ABSTRACT
This study analyses the linkage between inflation rate and
manufacturing sector of the Nigerian economy over the
period of (1981-2011). The study used data sourced from
the Central Bank of Nigeria (CBN). The ordinary least
square technique (OLS) was used to specify and examine
the relationship between the variables Government
expenditure, inflation rate and money supply which are
the independent variables and the manufacturing index
which is the dependent variable for the first model. The
independent variables for the second model are consumer
price index, Nominal interest rate and exchange rate while
the dependent variable is the manufacturing index. The
explanatory power of the models was given by the R2
of
11.799% for the first model and 62.85% for the second
model and was subjected to the t-test and f-test to test
the significance of the independent variables. The second
model based on the result, we found out that it was
more significant than the first model. The research
revealed that inflation has a positive effect on the
manufacturing sector in Nigeria. This goes a long way to
say that increase in inflation leads to increase in the
manufacturing output and that manufacturers should not
to be discouraged by the increase in inflation rate, and
depreciating value of Naira.
vi
TABLE OF CONTENT
Title page – – – – – – – -i
Approval page – – – – – – – -ii
Dedication – – – – – – – -iii
Acknowledgement – – – – – – -iv
Abstract – – – – – – – – -v
CHAPTER ONE: INTRODUCTION
1.1 Background of the study – – – – -1
1.2 Statement of problem – – – – -4
1.3 Research Question – – – – – -5
1.4 Objective of the study – – – – -6
1.5 Research hypothesis – – – – -7
1.6 Significance of the study – – – – -7
1.7 Scope of study – – – – – -8
1.8 Limitation of study – – – – – -8
1.9 Definition of terms – – – – – -9
vii
CHAPTER TWO: LITERATURE REVIEW
2.1 Characteristics of manufacturing
sector in Nigeria – – – – – -11
2.2 Concept of inflation – – – – – -13
2.3 Types of inflation – – – – – – -18
2.4 Theories of determinant of inflation – -21
2.5 Determinants of inflation in Nigeria – -28
2.6 Trade openness and manufacturing sector -31
2.7 Global economic down turn and the
manufacturing sector Performance
in the Nigerian economy – – – – -33
2.8 The Dynamics of money supply
and inflation in Nigeria – – – – -36
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research design – – – – – – 38
3.2 model specification – – – – – -38
3.3 Estimation Procedure – – – – -40
3.4 Source of data – – – – – – -40
3.5 Statistical tool and evaluation techniques -41
viii
CHAPTER FOUR:
DATA PRESENTATION AND ANALYSIS
4.1 Presentation of results – – – – -45
4.2 Interpretation of results – – – – -46
CHAPTER FIVE
SUMMARY CONCLUSION AND RECOMMENDATION
5.1 Summary – – – – – – – -60
5.2 Conclusion – – – – – – -62
5.3 Recommendation – – – – – -63
Bibliography
Appendix
1
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Inflation has remained a chronic problem for Nigerian
economy for some time. Inflation is not a new wood in the
world economy and not out rightly bad, but the case of
Nigeria is severe and i t will destabilize the entire
economic frame work if it is not properly checked. This
problem has brought about reduction of purchasing power
discouragement of real investment balance of payment
disequilibrium and unemployment.
Inflation in Nigeria can be said to be a direct result of
the policies of the country’s government to stimulate a
fast rate of economic growth and development since 1951
when it was introduced. Inflation trend since
independence shows to distinctive period. Until 1969 we
had a single digit inflation and even a negative growth
rate in 1963, 1967 and 1968. The year 1975, recorded
33-7 percent indicating the effect of 1974 Udojji salary
2
Awards (Adigun, M.S 1985 “Reviving the Nigeria
economy”)
The Nigerian economy seemed to have experience
moderate inflation prior to the advent of the structural
Adjustment programme (SAP) in 1986. Inflation on it own
is not bad as studies have shown that there exists a
positive relationship between inflation and growth. But the
problem lies on a country continuously having high
inflation rates. It has been revealed that a close
relationship exists between inflation and diminishing
growth rate across a variety of inflation ranges. Average
growth rates falls slightly as inflation rate across a variety
rates more towards 20-25 percent. The growth rate
declined more steeply as inflation rates approaches 25-30
percent and growth rates became increasingly negative at
a higher rate of inflation (Ogwuma, P.A. 1986; Gains and
pains of inflation in the manufacturing sector of the
Nigerian economy”
Manufacturing involves the conversion of law
materials into finished consumer goods or intermediate or
producers goods manufacturing creates avenues for
3
employment, helps to boost agriculture, helps to diversify
the economy while helping the nation to increase its
foreign exchange earnings and enables local labour to
acquire skills. The manufacturing sector in Nigeria has
passed through four clear stages of development. T
The first was the pre-independence era, when
manufacturing was limited to primary processing of simple
consumer items by foreign multinational corporations.
The second was the immediate past colonial era of
the 1960’s characterized by more vigorous import
substitution and the beginning of decline for the export
oriented processing of raw materials.
