managing inflation in nigeria: challenges and …rassweb.org/admin/pages/researchpapers/paper...

© 2015 Research Academy of Social Sciences

http://www.rassweb.com 372

International Journal of Empirical Finance

Vol. 4, No. 6, 2015, 372-386

Managing Inflation in Nigeria: Challenges and Prospects

Anochie Uzoma C.1, Ude Damian Kalu2, Opara Godstime I.3

Abstract

There appears to be a consensus that macroeconomic stability defined as low inflation is negatively related to

economic growth. Hence, rapid output growth and low inflation are the most common objectives of macro-

economic policy. Some scholars concur that inflation may also reduce a country’s international

competitiveness, by making its exports relatively more expensive, thus impacting negatively on the balance

of payment, in addition to reducing capital accumulation and productivity growth. This research work is to

examine the reasons of inflation and economic growth in Nigeria showing how inflation can affect every

sector in the economy, to identify the causes and examine the pattern of managing inflation in Nigeria. The

secondary data was employed for this work. The ordinary least square (OLS) criterion was adopted in

determining the relationship between the Dependent and independent variables, using the E-view, A two

model equation were adopted in this research work. However the results from the regression model R2

adjusted is 0.950, which implies that 95.5% of the total variation of real Gross Domestic Product (GDP) can

be attributed to the specified explanatory variables, while 0.5% is attributed to the variation of the

independent variable, also the R2 is 0.69, which implies that 69% of the total variation of inflation rate can be

attributed to the specified explanatory variables, while 31% is attributed to the independent variable. The R2 -

adjusted is 0.694 which implies -86% variation in the inflation rate is caused by the variation of the

explanatory variables. The study concludes that, government should include policies that will protect and

cover every sector in the economy, this will stand as a yardstick for measuring performance of each sector,

and inflation will also be checked alongside with performance. Firms may have to devote more resources to

dealing with the effects of inflation also. The paper recommends that effective monetary and fiscal policies

via efficient tax administration ought to be employed in order to stem this tide since inflation is caused by the

excess money supply, some of the monetary and fiscal policy instrument will have little effect in controlling

inflation.

Keywords: Inflation Money supply, Economy, Fiscal policy, economic growth.

JEL code: E31, E52, E62

1. Introduction

The maintenance of price stability is one of the macroeconomic challenges facing the Nigerian

government in our economic history. This elusive factor known and referred to as inflation is defined by

economists as a continuous rise in prices. By definition, inflation is a persistent and appreciable rise in the

general level of prices (Jhingan, 2002; Raza et al., 2012). 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. The rise in the price should affect almost every commodity and should not be

temporal. But Demberg and McDougall are more explicit referring to inflation as a continuing rise in prices

1Department of Economics, College of Management Sciences, Michael Okpara University of Agriculture, Umudike,

Abia State, Nigeria. 2Department of Economics, College of Management Sciences, Michael Okpara University of Agriculture, Umudike,

Abia State, Nigeria. 3Department of Economics, Imo State University, Owerri, Nigeria.


373

as measured by an index such as the Consumer Price Index (CPI) or by the implicit price deflator for Gross

National Product (Jhingan 2002). Inflation is a generalized increase in the level of price sustained over a

long period in an economy (Lipsey and Chrystal, 1995), that is, a persistent rise in the price levels of

commodities and services, leading to a fall in the currency’s purchasing power. In other words, Inflation can

be seen as a continuous rise in the price of goods and services as a result of large volume of money in

circulation used in exchange of the few available goods and services over a period of time.

Inflation is also seen as a general upward movement of prices, or a rise in the prices of most goods and

services (Akunya and Marcus, 2014). It can also be seen as persistent increase in the prices of commodities

and this is not matched with increase in production (Anyaele, 2003).

In an inflationary economy, it is difficult for the national currency to act as medium of exchange and a

store of value without having an adverse effect on income distribution, output and employment (CBN, 1984).

Inflation is characterized by a fall in the value of the country’s currency and a rise in her exchange rate with

other nation’s currencies. This is quite obvious in the case of the value of the Naira (N), which was N1 to $1

(one US Dollar) in 1981, average of N100 to $1 in year 2000 (Okeke, 2000) and over N128 to $1 in 2003.

This decline in the value of the Naira coincides with the period of inflationary growth in Nigeria, and is an

unwholesome development that has led to a drastic decline in the living standard of the average Nigerian.

Inflation is considered to be a complex situation for an economy. If inflation goes beyond a moderate

rate, it can create disastrous situations for an economy; therefore it should be under control. In a country that

is experiencing an inflationary trend a lot of reasons have been adduced that could be its causes. Some of

these causes are increase in demand in excess of supply, increase in cost of production and some structural

problems in the economy. In measuring inflation, there are two main indices used to measure inflation. These

are the Consumer Price Index (CPI) and Producer Price Index (PPI). The CPI indicates the change in the

purchasing power of a consumer; the PPI measures the change in the purchasing power of the producers of

those goods.

