ABSTRACT
Attaining
a sustainable level of economic growth which would further translate into
economic development is the major aim of policy makers in various countries as it
impacts positively on the citizenry and drives the economy even further to a
better level of equilibrium than that which it currently finds itself in.
Various studies have looked at the impact of macroeconomic determinants used in
this study either individually or as a collection and the effect which such
have on economic growth. This study therefore empirically examined the
macroeconomic determinants of economic growth in Nigeria obtaining data for a
thirty five year period between 1981 and 2015 for the various variables of
interest used in the study which include Gross Domestic Product (GDP),
Inflation rate, Interest rate, Exchange rate and Unemployment rate.
The
results of the study was analyzed using various tests such as the descriptive
statistics, stationarity tests using the Augmented Dickey Fuller test and
Phillip Perron tests, the Bound cointegration test for establishing the long
run relationship of the variables as well as the Pairwise granger causality
test to establish the level of causality among the variables of interest Also,
the Autoregressive Distributed Lag (ARDL) model was used in analyzing the
regression results while stability and diagnostic tests using were carried out
to establish the appropriateness of the ARDL model for the study. Also,
heteroskedasticity and autocorrelation tests were carried out to ensure the
absence of serial correlation among the variables used in the study.
The
result findings revealed that inflation contributes positively to economic
growth; interest rate and unemployment have a negative impact on economic
growth while exchange rate only contributes positively to economic growth in
the short run with a negative effect experienced in the long run. As for past
GDP, the result shows that it contributes positively to current GDP.
The study
concludes that past income as influenced by the macroeconomic variables
contribute significantly to the current level of income in the Nigerian
economy.
The
study thus recommends among others that inflation targeting which would commensurate
the level of economic growth should be pursued by policy makers. Also
recommended was policies which would discourage the inflow of excessive foreign
capital which makes exportables expensive and worsens the import dependency of
the country. In addition, social policies that would encourage transfer of
resources to the rural and poor areas were recommended.
CHAPTER ONE
INTRODUCTION
1.1
Background to the Study
The relationship between economic growth and
macroeconomic determinants has long been a popular issue of debate in the
literature of economic development (Nihat, Ali & Emrah, 2013). The
importance of economic growth in Africa cannot be underestimated with most
countries experiencing low growth rates. Discussions have been made on the area
of economic growth among policy makers and the focus has been on developing
countries and Nigeria has not been exempted from such discussions. The debate
on the key drivers of economic growth has been ongoing and it is still far from
over. Godwin (2007) defines economic growth as an increase in real gross
domestic product (RGDP). Research on economic growth had been undertaken in
both theoretical and applied work. The main aim of macroeconomic policy is to
have stable prices (low inflation), low levels of debt (whether foreign or
domestic), free market economy, low levels of unemployment, having an economy
based on a four sector model and based on an open economy (Mbulawa, 2015).
There is therefore a need to evaluate those macroeconomic determinants of
economic growth of a country with Nigeria being the country of focus in this
study.
The
GDP is one of the measures of national income and output for a given country's
economy at a given period of time. The definition of GDP is based on the total
market value of all final goods and services produced within the country in a
given period of time (normally one year). The evaluation process also involves
the sum of value added at every stage of production (the intermediate stages)
of all final commodities (goods and services) produced within a country in a
given period of time monetarily (Kira, 2013). Gross Domestic Product represents
the economic health of a country. GDP consists of consumer spending, investment
expenditure, government spending and net exports; hence it portrays an
all-inclusive picture of an economy (Nihat et al, 2013). It provides an insight
to investors as it highlights the trend of the economy by comparing GDP levels
as an index. GDP is not only used as an indicator for most governments and
economic decision-makers for planning and policy formulation; but also it helps
the investors to manage their portfolios
by providing them with guidance about the state of the economy (Nihat et al,
2013).
A
widely accepted view in macroeconomics is that low inflation is a necessary
condition for fostering economic growth. Although the debate about the precise
relationship between inflation and growth remains open, the question of the
existence and nature of the link between inflation and economic growth has been
the subject of considerable interest and debate (Munir & Mansur, 2009).
