Abstract:
This study investigates the effect of macro-economic policies on economic development in Nigeria from 2000 to 2016, focusing on their impact on Gross Domestic Product (GDP) and per capita income. Employing a quantitative research design, secondary data were obtained from reliable sources, including the Central Bank of Nigeria, the National Bureau of Statistics, and the World Bank. The study utilized multiple regression analysis, Analysis of Variance (ANOVA), and time series techniques to analyze variables such as interest rates, inflation rates, exchange rates, and foreign direct investment. The findings reveal a significant long-term relationship between economic growth and macroeconomic variables, as indicated by the Johansen co-integration test, which shows six co-integrating equations at a 5% significance level. Regression analysis highlights a positive impact of gross fixed capital formation, labor force, and government expenditure on GDP, while inflation exhibited a negative influence. The error correction model (ECM) confirms the adjustment of short-term imbalances to long-term equilibrium. The results emphasize the critical role of effective macro-economic policies in fostering sustainable economic development in Nigeria.
Chapter One
Introduction
- Background of the Study
Some of the macro-economic variables that can affect the economy of countries around the world with Nigeria inclusive are interest rate, inflation, exchange rate and foreign Direct Investment(FDI) etc.
Antwi et al (2013) opine that macroeconomic theory has identified different factors that can affect the growth of a given nation from the neoclassical , Keynesian and the new growth theories. These variables therefore comprise of interest rate, foreign direct investment, GDP per capita ,investment , natural resources, human capital, innovation, technology, economic policies, governmental factors, foreign aid, trade openness, institutional framework, political factors, geography, socio-cultural factors, demography etc. Market capitulation and all share price index are also macroeconomic variables(Ezenwa,2016).
Amah(2005) observes that interest rate is one of the most important macro-economic variables used for policy purposes in any economy.
Kamran et al (2014) opine that interest rate and GDP are inversely related. When central bank issues a loan to commercial bank, interest rate is charged. Interest rate volatility is strongly related to inflation. The major reason for high interest rate is high inflation. When the atmosphere is favorable the low interest rate results to low inflation and this facilitates economic growth(Kamran et al,2014). High interest rate decreases economic growth. There is therefore mutual relationship between interest rate and growth rate.
Accordingly, interest usually rises with increase in demand of credit and decreases with increase in supply of credit. Hence, through this process interest rate plays a major role in financial resources mobilization from deficit to surplus units and allocation of such resources efficiently among the deficit units and hence facilitating economic growth and development. Interest rate is capable of playing this role because any changes in rate will induce a shift in the portfolios of both banks and other economic units.
When interest rate increases it results to increase in interest bearing financial instruments issued by both the capital and money markets while a decrease in rates will bring about an increase in interest bearing financial assets and real investments.
However, it is the manipulation of the above variables through effective monetary and fiscal policies that enables countries around the globe to achieve economic growth and development. In Nigeria today, because of the state of the economy ,the Central bank of Nigeria(CBN) has been rolling out different monetary policies to make sure that Nigeria comes out of recession through manipulation of Monetary Policy Rate(MPR) which drives other interest rates in the economy and it has continuously intervened from time to time in foreign exchange supply to reduce the exchange rate and beef up the value of Naira. The inflation rate is said to be high because it is more than a single digit. What is globally accepted is single digit inflation rate. The foreign Direct Investment flows into the economy is at its lowest ebb because of the state of the economy and the operating business environment which is not very attractive to investors.
Shim et al(1995) posits that inflation is increase in the general level of prices of goods and services in an economy over a period of. Antwi, Mills and Zhao(2013) opine that economic growth rates and inflation are two major important and most closely linked macroeconomic variables. High inflation rate is essentially viewed as a very common phenomenon in most developing countries including Nigeria.
Kamran et al (2014) are of the view that inflation is politically expensive for government of any country. They further observed that studies have shown that inflation is harmful for economic growth. Inflation has n negative effect on GDP growth. Monetary authority in Pakistan uses M2 ie broad money as instrument for control of inflation. To control of inflation, it is important to recognize the factors that cause inflation. For control of inflation price stability is necessary, which is responsibility of state bank of Pakistan. From the co-integrating analysis it is concluded that in long run inflation would have positive relationship with money supply and has negative relationship with economic growth.
Enu et al (2013) established that there is negative significant relationship between the GDP growth and inflation .They also found out that the relationship between GDP growth and interest rate is significantly negative.
Shim et al(1995) opine that foreign direct investment(FDI) deals with long term participation by a foreign country in another country for investment purposes . It is essentially concerned with participation in management of an enterprise in which it has controlling interest and also includes joint venture arrangement, transfer of technology and expertise (Shim etal,1995).FDI drives economic growth through increase in productivity levels. Foreign direct investment has been acknowledged as the most crucial factor in enhancing economic development and the standard of living for emerging economies like Nigeria.