Since maintenance of price stability is one of the objectives of Central Bank of Nigeria in the economy,

it is done by ensuring that rate of inflation is maintained within a certain bound to enable a strong economic

activity in all facets of the economy. The government takes several measures and formulates policies to

control economic activities, these measures taken by the government to control inflation are monetary policy,

fiscal policy and price control and they will be examined.

Statement of Problem

In looking at the statement of problems, one could be induced to conclude that the measures taken in

Nigeria seems not to attract the desired level of economic stability. This conclusion follows the dismal

performance of the economy in recent years. Little wonder Donli (2004) writes that the last two decades

witnessed series of reforms aimed at the revitalization of the Nigerian economy owing to series of crises that

influence the growth of the economy during this period. The problems were seen to be a direct derivative of

structural imbalances in our economic system. The imbalances started right from colonial era, nurtured by

inappropriate policies after independence in 1960, and reinforced by the wind fall gains from petroleum in

the 1970s.Donli (2004) further contends that these structural defects consisted of undiversified monolithic

and monoculture production bases, undue reliance on agricultural products from 1960s and a total shift to

exclusive reliance on petroleum after 1973. The outcome of these events was that the growth process relied

heavily on external factors instead of the internal ones. However, of all the dependences, the exclusive

reliance on petroleum turned out to be the most devastating to the economy. The dismal economic outlook in

Nigeria desires investigation into whether or not monetary policy fiscal policy and price control are used to

manage or control Nigeria's economic stability.

Certain questions could be raised in this study. For example

Why does inflation need to be managed or controlled?

What are the determinants of inflation?

To what impact does inflation have over economic growth in Nigeria?

A. Uzoma C. et al.

374

What are the measures adopted to control inflation in Nigeria?

How effective are the measures adopted to control inflation are?

Thus, the objective of this study is to investigate empirically the impact of these measures on Nigeria's

macroeconomic stability between 1985 and 2014.This work tends to provide a clear picture of inflation,

types and causes in Nigeria. To analyze the determinants of inflation in Nigeria.

To analyze the different measures that can be used in controlling inflation in Nigeria. To determine the

effect of inflation in the economic growth and development in Nigeria.

The Following Hypothesis would be tested in the study,

H01: there is no significant effect between inflation and economic growth in Nigeria.

H02: there is no significant effect between inflation and Gross Domestic Product (GDP) in Nigeria.

2. Review of Related Literature

Theories of Inflation

The theoretical basis of this study was anchored on Monetarist and Keynesian schools of thought. The

Monetarists hinge their proposition on the quantity theory of money in which they argue that changes in the

Price level is determined by fluctuations in the level of money supply. Keynesian theory proposes that money

is transparent to real forces in the economy, and that visible inflation is the result of pressure in the economy

expressing them in price.

o The Monetarist View of Quantity Theory of Money

The monetarists used the quantity theory of money as the framework for explaining the relationship

between money supply and the price level. According to Jhingan (2006), the Monetarists emphasize the role

of money as the principal cause of demand-pull inflation. They contend that inflation is always a monetary

phenomenon. Price tends to rise when the Rate of increase in the money supply is greater than the rate of

increase in real output of goods and services (Johnson, 1973).

Ayodele and Emmanuel (2005) and Raza et al. (2011), assume that the price level will change

proportionately with changes in the quantity of money. This belief is often summed up in the phase, “money

is in the long run-neutral”. The rate of money creation is reflected in the rate of inflation in the long run. It

further posits the existence of the classical dichotomy between relative and absolute price determination. The

crude quantity theory, focusing on long-run relationship, posit that the theory of value explains the relative

prices (because they are determined in the real sector) while monetary theory explains absolute prices.

A change in the quantity of money will only change the general level of absolute prices; it will not

affect output or relative prices (Lucket, 1980).

According to Glahe (1977), it must be noted that the monetary conclusion is based on the joint validity

of a particular assumption about the demand for and supply of money. They are both assumed to be perfectly

interest elastic. This is what is referred to as the erogeneity of money. The Monetarist’s contention hence

goes thus: given the level of real money supply and the level of demand for money at certain income levels,

money does not change alone with changes in the level of interest rate. For the derivation of the general

equilibrium, the equilibrium is the real (goods) market that is needed, together with the money market

equilibrium, yield the general equilibrium level refer to as the aggregate demand in the economy, while the

full employment level yields what is referred to as aggregate supply level. Therefore, national income and

price are determined by the equilibrium of aggregate demand and supply (Omofa, 2000).

An increase in the equilibrium in the goods market will only lead to an increase in the rate of interest

with little or no impact on the income and price level. It can thus be said that the impact of fiscal policy is not

necessary since it may not yield the desired result. If on the other hand, nominal money supply is increased

through Central Bank, it will result in an increase in the money market equilibrium. This now meets the


375

original equilibrium in the goods market at full employment which results in a higher aggregate demand than

when fiscal policy was embarked upon. As a result of this decision, aggregate demand meets aggregate

supply at a higher level of national income and price level (Omofa, 2000). The quantity theorists established

a direct relationship between money supply and price level.

Thus, the monetarists employ the familiar identity of Fisher’s equation of exchange:

MV=PQ

Where;

M = Money supply

V = Velocity of money in circulation

P = Aggregate price level

Q = Level of real output/aggregate output.

