IMPACT OF INFLATION ON INVESTMENT AND ECONOMIC GROWTH IN NIGERIA

ABSTRACT

This study investigated the impact of inflation on investment and economic growth in Nigeria. Since Nigerian financial sector liberalization is anchored on interest rate and exchange rate deregulation and the inflation targeting monetary policy, therefore exchange rate was incorporated in the study. The OLX technique was used in this study to estimate the two models specified in the study. Other tests such as unit root test and cointegration test were conducted to determine the stationarity and long term relationship among the variables. The result of the investigation showed that both inflation has a negative effect on investment level and economic growth but exchange rate has positive effect on investment and economic growth. The study recommends that in order to curb inflation, government should create a conducive employment opportunity, transparency in the fiscal operations to bring about realistic fiscal deficits, exchange policy should be designed to bridge the savings investment gap, enhance government revenue and reduce the fiscal gap in order to ultimately enhance economic growth which will bring about development. 

CHAPTER ONE

INTRODUCTION

1.1              BACKGROUND OF THE STUDY

One of the greatest problems facing Nigerian economy today is inflation which is persistently a complex, economic and social problem of the economy. Inflation has become a leading topic of discussion in Nigerian families and other countries of the world. Government’s inability to provide a lasting solution to this aroused a universal conviction that inflation is inevitable and created pessimism that government has no power to bring rising price (inflation) trend to an end. Inflation is not only a serious problem but also has a disquieting effect on the economic life, political system and the society as a whole. A situation where the value of money continues to depreciate in terms of value, there is the tendency for rising prices for available goods and services generally and such situation is being referred to as inflation. Inflation can be defined as continuous rise in prices of goods and services. Inflation simply means too-much money chasing few goods. Inflation in the country has become a threat to the Nigerian economy particularly to investment and development.

Inflation, always and everywhere, is primarily caused by an increase in the supply of money and credit. According to American College Dictionary, inflation is “Undue expansion or increase of the currency of a country.” Inflation can also be defined as the sustained increase in the general level of prices of goods and services overtime (Adebayo 1999). The term inflation is often used to describe upward movement in the general level of prices.

Inflation can also be seen as the persistent and appreciable rise in the general level of prices (Jhingan, 2006).Not every rise in the price level is termed inflation. Therefore, for a rise in the general price level to be considered inflation, such a rise must be constant, enduring and sustained.

When the supply of money is increased, people have more money to offer for goods. If the supply of goods does not increase—or does not increase as much as the supply of money—then the prices of goods will go up.

Inflation is generally used to describe a situation of high and sustained increase in the general price level of an economy. It is a social malady as well as a pervasive economic phenomenon. Besides, distorting prices, it erodes savings, discourages investment, stimulates capital flight, inhibits growth, and makes economic planning a nightmare and political unrest .

The problem of how to reduce inflation has been a central issue among policy makers since the 1970s. Several authorities have attributed it to the expansion of public expenditure arising from the increase in oil revenue.

Existence of excess aggregate demand can cause inflation (demand pull inflation). Cost-push inflation arises from upward pressure of production costs, while structural inflation arises from constraints such as inefficient production, marketing and distribution systems in the productive sectors of the economy. Inflation has been apparent in Nigeria from the outset of our national life. This was propelled in the 1960s through the “cheap money policy” adopted by the government to stimulate development after independence.

Inflation can have positive and negative impact on the economic performance of an economy. Positively, inflation can lead to a higher sustained growth due to the effect it has on capital accumulation. Also, through its negative impact on productivity in an economy, inflation results in adverse effects on economic growth.

Some researchers advocated that, inflation can lead to uncertainty about the future profitability of investment project. Hence this lead to more conservative investment strategies than would otherwise by the case, ultimately leading to lower levels of investment and development.

In Nigeria, one of the major problem facing the economy is inflation, the country registered low inflation in the years immediately after independence.Various macro-economic policies notably fiscal, monetary and exchange rate had from time to time been adopted to address this problem of inflation. Unfortunately, these measures have met with little or no success and this has hindered the achievement of other macro-economic objectives.

It is in this light that this study is devoted to identify the impact of inflation on Investment and economic growth Nigeria.

1.2       STATEMENT OF THE PROBLEM

Since the attainment of independence of 1960, economic policies have been concerned basically with anti-inflationary measures aimed at achieving price stability. There is almost a universal consensus that macroeconomic stability, specifically defined as low inflation is positively related to development. Indeed, the monetary policy framework adopted by Nigeria since 1993 has an overriding objective and that is the achievement of single digit inflation. Monetary and fiscal policies as well as wage freeze, price control, exchange rate and other measures have been employed from time to time to stem the tide of sustained increase in the general price level. In retrospect, it appears that in spite of these efforts; the achievement of price stability objective has been limited.

Inflation undermines the role of money as a store of value. It frustrates investments and growth. It also, hurts people who are retired and living on a fixed income.it is very difficult to determine how much to produce because business cannot predict the demand for their product at the higher prices they will have to charge in order to breakeven. Empirical studies on inflation, investment and development confirm the long-term inverse relationship between inflation and development. The negative relationship between inflation and growth has been attributed to the strong negative association between inflation, capital accumulation and productivity growth. Consequently, high inflation is said to be harmful to both investment and hence, real output.

Though most countries aim at keeping inflation low, it has been volatile in Nigeria in-spite of the consistent effort of the central bank of Nigeria through its monetary policy that is geared towards achieving a single-digit inflation rate. For instance, within the last thirty years (1970 – 2000), inflation rate has fluctuated widely. It assumed single-digit only in seven years and double in twenty-three years reaching a peak of 72.8% in 1994 from 57.2% in 1993.

1.3       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 investment in Nigeria?

1.4        OBJECTIVE OF THE STUDY

The objective of this study is to examine the impact of inflation on investment and economic growth. The specific objectives of this study are to:

1).        analyze the trend of inflation and economic growth in the country over the years.

2).         investigate the relationship between inflation, investment and economic growth in Nigeria.

3)          examine the effect of inflation on investment and economic growth in Nigeria.

1.5       RESEARCH HYPOTHESIS

The hypotheses to be tested in the course of this study are stated below:

Ho:     Inflation does not affect Investment in Nigeria.

H1:     Inflation affect Investment in Nigeria.

Hypothesis II

Ho:     Inflation does not affect economic growth in Nigeria.

H1:     Inflation affect economic growth in Nigeria.

1.6        JUSTIFICATION OF THE STUDY

The justification of the study is that it intends to answer certain questions such as, what are the causes of inflation in Nigeria, and how can it be related to investment and economic growth. This answer will form the basis upon which suggestions will be made as to how inflation can be reduced or eliminated totally or to the minimum level.

1.7       SCOPE OF THE STUDY

This study shall focus on the effect of inflation on investment and economic growth covering the period between 1980 and 2013. Therefore, this study examines not only the effect of inflation on investment and development, it will also investigate its effect on other macroeconomic variables.

1.8       ORGANIZATION OF THE STUDY

This study shall be divided in five chapters.

I.Chapter one

Providing a background of the subject matter justifying the need for the study.

II.Chapter two

Present related literature concerning inflation, its causes and effects.

III.Chapter three

The research methodology

IV.Chapter four

Data presentation and analyses

V.Chapter five

Findings and recommendations based on the findings