The third stage was the decade of the 1970’s. This
was remarkable because of advent of oil and enormous
resources it provided for fierce government to investment
in manufacturing. This made the government to exercise
almost a complete monopoly in the following sub-sectors
basic steel production petroleum refining, petrochemicals,
liquefied natural gas edible salt machine tools yeast
alcohol, fertilizers etc. the period was marked by initiation
of the indigenization programme and hence intense
4
economic activity but poor results since governments
attempt at diversification into non-traditional products
such as steels, petrochemicals, fertilizers and vehicle
assembly yielded little success.
The last phase was the decade of the 1980’s here
government revenue fall because of serious decline of oil
prices in the world market. This led to the adoption of
export promotion strategy and the SAP era beginning
from July 1986 has even emphasized this strategy
especially as it relates to non-oil exports hence the
extension of export promotion incentives of various
descriptions (Enu, 1993: the Nigeria economy after
structural adjustment programme “problems and
prospects”)
1.2 STATEMENT OF PROBLEM
Inflation worsens the balance of payment positions.
Inflation has helped forced up interest rates thus
determining investment and so by doing reduces the real
values of aggregate consumer wealth such as government
debt and money. It has inhibited and distorted consumer
5
spending by rising domestic prices relative to foreign
prices, the currency inflation inhibits exports and
stimulates imports thus, depleting the nations scarce
foreign resources.
Due to the inflationary situation savers find out that
the value of their savings is eroded hence they are forced
to add their current consumption thus hindering capital
formation and the nation’s economic growth. Inflation
militates against long term savings plan of the consumer
and hence becomes a function in improving a sub optimal
lifetime consumption pattern upon the consumer.
Current inflation rates in Nigeria have tremendously
complicated and continued to complicate the task for
makers of government fiscal and monetary policies. Even
when they believe that rate of inflation is really the public
does not. This inflation not only makes it harder for policy
makers to diagnose the factors affecting aggregate
demand.
1.3 RESEARCH QUESTION
The questions we are investigating here are:
6
What significance does inflation have on the
manufacturing sector of the Nigerian economy?
What is the effect or impact of inflation on the money
sector of the Nigerian economy?
Does government expenditure have positive effect on
the manufacturing sector of the Nigerian?
Is there any relationship between interest rate and
the manufacturing sector of the Nigerian economy?
What is anti-inflationary policies pursued at present
and in the past by Nigerian government?
1.4 OBJECTIVES OF THE STUDY
The major objective of this study is to determine
empirically the impact of inflation on the manufacturing
sector of the Nigerian economy.
The specific objectives includes
1. To investigate empirically the relationship between
inflation and the manufacturing sector.
2. To assess the impact of government expenditure on
the manufacturing sector
7
3. To determine the nature of the relationship between
interest rate and manufacturing sector of the
Nigerian economy.
4. To review the past and present anti-inflationary
policies of the Nigerian government
1.5 RESEARCH HYPOTHESIS
H0: inflation does not have any significant impact on
the manufacturing sector of the Nigerian economy
H1: inflation has a significant impact on the
manufacturing sector of the Nigerian economy.
H0: interest rate does not have any significant
impact on the manufacturing sector of the Nigerian
economy.
H1: interest rate has a significant impact on the
manufacturing sector of the Nigerian economy.
1.6 SIGNIFICANCE OF THE STUDY
This research will enable us to understand the factors
responsible for the persistent rise in the price of goods
and services produced in the economy by the
manufacturing sector. It will provide appropriate
recommendation on the ways, of eliminating inflation or
8
reducing it, so as to empower the economy for self
sustained development capable of enhancing the
economic well being of a greater number of populations. It
will also equip the policy makers with adequate tools in
formulating the right policy.
1.7 SCOPE OF THE STUDY
The study covers a period oaring from 1981-2011.
The period was chosen in order to have serious
investigation into the activities of the manufacturing
sector.
The multiple regression models will be employed in
determining the functional relationship between inflation
and the research variables.
1.8 LIMITATION OF STUDY
In carrying out the investigation sources of data
posed a problem of its own. It is difficult to lay hands on
up to data statistical data for empirical analysis
especially in developing countries such as Nigeria. In any
case one had to mean the best use of what was available.
9
Resulting from the short time limit couple with the
financial constraints, the researcher was limited to
primary and secondary sources.
Generally the researcher suffers frustration owing to
administrative logistics. Below are some of the identifiable
limitations.
1. Unpublished data were rarely made available to
researcher by government officers who avoid
violation of the official secrecy act.
2. Secondary data on the subject was stale and scanty
in most of the libraries visited including the state
library.
1.9 DEFEINITION OF TERMS
INFLATION: It is a persist tendency for prices and
money wages to increase. The dictionary of economics
said “inflation is measured by the proportional changes
over time in some appropriate price index, commonly a
consumer price index or a GDP deflator” inflation occurs
when the general price level is rising.
MANUFACTURING SECTOR: Is s sub-set of the industrial
sector (others being processing draft and mixing sub-set)
10
Manufacturing involves the conversion of raw
materials into finished consumer goods or intermediate or
producer goods.
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