Assuming V and Q as constant, the price level (P) varies proportionately with the supply of money (M).

With flexible wages, the economy was believed to operate at full employment levels. The labour force, the

capital stock, and technology also change only slowly over time.

Consequently, the amount of money spent did not affect the level of real output so that a doubling of the

quantity of money will result simply in doubling the price level. Until price has risen by this proportion,

individuals and firms would have excess cash which they would spend, leading to rise in prices. So inflation

proceeds at the same rate at which the money supply expands (Jhingan, 2006; Raza, 2015).

o The Keynesian View

The Keynesian school of thought is usually referred to as demand side economist. Keynes economic

theory proposes that changes in money supply will not directly affect price and that visible inflation is the

result of pressure in the economy expressing them in price. Keynes emphasizes that increases in aggregate

demand are the source of demand-pull inflation. There may be more than one source of demand. Consumers

want more goods and services for consumption purposes. Businessmen want more inputs for investment.

Government demands more goods and services to meet civil and military requirements of the country. Thus,

the aggregate demand comprises consumption, investment and government expenditure.

Thus, Keynesian model is given as;

Y=C+I+G

(for a close economy)

Where;

Y = Aggregate Demand

C = Private Domestic Consumption

I = Investment

G = Government Expenditure

Inflation according to the Keynesian school of thought arises from excessive aggregate demand over

aggregate supply, particularly when the economy operates at the level of full employment resources. Keynes

rejected the quantity theory of money, which revolves around the Fisher’s equation of exchange which is as

stated earlier. He argued that an increase in the money supply would not inevitably lead to an increase in the

price level. Increasing M may instead lead to a decrease in V, in order words, the average speed of

circulation of money could fall because there was more of it in the system.

Alternatively the increase in M may lead to an increase in T (number of transactions) because as we

have seen Keynes disputes the assumption that the economy will find its own equilibrium. It may be in the

position where there is insufficient demand for full-employment equilibrium and in that case increasing the

money supply will fund extra demand and move the economy closer to full employment. Keynes tends to

argue that inflation is more likely to be cost-push or from an excess level of demand.This is usually term

demand-pull inflation (Robert 1988).

A. Uzoma C. et al.

376

Some Keynesian economists also disagree with the notion that the central bank fully controls the money

supply, arguing that central banks have little control, since the money supply adapts to demand for bank

credit issued by commercial banks. This is known as the theory of “endogenous money” and has been

advocated strongly by post-Keynesians as far back as the 1960s. It has today become a central focus of

“Taylor rule” advocates. This position is not universally accepted. Banks create money by making loans but

the aggregates volume of these loans diminishes as real interest rate increases. Thus, central bank can

influence money supply by making money cheaper or more expensive, thus increasing or decreasing its

production (Robert 1988).

The money supply is also thought to play a major role in determining levels of more moderate levels of

inflation, although there are differences of opinion on how important this role is for example, the monetarists

believe that the link is very strong. But Keynesian economists emphasize the role of aggregate demand in the

economy rather than the money supply in determining inflation, that is, for Keynes the money supply is only

one determinant of inflation. The fundamental concept in inflation analysis is the relationship between

inflation and unemployment. This relationship is sometimes expressed in terms of the “Philips curve”. The

models suggest that there is a tradeoff between price stability and employment. Therefore some level of

inflation could be considered desirable in order to minimize unemployment. The Philips curve model

described the US experience well in the 1960s but failed to describe the combination of rising inflation and

economic stagnation (sometime refer to as stagflation) experience in the 1970s (Chatham, 2008).

Thus, (Blanchard 2000) describes inflation analysis using a Philips curve that shifts (so that the trade-off

between inflation and unemployment changes) because of such matters as supply shock and inflation

becoming built into the normal workings of the economy. The former refers to such events as the oil shocks

of the 1970s while the latter refers to the price or wage spiral and inflationary expectations implying that the

economy “normally” suffers from inflation. Thought in the case of the monetarist,Keynes did not believe in a

single cause of inflation. His analysis allows other factors besides change in money supply to affect the

aggregate demand and supply curve such as fiscal policy and supply.

o Structuralism Theory

The inelasticity in the structures of the economy is the main drive of inflation based on this theory. This

is mainly obtainable in the developing countries. This is as result of inelasticity in capital formation,

institutional framework, labour force, production level, agricultural sector and unemployment structures.

Therefore, inflation sets in due to inefficiency in the structures of the economy.

Measurement of Inflation

The Wholesale Price Index: This measures the prices of inputs used in the production of goods and

services like machinery and other equipment, raw materials, etc, increase of which will affect price of goods .

The Consumer Price Index: This is the main determinant of the level of inflation in a country

because it measures the changes in price level of consumer goods. It is calculated as: CPI = Current year

price index/ Base year price index x 100/1

The Gross Domestic Product (GDP) Index: This measures change in the total value of goods and

services produced in a country over a period of time usually one year.

Types of Inflation

Inflation is divided into two main types, viz:

Ordinary Inflation: This is s gradual and intermittent rise in the price of goods and services caused by

under-production, hoarding and increase in the volume of money in circulation in a country.