1.2 Statement of the problem
The problem with Nigerian economy is policy inconsistency. When the new administration took over two years ago they said that they inherited empty treasury. In an attempt to revitalize the supposedly battered economy they introduced some monetary and fiscal policies. They tried to do so many things at the same time ie from implementation of Treasury Single Account(TSA) to Bank Verification Number(BVN) and Port reforms etc. One of the monetary policies that CBN introduced which affected the economy adversely was stopping importers to use their domiciliary accounts to transact international businesses. They were not allowed to send money abroad through their domiciliary accounts and to worsen the situation there was shortage of foreign exchange for the importers to use to import goods and services from abroad.We easily forget that Nigeria is still an import dependent economy and the trend can not be reversed overnight. The eventual introduction of flexible exchange rate did not help matters because the exchange rate to dollar keep escalating resulting to untold hardship to the masses. The inflation rate was on the increase and at a particular time , UN forecasted that inflation rate would hit 20% by December,2016. However, the rate has dropped but it is still in double digit mark.
Dr. Moses Tule Director in monetary policy department of Central Bank of Nigeria(CBN) in early part of this year opines that Nigeria is actually experiencing Stagflation that is a situation where the economy is not experiencing any growth. He observed that recession and inflation are the major components of stagflation. He also said that at the moment we are experiencing fiscal and current account deficits and in this situation that there is no way that monetary policy committee would have reduced the Monetary Policy Rate(MPR) which is the rate at which CBN discounts all banks’ instruments. It is the benchmark interest rate. It was of note that the reprising of petroleum products and removal of subsidy were considered as some of the factors that brought the economy to its present state apart from the crash of oil prices in international market. Nigeria is a mono-product economy and it depends so much on revenue from crude oil as its major foreign exchange earner. Oil price(OPEC Basket) each year is the variable on which Nigeria’s budget estimate is based. In the preparation of 2017 budget , oil price was initially fixed at $42.50 per barrel before it was finally adjusted to $44.50 per barrel. There is presently volatility in oil prices at international market with oil price (OPEC basket) dropping to $42.52 a week ago. The budget was predicated on crude oil price benchmark of $44.50 per barrel as against $42.50/$ adopted earlier,2.2million barrels per day oil production level, exchange rate of N305/$ as against N350/$ initially adopted. Inflation rate was put at 12%. Out of N7.44Trn ,the capital expenditure will gulp N2.24Trn which is 30% of the budget while N5.20Trn will be expended on recurrent expenditure and it is 70% of the total budget estimate(Ezenwa,2017).
It was observed that our GDP was experiencing a free fall and it even fell by 800% at a time. It was observed that the oil sector’s contribution to GDP is 8% while another 60% contribution to GDP is oil related. The remaining 32% is what other sectors contribute. It therefore means that our GDP is essentially dependent on oil and gas. Dr. Moses was of the opinion that CBN has injected more than N5Trn into the economy at the time. CBN was however accused of causing why JP Morgan delisted Nigeria’s bond from their index. It was stated that it is because they wanted CBN to adopt flexible exchange rate which it later implemented in May this year as against what supposed to have been done.
Hence, due to volatility of our foreign exchange, unfavourable operating environment, insecurity and lack of critical infrastructure, foreign capital flows that come through foreign direct Investment( FDIs) to the economy was almost zero.
However, a stable financial system is needed to accelerate economic growth which can be achieved through financing of large, small and medium scale enterprises(SMEs ) by commercial banks. Ariyibi(2014) posits that between April, 2013 and now ,Central Bank of Nigeria(CBN) has made some pronouncements which impacted negatively on income generation of commercial banks. They issue new policies which amongst them are increase in cash reserve requirements(CRR) for private and public deposits, statutory payment of a minimum 30 percent monetary policy rate on savings, attaching a risk weight of 125% on loans and advances extended to oil and gas by commercial banks and 20% of their portfolio in oil and Gas: Progressive reduction in commission on Turnover(COT) from 5per mille to 3per mille in 2013,2per mille in 2014,1 per mille in 2015 and 0 per mille in 2016.These measures are to ensure that there is stability in the banking system so that commercial banks can effectively finance large, Small and medium Scale Enterprises (SMEs) and other business organizations.CBN sometime last year issued operational guidelines and categorized banks as; large commercial banks with international operations called Tier 1 banks and are required to have a minimum cash reserve requirement of 15 percent while systematically important banks(SIBs) are to add 100 basis points additionally which brings their CRR to 16 percent effective April 2015.CBN also requires Nigerian banks to adopt Basel 11 Accord with effect from October 2015.The adoption of Basel 11 translates to additional capital charge on market and operating risks(Ariyibi,2014).
Other factors that affected banks are implementation of treasury single account(TSA) in which Ministries ,Department and Agencies(MDAs) are expected to transmit any amount they generate to their respective TSAs account with Central Bank of Nigeria(CBN),restricting banks to focus on their core line of business, Implementation of Bank Verification Numbers(BVNs) in which companies and individuals are restricted to use their true identities with regard to their bank account numbers instead of having multiple bank accounts with fictitious names. All these policies and best practices have made the commercial banks to experience lower liquidity and earnings resulting to mass sacking of their staff. Even technological development has also affected the way banks are doing business because bank customers now transact businesses through their phones. People do all sorts of transactions with their phones without entering the banks. All these measures in one way or the other affect banks’ liquidity and poses to problems for lending to operators in different sectors of economy.