Inflation is a rise in the prices of goods and services without a corresponding
increase in the value of such goods and services. Inflation remains a pervasive
and persistent world problem because no economy in the world has been spared by
its phenomenon. It is for this reason that making the maintenance of price
stability has been a fundamental objective of macroeconomic policy. The
emphasis here is that achieving the goal of price stability helps in the
promotion of sustainable growth and development as well as strengthening the
purchasing power of the domestic currency (Umaru & Zubairu, 2012; Ojonye,
2015). Consequently, the need to understand the relationship between inflation
and economic growth of the Nigerian economy has become imperative and
understanding the dynamics of inflation has become central to the achievement
of price stability.
Interest rates are crucial
elements in the transmission of monetary policy actions to economic activities.
The interest rate policy in Nigeria for example has changed within the time
frame of regulated and deregulated regimes. However, the impacts of this
variable on the economic growth of Nigeria have remained controversial (Acha
& Acha, 2011). The Nigerian economy has at different times witnessed
enormous interest rate swings in different sectors of the economy since the
1970s and mid 1980s under the regulated regime.
The preferential interest rates were based on the premise that the
market, if freely applied would exclude some priority sectors (Anyiyang, 2012).
Prominent among the preferred sectors were the agricultural, manufacturing and
solid mineral sectors which were accorded priority and deposit money banks were
directed to charge preferential interest rates on all loans to encourage the
upsurge of small-scale industrialization which is a catalyst for economic
development (Udoka, 2000). However, rising interest rate over the last three
years have started to hurt the Nigerian economy. Thus it is necessary to
establish the link also between interest rate and economic growth in Nigeria.
Exchange
rate management has been a topical issue among academics and policy makers for
a very long time (Azeez & Kolapo, 2012). Exchange rate has been defined as
the price of one currency in terms of another (Mordi, 2006). The increase or
decrease of real exchange rate indicates strength and weakness of currency in relation
to foreign currency and it is a standard for illustrating the competitiveness
of domestic industries in the world market (Razazadehkarsalari, Haghiri &
Behrooznia, 2011). In Nigeria and indeed any developing country, the price of
foreign exchange plays a critical role in the ability of the economy to attain
optimal levels in production activities (Rasaq, 2013). Rapid or persistent
growth is likely to involve positive changes in the nature of economic activity
which exchange rate fluctuation could encourage (Okorontah & Odoemena,
2016). However, negative fluctuations in the exchange rate of a country can
hamper economic growth. It is therefore imperative to study the relationship
between exchange rate and the economic growth in Nigeria.
It
is a widely accepted view in economics that the growth rate measured by the GDP
of an economy increases employment and reduces unemployment (Fuad, 2011).
However, unemployment and slow growth continues to be two of the major
challenges facing every country regardless of the state of their economic and
social development (Madito & Khumalo, 2014). While the level of
unemployment affects the rate of GDP-Growth, it also serves as an indicator of
the country’s state of the economy as it indicate how well the economy utilizes
its resources (Madito & Khumalo, 2014). Achieving a low level of
unemployment rate is therefore one of the goals of many governments in the
world which is also one of the policy goals of the Nigerian government, as it
is believed that this can help attain a better level of growth in the country.
The
focus of this research work therefore is to examine the extent to which
macroeconomic factors affect the rate of economic growth in Nigeria. It should
be noted that changes in macroeconomic conditions affect the performance of the
economy as a whole and thus a nation’s financial health. It is therefore very
important to ascertain the link between these macroeconomic conditions and
economic growth.
1.2 Statement of the Problem
Over the years, the Nigerian economy has
experienced stable rate of economic growth, though results recently points to a
declining state in the level of economic growth experienced in the past
especially in the last year under review in this study which was year 2015.
Studies in the past have shown the state of the economy depends on the
relationship that exists among various macroeconomic variables and how well
these variables interplay to push the economy to a better level of equilibrium
than that which it currently is in. According to Obrimah (2015), economic
interactions have resulted in a decrease in inflation levels in Nigeria from
about 18% in 2005 to about 12% in 2012, this cannot be said however for the
results of 2015 which experienced an increase in consumer price index of about
9% which was a 11.92% rise from the 8.1% recorded in 2014 and the 8.5% figure
for 2013 (Trading Economics, 2016)
Also, interest rate in Nigeria which has the
ability to impact on the level of investment and availability of credit in the
country has averaged about 10.24% from 2010 to 2015 following a record low of
6% in July 2009 where the country experienced tremendous economic growth
(Trading Economics, 2016). This increase in interest rates attracted the inflow
of foreign capital into the economy which has been sustained in the economy for
a long period of time as investors found the increase in the rates for borrowing
funds unattractive, thus leading to them seeking for funds from external
sources. The sustained dependence on foreign capital over a long period of time
has been associated as one of the major causes of a decline in the value of the
naira and also a cause of the increased level of inflation in Nigeria, a
country which largely depends on imported goods and has had its exportables
being unattractive to other countries. Despite the lack of synergy among the
level of inflation, the cost of borrowing funds represented by interest rate
and the value of the local currency which is the naira, Nigeria’s unemployment rate stood at 9.0% in
2015 which represents a 34.44% change from the 7.8% which was recorded in 2014
(Trading Economics, 2016).
