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PROJECT TOPIC AND MATERIAL ON IMPACT OF MACRO- ECONOMIC VARIABLES ON NIGERIAN ECONOMIC GROWTH
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- Name: IMPACT OF MACRO- ECONOMIC VARIABLES ON NIGERIAN ECONOMIC GROWTH
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This study examined the relationship between economic growth and some selected macroeconomic variables (inflation, interest and exchange rate, unemployment rate and balance of payment) over a period of 36 years ranging from 1981 to 2015 using a time series data. The study employed the ordinary least squares estimation technique in carrying out a quantitative econometric investigation. Furthermore a co-integration test was conducted using the Engle and Granger two steps method to enquire if there is any form of long run relationship amongst the observations. The study found out that balance of payment, exchange rate and interest rate are positive but yet insignificant at explaining economic growth in Nigeria. The study further revealed that inflation rate is negative and significant at explaining economic growth in Nigeria. Finally, the study further showed that unemployment rate is negative and insignificant at explaining economic growth in Nigeria. Based on the findings, the study recommended that that the policy maker should take tight policies against reduction of inflation growth in the country by implementing the tools such as controlling money supply in the market through open market operation, setting up interest rate and setting of bank reserve requirement.
1.1 Background to the Study
The desire of every economy is to experience and maintain sustainable growth. Ordinarily, the key macroeconomic goals pursued by world economies, aside from the increase in output, include the achievement of a balance in the national account, stability of general price level, and a rise in employment (Kolawole, 2013).
Recently, government policies began to show more concern on the management and improvement of the economy in an attempt to achieve these broad macroeconomic objectives. Government over the years have embarked on various Macroeconomic policy options to grow the economy in terms of growth and development and the policy option employed revolved round the stabilization polices (monetary and fiscal policy) (Peter and Simeon, 2011). Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. These policies affect tax rates, interest rates and government spending, in an effort to control the economy. Monetary policy guides the central bank’s supply of money in order to achieve the objectives of price stability (or low inflation rate), full employment, and growth in aggregate income. This is necessary because money is a medium of exchange and changes in its demand relative to supply, necessitate spending adjustments. The instruments of monetary policy used by the central bank depend on the level of development of the economy, especially the financial sector. These instruments could be direct or indirect (CBN, 2012).
According to Emerinini (2007) macroeconomics studies aggregate economic activities, it examines the economy as a whole or broad subdivisions of the economy, it treats concepts like employment or unemployment, balance of payment equilibrium of disequilibrium, price levels, growth of output, government activities etc.
The International Labor Organization (2012) asserts unemployment occurs when people are without work and actively seeking for job. Unemployment is a global issue that affects developed, developing and under-developed nations of the world. One of the broad Macroeconomic goals is to maintain full employment, so any country with low economic growth is often characterized by very low capacity utilization, low standard of living, lack of social progress and high rate of unemployment. According to Njoku (2011) the Nigerian economy grew by 55.5 percent between1991 and 2006, and the population grew by 36.4 percent. All things being equal, this growth rate should have resulted in a decrease in the rate of unemployment but rather, unemployment increased by 74.5 percent. Official figure from National Bureau of Statistics (NBS) show that unemployment rate in Nigeria by the end of 2011 stood at 23.9 percent. What this implies is that approximately one in every four Nigerian who is in the labour force is unemployed. The product ofthis unemployment rate and the active labour force in Nigeria revealed that about 16.5 million Nigerians within the active labour force are unemployed.
Price stability is an important macroeconomic indicatorboth in the domestically (inflation) and externally (exchange rate). A continues fluctuation (either decrease or increase) in the overall level of domestic prices measured by the consumer price index indicates domestic price instability. This index shows how the value of money changes overtime. Inflation is one of the primary concerns of economists and policy makers because it imposes a variety of cost on the economy, when inflation rate is high; the real value of money erodes. Like many countries, industrialized and developing, one of the most fundamental objectives of macroeconomic policies in every country is to sustain high economic growth together with low inflation. Not surprisingly, there has been considerable debate on the existence and nature of the inflation and growth relationship.
Another macroeconomic variable that influences economic growth is the exchange rate. Exchange rate is a major determinant of economic growth whenever international trade is discussed; exchange rate policies in developing countries are often sensitive and controversial, mainly because of the kind of structural transformation required such as reducing imports or expanding non-oil exports, which invariably implies a depreciation of the nominal exchange rate. Such domestic adjustments, due to their short run impact on prices and demand, are perceived as damaging to the economy.