Persistent Inflation: This is a continuous sharp and not easy to control rise in the prices of goods and

services which occurs mainly as a result of large volume of money in circulation far more than the available

goods and services.


377

Persistent inflation is further divided into two major types, they are;

Demand Pull Persistent Inflation: this occurs when the demand for goods and services is greater than

their supply caused mainly by increase in worker’s salaries and wages, or population explosion.

Cost Pull Persistent Inflation: rise in prices of goods and services caused by increase in the cost of

factors of production, demand for more wages by workers, etc. rising production cost forces prices up.

Galloping or Hyper Inflation: war, deficit budget, etc, are the causes of his inflation. Prices rise at a

fast rate and money ceases to function as a medium of exchange.

Imported Inflation: This type of inflation occurs whenever raw materials and finished goods are

imported into the country at a very high cost. For example, devaluation of import makes imports to become

relatively expensive. This can easily give rise to inflation in the economy of the importing country.

Causes of Inflation

Population Explosion: Our population is rising at a very fast that is 3%. On other hand the rate of

growth of GNP is not very high that is 5.4%. Thus increase in national output is insufficient to solve the

problem of scarcity of goods. Since independence, our population has increase four times.

Political instability: A country’s economy depends upon political stability. Political instability

discourages investment and encourages speculation. Under such circumstances, the industrialist and

businessman feel unsecure and cannot make good plans. The government also cannot adopt affective

measures to control rise in prices.

Imported Inflation: A very important cause of inflation in Pakistan is the existence of inflation in

their countries. Since 1970’s most countries are experiencing inflation. The result in the Pakistan has to

import machinery, raw material and other goods at higher prices.

Wages increases: The increase in wages of workers has also contributed to inflation. Increase in

wages result in higher cost of production of goods. So their price rises.

Climatic factors: Pakistan economies heavily depend upon agriculture but due to weather condition

many crops fall short of target, thus pushing up prices. For example cotton production remain stagnant and

below target during previous years. Wheat production has also not kept pace with rising demand.

Oil crises: The oil prices in 1973 created by a large quantity of inflation throughout the world. Import

of oil is a high Burdon on our foreign exchange resources. At present 25 percent of our exports are used to

pay for oil. From time to time, oil exporting countries increase price of oil, which raises transport cost.

Artificial scarcity of goods: Frequent artificial scarcity of essential items is created (cement, ghee, oil,

sugar, etc) and huge profits are charged. Similarly through smuggling, large quantity of essential goods is

sent to Afghanistan and India.

General Industrial Strike: Production will come to halt thereby causing scarcity of goods.

Increase in Bank Lending: This will also increase the volume of money in circulation in a country.

The Impact of Inflation on the Nigerian Economy:

Inflation affects different people in different ways. This is because of the fall in the value of money.

Social effect: Inflation widens the gap between the rich and the poor. The rich become richer and the

poor, poorer. Since majority of the masses are poor in Nigeria, rising prices brings about discontentment

among the masses.

Businesses: All types of businesses gain during inflation, due to the increase in the price of goods and

services.

Debtors and Creditors: During inflation debtors (borrowers) gain and creditors (lenders) loss. This is

because, when inflation occurs, the debtors pay their creditors with money which has a lesser value.

A. Uzoma C. et al.

378

Fixed income earners: All those who receive fixed incomes loss during inflation. This is because,

while their incomes remain fixed, the value of money continues to fall with rising prices.

Reduction in savings: When prices rise, the propensity to save reduces, because people need more

money to spend on goods and services. As a result, investment and capital formation reduces, which hinders

production, and economic growth.

Effect on exports: as inflation makes exports more expensive, In this way the country becomes unable

to sell as much as before, and may not sell enough to meet its import bills. This may cause a deficit in the

country’s balance of payments.

General Measures of Controlling or Managing Inflation

The governments of various countries including Nigeria take several measures and formulate policies to

control inflation and economic activities.

o Monetary Policy

This is one of the most commonly used. Monitory policy is a policy that influences the economy

through changes in money supply and available credit. Akunya, e’tal (2014) refers monetary policy as the

combination of measures designed to regulate the value, supply and cost of money in the economy. Monitory

policy is adopted by the Central Banks to alter the cost of credit, demand for credit and availability of credit.

It is also known as the credit control policy. In the monetary policy, the central bank increases rate of interest

on borrowings for commercial banks. As a result, commercial banks increase their rate of interest on credit

for the public. In such a situation, individuals prefer to save money instead of investing in new ventures. This

would reduce money supply in the market, which in turn controls inflation. Apart from this, the central bank

reduces the credit creation capacity of commercial banks to control inflation.

The Monetary Policy Involves the Following

Rise in Bank Rate: This is one of the most widely used measure taken by the central bank to control

inflation. The bank rate is the rate at which the commercial bank gets a rediscount on loans and advances by

the central bank. The increase in the bank rate results in the rise of interest on loans for the public. This leads

to the reduction in total spending of individuals.

