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