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DETERMINANTS OF INFLATIONARY
PRESSURE IN NIGERIA ECONOMY (1970-2008).
TABLE OF CONTENTS
Title Page i
Certification ii
Dedication iii
Acknowledgment iv
Table of Contents v
List of Tables vi
List of Figure vii
CHAPTER
ONE: INTRODUCTION
1.1 Background
of study 1
1.2 Statement
of the problem 5
1.3 Objectives
of the study 7
1.4 Hypothesis 8
1.5 Significance
of the study 8
1.6 Scope
and limitation of the study 9
1.7 Definition
of terms 10
1.8 Organization
of study 12
CHAPTER
TWO
2.0 Literature
review and theoretical framework 14
2.1 Introduces 14
2.1.1 The demand pull theories of
inflation 14
2.1.2 Cost push theories of inflation 22
2.1.3 Structural theories of inflation 27
2.1.4 Imported inflation 29
2.1.5 Review of related studies on
inflation 29
2.2 Causes
of inflation in Nigerian economy 31
2.3 Effects
of inflation in Nigeria 34
2.4 Inflation
control measure in Nigeria 41
2.5 Measurement
of inflation 47
2.6 Classification
of inflation 51
2.7 Inflationary
trend in Nigeria 54
CHAPTER
THREE
3.0 Method
of study 58
3.1 Introduction 58
3.2 Types
and sources of data 58
3.3 Method
of analysis 59
3.4 Model
specification 59
3.5 Mathematical
form of the model 61
3.6 Definition
of terms 62
CHAPTER
FOUR
4.0 Data
presentation and empirical analysis 64
4.1 Data
presentation and analysis 64
4.2 Empirical
result from the regression analysis 66
4.2.1 Interpretation of result
economics criteria 67
4.2.2 Interpretation of result:
statistical criteria 67
4.2.3 Interpretation of result
econometrics criteria 69
4.3 Implications
of the results for the research hypothesis 71
CHAPTER
FIVE
5.0 Summary,
recommendation and conclusion 73
5.1 Summary
of major findings 73
5.2 Recommendation
for policy 74
5.2.1 Recommendation for further
studies 75
5.3 Conclusion 76
Bibliography
There are no sources in the current document.
77
Appendix 79
LIST OF TABLES
Table 4.1: Data Presentation for Regression Analysis
LISTS OF FIGURES
Fig
2.1: Diagrammatic illustration of
Keynesians theory of inflation
Fig
2.2: Diagram depicting the demand pull
theory of inflation (quantity theory version).
Fig
2.3 Diagram depicting the cost push
theory of inflation
Fig
2.4: The Philips curve
Fig
2.5 Diagram illustration stagflation.
ABSTRACT
This work is
aimed at identifying the major determinants of inflation in Nigeria with a view
of determining the relevant policy instrument that could contribute to its
reduction. The empirical analysis using econometrics method of ordinary least
square regression analysis method confirms the findings of earlier studies that
monetary expansion significantly influences the rate of inflation in Nigeria.
To other dominant factor is the exchange of inflation rate which has a
significant and positive impact on the rate of inflation. Government deficit
financing was also another factor but it wasn’t quite significant in explain
inflation in Nigeria. Inspite of the use of monetary fiscal policy measures for
controlling inflation in Nigeria, inflation still remains a serious and
contentious problem in Nigeria. Based on the findings it was recommended among
other that monetary authorities should mop up excess liquidity outside the
banking system and also that the government should avoid or curtail financial
indiscipline on extra budgetary expenditure. It is important that credibility
of government’s anti-inflationary policies should be maintained so as to stick
firmly to inflation targets once they have been set.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Inflation
is an age long problem. It is one of the worst economic phenomena that have put
almost all the countries in the world in shambles. A lot of attention has been
focused on the vision 2020 in recent times; hence from the growth of the
economy from now to 2020 will determine if these macro-economic problems can be
solved.
In
Nigeria, inflation has become of one of the problems that have plagued nation
since early 70s. This macro-economic problem has existed throughout history
even through the Greek and Roman period. Inflation has been known to exist
throughout the pages of history as long as the market system exists.
Experiences has shown that inflation is not a peculiar problem of developing
countries like Nigeria alone but a global problem that spread across countries
in varying degrees. But more to the point of the truth is that inflation has
shown a higher level for developing countries.