The main reasons for reduction in total expenditure of individuals are as follows;

Making the borrowing of money costlier This is fact that with the rise in the bank rate by the central

bank, increases the interest rate on loans and advances by commercial banks. This makes the borrowing of

money expensive for the general public. Consequently, individuals postpone their investment plans and wait

for fall in interest rate in future. The reduction in investments results in the decreases in the total spending

and helps in controlling inflation.

Creating adverse situations for business: Implies that increase in bank rate has a psychological

impact on some of the businesspersons. They consider his situation adverse for carrying out their business

activities. Therefore, they reduce their spending and investment.

Increasing the propensity to save: Refers to one of the most important reason for reduction in total

expenditure of individuals. It is a well-known fact that individuals generally prefer to save money in

inflationary conditions. As a result, the total expenditure of individuals on consumption and investment

decreases.

Direct Control on Credit Creation: Constitutes the major part of monetary policy.


379

The Central Bank directly reduces the credit control capacity of commercial banks by using the

following methods:

Performing Open Market Operation (OMO): Refers to one of the important methods used by the

central bank to reduce the credit creation capacity of commercial banks and certain private businesses. In this

way, the cash with commercial banks would be spent on purchasing government securities. As a result,

commercial banks would reduce credit supply for the general public.

Changing Reserve Ratios: Involves increase or decrease in reserve ratios by the central bank to

reduce the credit creation capacity of commercial banks. For example when the central bank needs to reduce

the credit creation capacity of commercial banks, it increases Cash Reserve Ratio (CRC). As a result,

commercial banks need to keep a large amount of cash as reserve from their total deposits with the central

bank. This would further reduce the lending capacity of commercial banks. Consequently, the investment by

individuals in an economy would also reduce.

Interest Rate Changes: these affect the amount of money in the country through their effects on the

demand for loans. Since the rate of interest is the price of the loan, any change in it will affect the demand for

loans. An increase in the interest rate will reduce the demand for loans because it has made them more

expensive. The result of this will be a decrease in the amount of money in the country. A decrease in the

interest rate will increase the demand for loans because it has made the cheaper than before. In this case, the

result will be an increase in the amount of money in the country.

Moral Suasion: This consists of appeals to the banks to act in certain desired ways. It is used to bring

pressure to bear on the banking community, with the objective of persuading institutions to undertake actions

which might not be in their own best interest, but which reduce aggregate demand during an inflation affects

the economy unevenly.

o Fiscal Measure

Apart from monetary, the government also uses fiscal measures to control inflation. Fiscal policy is the

deliberate change in either government spending or taxes to simulate or slow down the economy. It is the

budgetary policy of government relating to taxes, public expenses, public borrowing and deficit financing.

The two main components of fiscal policy are government revenue and government expenditure. In

fiscal policy, the government controls inflation either by reducing private spending or by decreasing

government expenditure, or by using both. It reduces private spending by increasing g taxes on private

businesses. When private spending is more, the government reduced its expenditure to control inflation.

However, in present scenario, reducing government expenditure is not possible because they may be

certain on-going projects for social welfare that cannot be postponed. Besides this, the government

expenditures are essential for other areas, such as defense, health, education and law and order. In such a

case, reducing private spending is more preferable rather than decreasing government expenditure. When the

government reduces private spending by increasing taxes, individual decrease their total expenditure.

For example, if direct taxes on profits increase, the total disposable income would reduces. As a result,

the total spending of individuals decreases, which in turn reduces money supply in the market. Therefore, at

the time of inflation, the government reduces its expenditure and increase taxes for dropping g private

spending.

o Price Control

Another method for ceasing inflation is preventing any further rise in prices of goods and services. In

this method, inflation is suppressed by price control, but cannot be controlled for the long term. In such a

case, the basic inflationary pressure in the economy is not exhibited in the form of rise in prices for a short

time. Such inflation is termed as suppressed inflation. The historical evidences have shown that price control

alone cannot control inflation, but only reduces the extent of inflation. For example, at the time of wars, the

government of different countries imposed price controls to prevent any further rise in the prices. However,

A. Uzoma C. et al.

380

prices remain at peak in different economies, which caused sharp rise in prices. Therefore, it can be said that

inflation cannot be ceased unless its cause is determined.

3. Research Methodology

Methodology

The study used a time series data that span a period of 28 years (1985- 2013). An econometrics method

of multiple regression analysis was employed as the tool to estimate the relationship between inflation and

some selected explanatory variables. The data for explanatory variables were obtained from Central Bank of

Nigeria annual bulletin; annual reports. The coefficient of determination was used to examine the effect the

explanatory variables on inflation in Nigeria. The student t and f-statistics was equally used to test for

individual and over all significance of the regression respectively.

