The Effect of Inflation and Interest Rate on Economic Growth of Nigeria (a Case Study of First Bank)
Chapter One
OBJECTIVES OF THE STUDY
The study is aimed at achieving the following objectives:
- To determine the Impact of inflation on Nigerian economic growth.
- To identify how the money supply affects the Nigerian economy
- To recommend to the monetary authorities and the government on how inflation should be reduced an acceptable level.
CHAPTER TWO
LITERATURE REVIEW
THEORITICAL LITERATURE
CONCEPT OF INFLATION
Inflation is a social malady as well as a pervasive economic process whose effects are felt by all and sundry in all sectors of the economy.
An attempt to solve inflation problems has been so difficult, because any attempt to solving the economic problem would entail a trade off among other completing macroeconomic and social variables such as employment, economic growth, balance of payment, social safely nets.
Jean Bodin first attributed inflation in the Western Europe to the abundance of monetary metal imported from the nines of the Spanish colonies in South Africa. This theory came into the mainstream of the orthodox monetary tradition after a through research made by John Locla, David Hume and Richard Contillon in the 18th century. Quantity theory of money is the main contention of this theory. It says that changes in the general level of commodity prices are primarily determined by changes in the quantity of money in circulation as was modified by an American economist professor Ivring fisher. The theory implies that the value of money in an economy is determined by the total quantity of money (m1, m3, and m3¬) in that economy. According to the theory, when money becomes abundant, its purchasing power (value) falls and consequently, the average of commodity price rises. Conversely, if money becomes scare, purchasing power rises and the general price level falls. The equation of the theory is stated thus:
MV=PT
Where m=the strick of money in circulation
V=commodity prices
T=The volume of Trade.
The equation means that the velocity of money circulation determines the prices of commodity (volume of trade) In support of the theory, Wyoming (1984) on the paper presented on a symposium sponsored by the federal preserve Bank of Kanses city, stresses that when a country inflation is high for any sustained period of time, it’s rate of money supply growth is also high. Hence inflation is a monetary phenomenon.
EXPECTATION THEORY
The theory according to Shiller holds that if investors expect that the prices of commodities will rise, the will go into investing, today since its return tomorrow will be higher. He continued that if wealth holders know that inflation rate will rise next year, they will know how to adjust their wealth portfolio positively and negatively when they anticipate a fall in price level next year (Anyanwu, 2003).
MARKUP THEORY
The theory is associated with professor Adey the theory assumed that both wages and prices are “administered” and are settled by workers and business firms. Firms fix administrative prices for their goods by adding to their direct material and labour costs some standard markup on its cost of hiring, (Ihingan, 1997).
This model can lead to either a stable, arising or a falling price level depending on the markups which firm and workers respectively use (Ihingan 1997:452). If either or both use a percentage markup, inflation will progress faster than if either or both fix the markups in money firms.
Ihinagan continued by explaining that if each participant fix prices on the basis of prices he pays, the inflation will be high and of low direction.
STRUCTURAL INFLATION THEORY
The structuralist school of South America stresses structural rigidities as the principal cause of inflation in such developing countries as Argentina, Brazil and chile. This type of inflation is also to be found in other developing countries like Nigeria.
The structuralist holds the view that inflation is necessary with growth. According to this view, as the economy develops, rigidities arises which lead to structural inflation. As the demand for agricultural goods rise their domestic supply being inelastic, the prices of agricultural goods rise. The output of these goods does not increase when their prices rise because their production is inelastic do to defective system of land tenure and other rigidities (Ihingan 1997). To prevent the rise, the products can be imported. The prices of imported products are relatively higher than their domestic price. This tense raise the price level further within the economy. When the prices of good and other products rises, wage corners press for increase in wage rate to compensate for the fall in their real incomes, with this, cost of industrial products will rise and the inflation cuts across the whole economy.
CHAPTER THREE
RESEARCH METHODOLGY AND DESIGN
RESEARCH METHOD
The method to be adopted in carrying out this work is the scientific method. Scientific method is defined as a systematic, controlled empirical and unbiased investigation of the hypothetical propositions about the assumed relationship between the variables that create a particular state of affairs (Ndagi, 1986). The reason for adopting this is because it is based on the process of reflective thinking or inquiry which is systematic and logical and it is more reliable, verifiable, valid and more permanent.
