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TOPIC : IMPACT OF INFLATION ON ECONOMIC GROWTH OF NIGERIA (2011Q1 - 2015Q3)
Also available for (1981 - 2013)
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
(Imobighe, 2012; Adenuga, et al. 2012). Although, there
is no a clear cut relationship between economic growth
and inflation (Majumder, 2016), some evidence suggests
that moderate inflation helps in economic growth, the
overall weight of evidence so far clearly indicated
that inflation is inimical to growth (Bawa and Abdullahi,
2012; Omotosho and Doguwa, 2013; Amandeep, 2014). The
problem of inflation surely is not a new phenomenon.
It has been a major problem in the country over the
Inflation is defined as a generalised increase in the
level of price sustained over a long period in an economy
(Lipsey and Chrystal, 1995). According to Umaru and
Zubairu, (2012) the concept of inflation can be define
as a persistence rise in the general price level of
broad spectrum of goods and services in a country over
a long period of time. They state that Inflation has
been intrinsically linked to money, as captured by the
often heard maxim “inflation is too much money
chasing too few goods”. According to Badreldin
(2014), inflation reflects a reduction in the purchasing
power per unit of money – a loss of real value
in the medium of exchange and unit of account within
the economy. 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 inflation
particularly 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.
Oyakhilomen and Rekwot (2014) traced the history of
inflation in Nigeria to the 1960s when “cheap
money policy” was adopted by the government to
stimulate development after independence. 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 rapid growth in domestic money supply,
exacerbated by the monetization of the earnings from
oil (Kumapayi, et al., 2012) and 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. But high inflation rate
was again recorded in 2015/2016 when crude oil price
at the international market crashed in 2014/2015 and
thereby mounted pressure on Naira exchange rate due
to dwindling external reserve. As a heavily import-dependent
economy, the high import cost pushed up the inflation
rate to double digit.
Undoubtedly one of the macroeconomic goals which the
government strives to achieve is the maintenance of
stable domestic price level (Rao and Yesigat, 2015).
This goal is pursued in order to avoid cost of inflation
or deflation and the uncertainty that follows where
there is price instability (Ibrahim and Agbaje, 2013;
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 incompatable with growth.
As it is generally believed that the attainment of every
other macroeconomics goals depend on the maintenance
of a stable and low inflation environment (Ajide and
Lawanson, 2012; Zahra, 2014).
OF THE PROBLEM
There is almost a universal consensus that macroeconomic
stability, specifically defined as low inflation (Rao
and Yesigat, 2015), 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). While the structuralists
argue that inflation is crucial for economic growth,
the monetarists posit that inflation is harmful to economic
growth (Doguwa, 2013). 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 that inflation 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). Kumapayi et al. (2012) reveals that
over the last few decades, high inflation in Nigeria
has caused yield on investment to decline while government
policy objectives has been adversely affected as the
real size of its budget shrinks with rising inflation
which has hampered economic growth. Contrarily, Omotosho
and Doguwa (2013) found that the periods of high inflation
volatility in Nigeria are associated with periods of
specific government policy changes, shocks to food prices
and lack of coordination between monetary and fiscal
However, most previous studies have focused on the effect
of inflation on growth in developed countries while
little attention has been paid to developing countries.
It is therefore imperative to conduct a research into
the effect of inflation on economic growth in developing
countries with special focus on Nigeria, which is the
main thrust of this study.
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
(ii) investigate the impact of inflation on the economic
growth of Nigeria;
(iii) Explore the effect of inflation on capital formation
(iv) Examine the influence of inflation on peoples’
(v) Suggest visible solutions to the problem of inflation
in the country.
This study would be guided by the following research
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?
The hypotheses to be tested in the course of this study
are stated below:
Ho : Inflation does not hinders significantly the economic
growth of Nigeria.
H1 : Inflation hinders significantly the economic growth
Ho : Inflation does not hinders significantly capital
formation in Nigeria.
H1 : Inflation hinders significantly capital formation
Ho : Inflation does not hinders significantly consumption
expenditure of people in Nigeria.
H1 : Inflation hinders significantly consumption expenditure
of people in Nigeria.
The analysis to be made in this study shall be based
on time series data for Nigeria’s Inflation rate,
Federal Government Total Expenditure, Broad Money Supply,
Interest rate, Growth Rate of Gross Domestic Product,
Gross Domestic Product, Gross Fixed Capital Formation,
and Private Consumption Expenditure. Due to the linearity
nature of the model formulation, Ordinary Least Square
(OLS) estimation method was employed in obtaining the
numerical estimates of the coefficients in the model
using Statistical Software for Social Sciences (SPSS).
Three multiple regression models shall be used in the
estimation. The first model would seek to investigate
the effect of inflation on the economic growth of Nigeria,
the second model seeks to examine the effect of inflation
on capital formation (investment) while the third model
probe the impact of inflation on private consumption
expenditure. The estimation period would be restricted
to the period between first quarter of 2011 and third
quarter of 2015 due to non-availability of all the needed
data. Besides the regression analysis, tables and charts
were also used to examine the trend of inflation rate
over the years.
Secondary data shall be the basis of data to be used
in this study. They would be sourced mainly from the
publications of the Central Bank of Nigeria (CBN) namely;
CBN Statistical Bulletin, CBN quarterly Statistical
Bulletin, CBN Annual Reports, CBN Economic and Financial
Review Bullion, and Bureau of Statistics publications.
The variables for which data were sourced include: Inflation
rate, Federal Government Total Expenditure, Broad Money
Supply, Interest rate, Growth Rate of Gross Domestic
Product, Gross Domestic Product, Gross Fixed Capital
Formation, and Private Consumption Expenditure for the
period 2011Q1 to 2015Q3.
OF THE STUDY
A vital component of any move towards macroeconomic
stability and growth is an integrated efforts towards
price stability. In order to identify the macroeconomic
effect of inflation persistence in Nigeria, this study
would investigate the impact of inflation on macroeconomic
variables such as productivity, investment, and consumption.
This study is significant in the followings ways:
a. it would have a direct effect on the efficiency and
effectiveness of the use of policy instruments in the
stabilisation of macroeconomic variables to stimulate
production and investment.
b. it would reveal the remote and immediate causes of
inflation in Nigeria with due consideration to theoretical
c. it would also provide an explanation for Nigeria’s
OF THE STUDY
This study shall focus on the effect of inflation on
economic growth in Nigeria as necessitated by the inflationary
pressure generated by recent global economic crisis
through the exchange rate sensitivity. Despite various
policies that had been formulated and implemented, no
meaningful progress has been made in the combat of inflation.
Therefore, this study examines not only the effect of
inflation on the economic growth, it also investigate
its effect on other macroeconomic variables. The effect
of inflation on economic growth shall be investigated
empirically with the data spanning from 2011Q1 to 2015Q3.
This restriction is unavoidable because of the rebasing
of economic data from 1990 to 2010 and due to non-availability
of all the needed data.
OF THE STUDY
This study shall be divided in five chapters. The research
shall commence by providing a background of the subject
matter justifying the need for 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 analyses shall be made 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 the findings.
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Regression Data and Results are included
inflation rate, inflation definition, causes of inflation,
effects of inflation, economic growth
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