1.3 Objectives of the Study
The main objective of this study is to evaluate the impact of macroeconomic variables on economic development of Nigeria.
Specific objectives are:
1.To determine the effect of interest rate on GDP.
- To check the impact of inflation on GDP .
3.To examine the effect of exchange rate on GDP
- To ascertain the effect of foreign direct investment on GDP.
5.To establish the effect of interest rate on per capita income
6.To ascertain the effect of inflation on per capita income
7.To check the impact of exchange rate on per capita income
8.To determine the effect of foreign direct investment on per capita income
- To investigate the relationship between interest rate ,savings and investment .
1.4 Research Questions
The researcher shall intend to find answers to the following research questions
1.What are macro-economic variables and how can they be measured?
2.What are the measures of economic development in this study?
3.Does interest rate affect GDP?
4.Does inflation affect GDP?
5.Does exchange rate affect GDP
6.Does foreign direct investment affect GDP ?
7.Does interest rate affect per capita income?
8.Does inflation affect per capita income ?
9.Does exchange rate affect per capita income?
10.Does foreign direct investment affect per capita income?
1.5 Research Hypothesis
The following hypotheses would be stated and tested in this study:
1.H0:There is no significant effect of interest rate on GDP.
Ha: There is significant effect of interest rate on GDP
2.H0:There is no significant of inflation on GDP
Ha: There is significant effect of inflation on GDP.
3.H0:There is no significant effect of exchange rate on GDP.
Ha: There is significant effect of exchange rate on GDP.
4.H0: There is no significant effect of foreign direct investment on GDP.
Ha: There is significant effect of foreign direct investment on GDP.
5.H0:There is no significant effect of interest rate on per capita income.
Ha: There is significant effect of interest rate on per capita income
6.H0:There is no significant of inflation on per capita income
Ha: There is significant effect of inflation on per capita income.
7.H0:There is no significant effect of exchange rate on per capita income.
Ha: There is significant effect of exchange rate on per capita income.
8.H0: There is no significant effect of foreign direct investment on per capita income.
Ha: There is significant effect of foreign direct investment on per capital income.
1.6 Significance of the study
This study is timely because of the state of Nigerian economy. The main trust of the study which has to do with macroeconomic variables are critical for the stability and sustainability of Nigeria as a country. We must get the management of these variables right for the country to come out of recession. The development and growth of the economy depend on how well our fiscal and monetary policies are issued based on these variables. Employment creation, large, small and medium scale enterprises(SMEs) will be impacted upon positively with the effective manipulations of macroeconomic variables. Essentially, the entire financial systems and the economy are affected negatively if these variables are not well managed.
The study will impact on the Nigerian economy if the findings and recommendations contained would be accessed and used by policy makers. The study will also be useful to scholars, students, corporate organizations and individuals who may lay hand on it because of current issues captured in the background of the study, the literature review and findings that would be established.
The study is also targeted at closing the knowledge and theoretical gaps by providing theoretical and conceptual approaches towards enhancing knowledge in macroeconomics and macroeconomic variables, economic development , operation of interest rate and its relationships with transmission mechanism in the entire financial system, through publications in international and local journals.
1.7 Scope of the Study
The study is focused on impact of macroeconomic variables on economic development of Nigeria. Related literature on macroeconomic variables and how they relate with economic growth and development would be examined .
The study will also evaluate economic development through its gross domestic product( GDP),per capita income and relate them to macroeconomic variables such variables as interest rate, inflation, foreign exchange rate and foreign direct investment to establish their impacts. A review of theoretical and conceptual framework, methodology and empirical study relevant to this research would be made. Time series data for the period 2000 to 2016 would be sourced.
DISCLAIMER: All project works, files and documents posted on this website, eProjectTopics.com are the property/copyright of their respective owners. They are for research reference/guidance purposes only and some of the works may be crowd-sourced. Please don’t submit someone’s work as your own to avoid plagiarism and its consequences. Use it as a reference/citation/guidance purpose only and not copy the work word for word (verbatim). The paper should be used as a guide or framework for your own paper. The contents of this paper should be able to help you in generating new ideas and thoughts for your own study. eProjectTopics.com is a repository of research works where works are uploaded for research guidance. Our aim of providing this work is to help you eradicate the stress of going from one school library to another in search of research materials. This is a legal service because all tertiary institutions permit their students to read previous works, projects, books, articles, journals or papers while developing their own works. This is where the need for literature review comes in. “What a good artist understands is that nothing comes from nowhere. The paid subscription on eProjectTopics.com is a means by which the website is maintained to support Open Education. If you see your work posted here by any means, and you want it to be removed/credited, please contact us with the web address link to the work. We will reply to and honour every request. Please notice it may take up to 24 – 48 hours to process your request.
