentage of 72.8%, compared to 57.2% in the previous year, 1993. In recent times, economic analysts (Adeyeye and Fakiyesi 1980, Osakwe 1993, and Asogu 1991) have been investigating the reasons behind the concerning trend that is hindering economic growth in the country. Given the context, this policy aims to conduct an investigation and determine the impact of inflation on economic growth. Its objective is to provide recommendations on how to control inflation.

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 24 years, that is, from 2000-2023. 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.

1.8 Organization Of The Study

This study will be divided into five chapters. The research shall commence by providing a background to the study in chapter one. Chapter two shall present related literatures concerning inflation, its causes and effects. The research methodology shall be outlined in chapter three while the data presentation and analyse shall be presented in chapter four as well as highlights of the implications of the findings. Concluding comments in chapter five shall reflect on the findings of the study and recommendations based on the findings.