Ironically, the distortion inherent in an overvalued exchange rate regime is hardly a subject of debate in developing economies that are dependent on imports for production and consumption. The debate stems from that fact that there are consensus views that devaluation or depreciation could boost domestic production through stimulating the net export component. This is evident through the increase in international competitiveness of domestic industries. Leading to the diversion of spending from foreign goods whose prices becomes high, to domestic goods as illustrated by Guitan (1975) and Dornbusch (1988),the success of a currency depreciation in promoting trade balance largely depends on switching demand in proper direction and amount as well as on the capacity of the home economy to meet the additional demand by supplying more goods. On the whole, exchange rate fluctuations are likely, in turn, to determine economic performance. It is therefore necessary to evaluate also the impact of this macroeconomic variable on economic growth of the nation.
In this paper, we will examine several different economic theories and empirical studies to assess the impacts of some macroeconomic variable (interest rate, inflation, balance of payment adjustment, unemployment and exchange rate) on economic growth. Ultimately, we will test whether a meaningful relationship between the four variables exists in Nigeria.
1.2 Statement of the Problem
The desire of every economy is to experience and maintain sustainable growth. Ordinarily, the key macroeconomic goals pursued by world economies, aside from the increase in output, include the achievement of a balance in the national account, stability of general price level, and a rise in employment (Kolawole, 2013). The attainment of these macroeconomic objectives notwithstanding, the overall economy is required to be stable. Sustainable economic growth requires free and competitive function of prices and setting up a safe economic environment for promoting private sector investment. Macroeconomic stability is the fundamental basis of sustainable economic growth, because, it increases national saving and private investment and also improves exports and balance of payments with improving competitiveness (Kolawole, 2013).Macroeconomic stability, therefore, to a large extent guarantees economic wellbeing of the people.
In the light of the foregoing, the Nigerian economy has been set on the path of stability following various macroeconomic policies that were formulated and implemented at different periods. Prominent in these policies are the fiscal and monetary policies of the government. The remarkable growth which resulted is evident in an average annual real growth rate of GDP of over 6 per cent between 2004 and 2012. Specifically, the economy grew robustly at 7.45 per cent in 2011. This economic growth, however, has not translated into job creation or poverty alleviation as unemployment increased from 21 per cent in 2010 to 24 per cent in 2011.
The instability in the exchange rate created uncertainty and fuelled inflation. Indeed, there was a direct correlation between movements in the exchange rate, interest rate; government total expenditures were not directed to the real sector of the economy. The external balance was in disarray despite the devaluation of the domestic currency while external debts mounted (Ilegbinosa, Uzomba and Somiari, 2012).
Thus, following the trend of economic growth of the country, several studies have examined the likely variables that are responsible for such growth pattern. Many of the studies have concentrated on a pairwise relationship (see for example, Ajayi and Oke, 2012; Doguwa, 2012) and tripartite relationship (Odusola and Akinlo, 2001) among certain variables and growth in Nigeria and all having varying option about the contributions and impacts of each variable on the economy.
Against this backdrop, this study finds motivation for examining the effects of macroeconomic stability factors on economic growth in Nigeria. The study essentially will explores the effects of inflation (INF), exchange rate (EXR), interest rate (INR), unemployment (UNE) and balance of payment adjustment (BOP) on growth in Nigeria.
1.3 Research Questions
- What is the effect of the macroeconomic variables on economic growth in Nigeria?
- Is there any causal relationship between the macroeconomic variable under study and economic growth in Nigeria?
1.4 Objectives of the Study
The broad objective of this research work will be to analyze the impact of macroeconomic variables on economic growth in Nigeria
This will be achieved through the following:
- To determine the impact of some macroeconomic variables under study on economic growth in Nigeria.
- To investigate if there is a casual relationship between the macroeconomic variables under study and economic growth in Nigeria.
1.5 Hypotheses of the Study
Based on the above stated research objectives, conclusion will be drown from the following research hypothesis.
- H0: There is no significant effect of macroeconomic variables under study on economic growth in Nigeria.
- H0: There is no causal relationship between the macroeconomic variables under study and economic growth in Nigeria.
1.6 Significance of the Study
The study will contribute immensely in aiding the government, policy makers, economic planners, researchers and the academia generally. This will provide an insight and understanding to the government on how to be prudent in spending public funds that would bring about economic growth and development. It will also be of immense help in providing an insight and knowledge to the general public, policy makers, economic planners, and manufacturing sector regulatory authorities on the impact of macroeconomic factors on the economic growth in Nigeria. To the academia, the findings of the study will contribute to the available literature on the current macroeconomic policies in Nigeria and its level of contribution to the GDP. Based on our empirical findings and analysis, the result of the study will be of immense benefit to researchers who will rely on their contributions to existing knowledge for further research.
1.7 Scope and Limitation of the Study
This research will be restricted to the Nigerian economy as it relates to current macroeconomic policies in the country from 1981 – 2016.The generalization of the term macroeconomic variables is restricted to the variables considered for study which includes unemployment, interest rate, price stability (inflation and exchange rate) and balance of payment position.
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