Model Specification

The search for a reliable inflation function continues to be an intensive activity. Given the nature of the

Nigerian economy, very little is still known about the contemporary relationship between inflation and other

key macroeconomic variables. The inflation function adopted in this study, therefore, combines the

structuralist, monetarist and fiscalist approaches as follows:

Inf = f (EXC, MS2, IR, GDP) …………………………1

The explicit form of the model is formulated as:

Inf = βo + β1EXC + β2MS2 + β3IR + β4GDP + U………..2

Where; INF = Inflation; EXC= Exchange Rates; MS2 = Money Supply; (M2)IR=Interest Rates; GDP=

Gross Domestic Products; U = Random Variable. A Priori Expectation It is expected that EXC, MS 2 , IR,

and GDP are positively related to inflation. This is, given as:

Inf =b0> b1EXC0>b2 MS2>0bIR 0>b4GDP0>U………………….3

This implies that as these variables increases; inflation also increases.bo, b1, b2, b3 and b4 are

parameters to be estimated while U1 is the error term. It was expected that increased/higher b1EXC, b2MS2,

b3IR and b4GDP resulted in high inflationary rules within the period under review. Thus, the a priori

expectation becomes b1 > 0 b2 > 0 b3 > 0 b4 > 0. Based on a priori therefore, the signs of b1, b2, b3

and b4 are expected to be positive while the sign b3 is expected to be negative. This is so because,

inflationary tendency is expected to increase as fiscal deficits, exchange rates, money supply (MS2) increase.

The normal distribution of the error term is the key assumption of the model. Presentations and Analysis of

Data the data assessed (shown below) was regressed and the result obtained shown below. The equation was

estimated to capture the relationship between the explanatory variables and the rate of inflation. The model

was estimated to examine the impact of these explanatory variables on the inflation rates in order to manage

it.

4. Empirical Results and Discussion

Data Presentation

This section concentrates on the presentation and analysis of the data collected which were to disclose

facts concerning the subject matter and to interpret the findings of our investigations and the results of the

presentation and analysis.


381

The researcher got the data from the CBN Statistical bulletin of various years and CBN Annual Reports

of various years.

The table below shows the data for inflation (INF), Exchange Rates (EXC), Money Supply (MS2),

Interest Rates (RATE) and Gross Domestic Products (GDP) of CBN Statistical bulletin of various years and

CBN Annual Reports of various years under review.

Year INF EXC MS2 INT RATES GDP

1985 3.226 0.894 12.44 9.43 11.33

1986 6.25 2.02 4.23 9.96 1.89

1987 11.765 4.02 22.92 13.96 -0.69

1988 34.211 4.54 34.99 16.62 7.58

1989 49.02 7.39 3.99 20.44 7.15

1990 7.895 7.39 45.92 25.30 11.36

1991 12.195 8.04 27.43 20.04 0.01

1992 44.565 9.91 47.53 24.76 2.63

1993 57.143 17.30 53.76 31.65 1.56

1994 57.416 22.33 34.50 20.48 0.78

1995 72.729 21.89 19.41 20.23 2.15

1996 29.291 21.89 16.18 19.84 4.13

1997 10 673 21.89 16.04 17.80 2.89

1998 7.862 1.89 22.32 18.18 2.82

1999 6.618 21.89 33.12 20.29 1.19

2000 6.938 85.98 48.07 21.27 4.89

2001 18.869 111.23 27.00 23.44 4.72

2002 12.883 120.58 21.55 24.77 4.63

2003 14.039 129.22 24.11 20.71 9.57

2004 15.001 132.89 14.02 19.18 6.58

2005 17.856 131.27 24.35 17.95 6.51

2006 8.218 128.65 43.09 16.90 6.03

2007 5.413 125.81 44.24 16.94 6.45

2008 11.581 118.55 57.78 15.48 5.98

2009 12.543 148.90 17.60 18.36 6.96

2010 13.72 150.30 6.91 17.59 7.98

2011 10.841 254.7 415.43 16.02 5.31

2012 12.217 157.50 16.39 16.79 4.21

2013 8.476 157.3 11.32 16.72 5.49 Source: CBN Statistical bulletin of various years

Where; INF= Inflation; EXC= Exchange Rates; MS2 = Money Supply (M2); IR=Interest Rates;

GDP=Gross Domestic Products; U = Random Variable

Regression Result and Interpretation

From the empirical equation in the model used in this study, the regression result is presented below.

The regression results showed that only the money supply and exchange rate are statistically significant. This

means that exchange rate and money supply are the main determinant of the inflation rate in Nigeria. Other

variables captured in the model exert an insignificant effect on the rate of inflation. Furthermore, the

coefficient of the money supply and exchange rate are positively signed. The coefficient of money supply

(MS2) is -0.069with a t-statistic of -1.75. The coefficient is thus statistically significant at the 10% level. This

implies that the money supply is an important determinant of the inflation rate. On the other hand, the

coefficient of exchange rates (EXC) is 0.078 with a t-statistic of8.03. The coefficient is thus statistically

significant at the 5% level; the coefficient of the Interest rate (RATE) -0.03, with a t-statistic of-0.32. The

A. Uzoma C. et al.

382

coefficient is thus statistically not significant at the 5% level; the coefficient of Gross Domestic Products

(GDP) is 3.67 with a t-statistic 0.048. The co-efficient is thus statistically not significant.

Method: Least

Squares

Date: 10/02/15 Time: 12:23

Dependent Variable: INF

Sample: 1985 2014

Included observations: 29

Variable Coefficient Std. Error t-Statistic Prob.

