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DETERMINANTS OF INFLATIONARY PRESSURE IN NIGERIA ECONOMY (1970-2008).
TABLE OF CONTENTS
Title Page i
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
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
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
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
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
There are no sources in the current document.
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.
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.
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.
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.