Inflation
is occurs when general level of prices rises rapidly and persistently over a
period of time. It can also be defined as a continuous and persistent rise in
the general level of prices of goods and services i.e. continuous and
persistent fall in the value of money.
After
years of theorizing on the issue of inflation, it has failed to provide the
nation the desired antidote to the problem and this is one of the intractable
problems facing Nigerian Economy. However, the shift from agricultural sector
to the oil sector increased our revenue base and this allowed government to
increase wages and salary through the Udoji salary review commission of 1974
coupled with the big surge in prices of commodities that occurred early in the
decade.
This
state of affairs is also largely due to the prevailing and advancing
inflationary pressures in the economies of our foreign trading partners, the
international monetary crisis over which we have no direct control and partly
due to the fact that local production has lagged behind demand especially in
sensitive areas like food and housing.
Furthermore,
the monetarist school of thought said that the major likely cause of inflations
is directly related to money supply in circulation which was derived from the
quantity theory of money. Amongst other factors responsible for the cause of
inflation in Nigeria are money supply, higher production costs, poor
distributive system, exchange rate, political instability etc also, a rapid
growth of public to the inflow of petrol dollars coupled with the deficit
financing of the government which provides the nation with surplus capital
without any well-defined and articulate ideas on what to do with the surplus
income and the country also embarked on guided spending jamboree in the
non-directly productive sectors.
Consequently,
in the 1970s , the Nigeria economy was depicting a scenario of stagflation. The
current situation is one of too little money chasing fewer goods as opposed to
the neo classical explanation of too much money chasing too fewer goods”. This
has added to the new dimension of economics though by employing other budgetary
measures starting from the austerity measures that ended with Alhaji Shehu
Shagari that allowed a lot of importation, which sprung up inflation in 1984.
Therefore, there was need to diversify the economy. Thus, the structural
adjustment programme was introduced in July 1986.
More
so, there was the removal of government subsidies in all sectors by policy
makers for the elimination of inefficiency in the system and after this period,
there was stability and continued depreciation of the Naira (N) and in the
foreign exchange market (FEM) which resulted to the high cost of living of the
populace, increased cost of production (Cost-Push inflation). After the
deregulation of the economy in 1986, there were other periods of high inflation
which are 1988, 1989 and 1992 to date. Reduction of high inflationary pressures
is considered to be one of the most crucial macro-economic objectives of
Nigeria.
Lastly,
having identified some major determinants of inflationary pressures on the
Nigerian economy, some factors have been offered to bring about solution to
this macro-economic problem. They include: reducing government deficit
financing which will thereby reduce is the magnitude of money supply in the
economy effective price control, fiscal policy, monetary policy etc despite the
fact that successive governments are trying to stop this problem of inflation
and it is still rising.
1.2 STATEMENT OF THE PROBLEM
The
problem of inflation is one condition that currently fomenting the economy of
Nigeria. It has grown to the extent that it has reached the situation is
described as stagflation. Nigeria as a developing country is presently batting
with inflation, which has sparked off prices of virtually all purchase items.
Recent attempts by many developing countries to attain higher rate of capital
formation have generally been accompanied by severe and prolonged inflation.
Therefore,
it is a known fact that inflation impacts greatly on various spheres of human
existence. Thus this has been seen that the process of rapid economic growth and
development might provoke inflationary pressures.
Furthermore,
inflation can rise because of the existence of excessive aggregate demand,
imported demand as well as upward pressure on production cost and administered
prices or due to structural constraints such as inefficient production,
marketing and distributional systems in the productive sector of the economy.
These are commonly known as demand-pull, imported, cost-push as well as
structural inflation respectively. No matter the source, inflation basically is
a monetary phenomenon in the sense that it cannot be sustained without
accommodating increase in money supply.
Inflation
is therefore, an undesirable to the public and policy makers. From this point
of view of the public, inflation causes uncertainty about prices and this
affects decisions on expenditure, savings and investment and also causes
misallocation of resources. It also allows substantial re-distribution of
income and wealth from savers to borrowers. Also to the policy makers,
inflation hinders growth and development of an economy as it discourages
investment. These factors explain and why policy makers put lots of efforts to
reduce inflation and why several writers focused on this issue.
Finally,
inflation affects the welfare of the people that is employment of the
unemployment and reduction of the purchasing power of the country’s currency;
thereby bring about a high rate of living for the people.