MS2 -0.000694 0.000396 -1.751430 0.0926

EXC 0.078348 0.009755 8.031223 0.0000

GDP 3.67E-06 7.61E-05 0.048294 0.9619

INT -0.030885 0.094462 -0.326954 0.7465

C 6.894501 1.879868 3.667546 0.0012

R-squared 0.738108 Mean dependent var 10.02759

Adjusted R-squared 0.694460 S.D. dependent var 3.755177

S.E. of regression 2.075700 Akaike info criterion 4.454059

Sum squared resid 103.4047 Schwarz criterion 4.689800

Log likelihood -59.58386 Hannan-Quinn criter. 4.527891

F-statistic 16.91025 Durbin-Watson stat 0.991070

Prob(F-statistic) 0.000001

Source: E-view 8 statistical package

Dependent Variable: GDP

Method: Least Squares

Date: 10/02/15 Time: 12:26

Sample: 1985 2014



C -301.4487 6300.850 -0.047843 0.9622

INF 26.45032 547.6971 0.048294 0.9619

MS2 4.963454 0.497361 9.979572 0.0000

EXC -20.15996 50.09796 -0.402411 0.6909

INT 52.33000 253.8077 0.206180 0.8384




Sum squared resid 7.45E+08 Schwarz criterion 20.47940




Source: E-view 8 statistical package


383

The regression results showed that only the money supply is statistically significant. This means that

money supply is the main determinant of the inflation rate in Nigeria. Other variables captured in the model

exert an insignificant effect on the rate of inflation. Furthermore, the coefficient of the money supply and is

positively signed. The coefficient of money supply (MS2) is 4.96with a t-statistic of 9.97. The coefficient is

thus statistically significant at the 10% level. This implies that the money supply is an important determinant

of the inflation rate. On the other hand, the coefficient of exchange rates (EXC) is -20.15 with a t-statistic of-

0.40. The coefficient is thus statistically insignificant at the 10% level; the coefficient of the Interest rate

(RATE) -20.15, with a t-statistic of -0.40. The coefficient is thus statistically not significant at the 10% level;

the coefficient of Inflation Rate is 52.33 with a t-statistic 0.20. The co-efficient is thus statistically not

significant.

Test of Hypotheses

At 5% level of significance, the first null hypothesis which states that changes in the level of money

supply have no significant effect on the rate of inflation in Nigeria is rejected as the t-test revealed that

changes in the level of money supply have significant influence on inflation in Nigeria. The second null

hypothesis which states that changes in Exchange Rate have no significant impact on inflation is also

rejected as the t-test also revealed that the changes in Exchange Rate had a significant effect on the rate of

inflation in Nigeria from 1985 to 2014. It is therefore concluded that money supply and Exchange Rate

significantly affect inflation in Nigeria.

Discussion of Findings

The model used in this research reveals a positive relationship between inflation, Money Supply,

Exchange Rate, Gross Domestic Product (GDP), Interest Rate induced inflation during the study period. As

stated earlier, the coefficients of all the explanatory variables being positive sign, confirm a priori

expectations. The positive signs imply a positive relationship of the relevant variables with the rate of

inflation. This is an indication that the variables perform in line with the economic theory. The study shows

that money supply is a strong determinant of inflation, which indicates a positive relationship between the

money supply and inflation rate in Nigeria in the period under study and this is in line with the objective one

of the study as against the findings of Omofa (2006) who concluded that money supply have no significant

impact on price level in Nigeria. The study revealed that changes in exchange rate had a significant effect on

the rate of inflation in Nigeria in the period under study; this is in line with the objective two of the study.

5. Conclusion

This study attempts to examine the best way of controlling inflation in Nigeria. It adopted the

monetarist’s approach fiscalist approach and the structuralism approach based on their usefulness for the

purpose at hand. From the various econometric tests carried out, it was revealed that money supply and

exchange rate had significant impact on the price level in Nigeria. The implication of this result is that, the

emphasis by the monetarists on the relative effectiveness of monetary policy in controlling inflation may be

the best policy for the Nigerian economy.

6. Recommendations

Based on the finding of the study, the following recommendations are hereby made

The Central Bank of Nigeria should continue to focus on controlling the growth of the money stock

through a restrictive monetary policy. Government should pursue a conservative fiscal policy by reducing

substantially the fiscal deficit, it should be noted that fiscal deficits when financed through the financial

system as currently done in Nigeria not only increase aggregates but impinge directly on the money supply.

A. Uzoma C. et al.

384

The above recommendations underscore the need for monetary and fiscal co-ordination as they

complement each other. Government should not be pursuing a liberal fiscal policy when the Central Bank is

advocating restraint in the face of mounting pressure on the price level.