RESEARCH DESIGN
The design of this study is the survey research method and the methodology adopted for data collection is sample survey. This is because it is capable of testing specific hypothesis and allows sample to be drawn from the whole population.
Samples drawn for this study was limited to sample of respondents drawn from member of staff in First Bank plc, Enugu state as they represent the entire banking industry. The use of questionnaire, personal interview and oral interview will be used for the collection of data from the staff of the bank.
RESEARCH POPULATION
The population for this study comprises the member of staff of First bank plc Bank Road branch. The population of this study numbered 60 and they are permanent staff of the bank who works at different level in the branch.
CHAPTER FOUR
DATA PRESENTATION AND INTERPRETATION
This chapter is concerned with the organization, tabulation and analysis of data. A total number of 36 questionnaires were administered to respondents and all were duly received. The simple percentage formula is employed in analyzing the data collected i.e.
% = F/ ∑F x 100/1
Where; % = percentage distribution of frequency
F = frequency of responses.
∑ F = sum of the responses.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
SUMMARY OF FINDINGS
Before summarizing the findings of this study proper, it should be noted that these findings were made in relation to the scope of the study and the result of the regression analysis. Thus, based on the regression result, the following findings were made:
The joint influence of the explanatory variables on the dependent variables is significant between 1980 to 2006.
The student-test used shows that the individual variable is statistically significant.
The computed coefficient of multiple determination shows that 98.9343% of the total changes in the dependent variable (GDP) is explained by the changes in the independent variables (money supply inflation). This shows that the model is a good fit.
It was found from related views and opinion that relates to the study that inflation has more negative impact on Nigerian economy than positive impact.
CONCLUSION
Having considered the present state of the impact of inflation on Nigerian economy growth for the period 1980 to 2006, a tight monetary and fiscal measures are vital to Nigeria’s development process.
In an era of ever-changing global economic environment especially now that the current economic approach of most countries is towards price stability and welfare maximization, Nigeria cannot afford to be lest behind.
Inflation was significantly affected Nigeria economic growth. The persistent increase in prices of goods and services has affected the economy tremendously.
Nigeria government have been trying through various policy measures such as monetary and fiscal policies to reduce drastically high rate of inflation to an acceptable level, but these policies have failed to achieve its desired goals.
However, the failure of these policies to achieve the desired goal can be attributed to the myriad of problems, which have characterized the Nigerian economy such as corruption, political instability poor management, policy inconsistency and the problem of implementation. It is also pertinent to say that there has been enough effort by the government as to warrant a far-reaching impact on the economic.
Finally, inflation has done more than good in Nigeria economy since 1980 to 2006. Hence, good polices that will revive the trend is urgently needed.
RECOMMENDATION
Many macroeconomic theories tried to find the interrelationship between interest rate, GDP, inflation, and real economic growth. Fisher (1930) suggested that expected interest rates change in proportion to the changing expected inflation, or expected real interest rates are invariant to the expected inflation rates. Mundell (1963) concluded that: nominal interest rate and expected inflation rate do not have one to one adjustable relationships. This study, investigated the effect of interest rate, inflation, and GDP onNigeria ‘s economic growth over the period of 2000-2010.It is well known that regional economy is not yet out of the woods and since the global recovery from last recession seems to have encountered further delays; economic growth outlook forNigeria is increasingly challenging. Although adverse external environment continues to add to domestic uncertainties associated with the regional socio-political unrests, have thus weighing onNigeria ‘s aggregate demand and economic growth. AlthoughNigeria ‘s economy has achieved strong growth in recent years after a number of key reforms were introduced by the government; yet, the kingdom’s economy still faces a major threat from soaring inflation; the kingdom’s economic growth is being offset by rising inflation which has hit all-time highs Group Research Dept. (2012). However, This study advocated the results of some previous researches that showed a positive effect of real interest rate on both national income and on (GDP) Bader and Malawi (2010).
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