1.3 OBJECTIVE OF THE STUDY
1. To identify
some possible determinants of inflationary pressures on the Nigeria economy.
2. To determine
the extent to which the factors identified influence inflation in the economy.
3. To suggest
measures that could contribute to its reduction.
1.4 HYPOTHESIS
H01:
There is no significance relationship between the rate of inflation and money
supply in Nigeria.
H02:
There is no significant relationship between the rate of inflation and
government deficit financing in Nigeria.
H03:
There is no significant relationship between the rate of inflation and exchange
rate in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
This
study will critically examine the economic phenomenon called inflation. And as
such be significant in the following ways.
1. The
study will serve as a tool for policy makers to solve this macro-economic
problem.
2. It
will examine the choice of policy instrument to be used in reducing the rate of
inflation in Nigeria.
3. it
will contribute to the widening of the knowledge of other researchers and also
score as a reference material in the future.
1.6 SCOPE AND LIMITATION OF STUDY
This
study tends to critically analyze the determinant of inflationary pressure on
the Nigerian economy (1970-2008) to see the impact of the independent variables
(money supply, government deficit financing and exchange rate) on the dependent
variable which is inflation. Also, available data and finance posed a little
problem to this research but these did not stop the progress and the findings
of this work.
1.7 DEFINITION OF TERMS
a. Inflation:
this can be seen as a continuous and persistence fall in the value of money.
Inflation can be defined as a general and sustained rise in the general price
level or an average of all prices, that is, it is the process of prices
generally increasing.
b. Money
Supply: this can be defined as the total stock of money in the economy. It
consists of the total stock of currency (Coin, Paper currency) in the hands of
non-bank public plus the demand deposit of commercial banks (Keynesian view).
Friedman
defined money supply as the numbers of naira (Dollars) people are carrying
around in their pockets, the numbers of (Dollars) that they have to their
credit at bank in the form of demand deposit and also commercial time deposits.
It
can also be defined as the total amount of money (example currency and demand
deposits) in circulation in a country at any given time. That is the amount of
money which is available in an economy in sufficiently and spendable form.
c. Fiscal Policy:
this is the use of government tax and expenditure to regulate the economy. It
can also be defined as that part of government policy concerning the raising of
revenue through taxation and her means and deciding on the level and pattern of
expenditure for the purpose of influencing economic activities. It is the
direct policies of the government, which involves manipulation of parameters
that will directly affect government revenue and expenditure. It therefore
deals with taxation, other revenues, the public borrowing and public
expenditure.
d. Monetary
Policy: This is the use of central banks weapons of control; it can be
defined as a measure to control the availability cost and use of money and
credit in the economy. For the purpose of achieving stated objectives. it can
also be defined as any conscious action undertaken by the monetary authorities
to change the quantity, availability or cost of money. This can be achieved
through the use of money supply and interest rate and investors will reduce
their investment affected.
e. Exchange
Rate Official Exchange Rate: This can be defined as the numbers of domestic
currency that could purchase one unit of foreign currency i.e. when more units
of local currency are being exchanged for a unit of foreign currency example N;
$ given out type of economy that is dependent on manufactured goods and
essential industrial inputs if the exchange rate goes up, (that if the naira
depreciate), like what happen under SAP regime, this invariably implies that
the price of imported inputs will go up. The cost of domestically produced
items will rise because the cost of production has risen as a result of the
higher exchange rate.
f. Gross
Domestic Product (GDP): this is the total value of goods and services
produced in a given country without regards to whether the income generated is
paid by foreigners or nationals of the country. It can also be defined as the
value of final goods and services produced within the confines of a country.
1.8 ORGANIZATION OF THIS WORK
This
study is divided into five chapters, which are in expository order.
Chapter
one deals with the introduction that covers the background of the study,
statement of problem, objective of the study, hypothesis, scope and limitations
of the study and organization of the study.
Chapter
two deals with literature review and theoretical framework that reviews all
relevant contributions from various authors or scholars with respect to the
subject matter.
Chapter
three deals with the method of study it focuses on the method of data
collection, research design, instruments of measurement and data analysis.
Chapter
four deals with data presentation and analysis. This chapter our hypothesis and
gives an empirical evidence to justify the relationship between inflation and
its determinant.
Chapter
five deals with the summary, conclusions and gives necessary recommendations.
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