References

AbdullahiF.Z., Ladan, S. and Bakari, Haruna R. (2011) “Foreign Private Investment and Economic Growth

in Nigeria: A Cointegrated VAR and Granger Causality Analysis”. CBN Journal of

AppliedStatistics,vol.2.No.2.Pp.15-28

Banerjee, A., Dolado, J.J., Galbraith, J.W. and Hendry, D.F (1993) “Co-integration, Error Correction and

Econometric Analysis of Non Stationary Data”. Oxford University Press, Oxford

Central Bank of Nigeria (2006) “Communique no. 48”

Dania, Evelyn N. (2013) “Determinants of Inflation in Nigeria (1970 – 2010)”. The Business & Management

Review, vol. 3.No. 2. Pp. 106-114

Enu, Patrick and Havi, Emmanuel Dodzi K. (2014) “Macroeconomic Determinants of Inflation in Ghana: A

Co-integration Approach”. International Journal of Academic Research and Social Sciences,

vol.4.No.7. Pp. 95-110

Hossain, Tanjil and Islam, Nazrul (2013) “Economic Analysis of the Determinants of Inflation in

Bangladesh”. The International Journal of Social Sciences, vol. 11.No. 1. Pp. 29-36

Iya, I. B. and Aminu, U (2014) “An Empirical Analysis if Determinants of Inflation in Nigeria”. Journal of

Economics and Sustainable Development, vol. 5.No. 1. Pp. 140-150

Maku, Adejoke O. and Adelowokan, Oluwaseyi A. (2013) “Dynamic of Inflation in Nigeria: An

Autoregressive Approach”. European Journal of Humanities and Social Sciences, vol. 22.No.1.

Odusanya, Ibrahim A and Atanda, Akinwande A. (2010) “Analysis of Inflation ant its Determinants in

Nigeria”. Pakistan Journal of Social Sciences, vol.7. No.2. Pp. 97-100

Ratnasiri, H.P.G.S. (2009) “The Main Determinants of Inflation in Sri Lanka: A VAR Based Analysis”.

Central Bank of Sri Lanka-Staff Studies, vol.39.No.1&2. Pp. 1-14

Raza, S. A., Sabir, M. S., & Mehboob, F. (2011). Capital inflows and economic growth in Pakistan. MPRA

Paper No. 36790, University Library of Munich, Germany.

Raza, S. A., Ali, Y., & Mehboob, F. (2012). Role of Agriculture in Economic Growth of Pakistan.

International Research Journal of Finance and Economics, (83), 180-186.

Raza, S. A. (2015). Foreign direct investment, workers’ remittances and private saving in Pakistan: an ARDL

bound testing approach. Journal of Business Economics and Management, 16(6), 1216-1234.

Sanusi, S. L (2011). “ Banks in Nigeria and National Economic Development: A Critical Review” Being a

Keynote Address at the Seminar on “Becoming An Economic Driver while Applying Banking

Regulations” organized by the Canadian High Commission in joint collaboration with the Chartered

Institute of Bankers of Nigeria (CIBN) and Royal Bank of Canada (RBC) on March 7. Research

Department, Abuja, CBN.

Sanusi, S. L (2012). “Banking Reform and its Impact on the Nigerian Economy”. Being a Lecture delivered

at the University of Warwick’s Economic Summit, UK, 17th February. Research Department, Abuja,

CBN

Terence, C.M. and Raphael, N.M. (2008) “The Econometric Modeling of Financial Time Series”, 3rd

edition, Cambridge University Press: New York.

http://www.economywatch.com/inflation/controlling.html

http://www.economywatch.com/inflation/controlling.html


385

http://www.academia.edu/2541168/the_impact_of_monetary_policy_on_inflation_in_nigeria

http://www.siilats.com/docs/keskkoolECON/INFLAT.htm

http://www.economicshelp.org/blog/2269/economics/ways-to-reduce-inflation/

http://www.economicsdiscussion.net/inflation/measures-for-controlling-inflation-with-diagram/4075

http://dataworld bank.org/country/Nigeria.

APPENDIX

http://www.academia.edu/2541168/the_impact_of_monetary_policy_on_inflation_in_nigeria

http://www.siilats.com/docs/keskkoolECON/INFLAT.htm

http://www.economicshelp.org/blog/2269/economics/ways-to-reduce-inflation/

http://www.economicsdiscussion.net/inflation/measures-for-controlling-inflation-with-diagram/4075

http://dataworld/

A. Uzoma C. et al.

386


Date: 10/02/15 Time: 12:23

Dependent Variable: INF

Sample: 1985 2014



MS2 -0.000694 0.000396 -1.751430 0.0926

EXC 0.078348 0.009755 8.031223 0.0000

GDP 3.67E-06 7.61E-05 0.048294 0.9619

INT -0.030885 0.094462 -0.326954 0.7465

C 6.894501 1.879868 3.667546 0.0012




Sum squared resid 103.4047 Schwarz criterion 4.689800




Dependent Variable: GDP


Date: 10/02/15 Time: 12:26

Sample: 1985 2014



C -301.4487 6300.850 -0.047843 0.9622

INF 26.45032 547.6971 0.048294 0.9619

MS2 4.963454 0.497361 9.979572 0.0000

EXC -20.15996 50.09796 -0.402411 0.6909

INT 52.33000 253.8077 0.206180 0.8384




Sum squared resid 7.45E+08 Schwarz criterion 20.47940




managing inflation in nigeria: challenges and …rassweb.org/admin/pages/researchpapers/paper...

Documents