The
increase in the level of unemployment has been associated to loss of jobs as
various companies in different industries have been involved in massive
retrenchments due to the uncertainty of the economic environment in the
country. The effect of the variations in unemployment rate, interest rate,
exchange rate and inflation rate has definitely had an impact on the
environmental conditions of the household, firms and government. The result of
the increase in the dependence on foreign capital coupled with the fact that
Nigeria depends majorly on imports impacted on the ability of the household to
buy goods and services as prices for commodities were high which thus reduced
the purchasing power of the household. This also affected the level of savings
of the domestic household, as increasing interest rates and its associated
features discouraged consumption and thus impacted on the level of earnings of
the firms as profit dropped which led to a mass retrenchments of workers in
2015. Bringing all the above fact together, it is
obvious that the Nigerian economy has been performing without synergy between
the macroeconomic objectives as well as the monetary and fiscal policy.
Efforts by the monetary authority, the Central
Bank of Nigeria (CBN) to curtail inflation by increasing interest rate shrinks
the ability of the financial sector to create more money through loans and
which thus contributed negatively to growth. In the same vein, the increasing
level of interest rate has failed to suppress the level of inflation, as the
Nigerian economy is largely import dependent. Efforts by the monetary authority
to improve the value of Naira through increased interest rate has failed to
attract foreign investment into the Nigerian economy, with the domestic economy
suffering from the scarcity of capital and consequently close down of
industries which affected the employment rate within the economy negatively and
which has also led to the consistent decline in the growth of the economy in
2015. Having this in mind, it can be said that the level of growth experienced
by the Nigerian economy over the study period has been non-inclusive, as the
ability of Nigerians to defend their standard of living through prior savings
was insufficient. All these problems obviously need to be attended to as they all
have their chain-reaction and contribution to the current level of income which
obviously has its implication for economic growth of Nigeria.
1.3
Objective of the study
The
specific objectives of the study are to:
1.
evaluate
the relative importance of prior income (past GDP) on current national income
(current GDP) and
2.
ascertain
the relative significance of macroeconomic factors (inflation rate, interest
rate, exchange rate and unemployment rate) on current national income (current
GDP).
1.4 Research
Questions
The research questions which the study seeks
to address are:
1.
Does
prior income have a greater impact on current income (current GDP)?
2.
Do the
macroeconomic factors (inflation rate, interest rate, exchange rate and
unemployment rate) have a greater impact on current income (current GDP)?
1.5 Hypotheses
In the course of the research work, the hypotheses were tested at 0.05
and 0.10 level of significance
H01: Prior income (past GDP) does
not have a significant impact on current income (current GDP).
H02: The macroeconomic factors
(inflation rate, interest rate, exchange rate and unemployment rate) do not
have a significant impact on current income (current GDP).
1.6 Justification for the
Study
The
macroeconomic environment of the Nigerian economy has experienced different mix
of policies, from the colonial era to independence, the adoption of SAP and the
emergence of the democratic government. The adoption of SAP led to significant
shift in policy orientation, as the economy was exposed to varying exchange
rate and deregulation of sectors of the Nigerian economy which subsequently
paved the way for the democratic government. The high level of growth attained
which are largely through crude oil exportation have not been fully utilised to
develop the economy and thus reliance falls on the macroeconomic determinants
of growth to bail out the economy. The efficiency of the macroeconomic
determinants has shown varying trends over the study period. The most revealing
of all is the level of non-inclusiveness of growth experienced by the Nigerian
economy which is largely due to the monotonic nature of the economy by over
dependence on crude oil and the abandonment of the agricultural sector. The
level of income available to Nigerians has been eroded with rising inflation
and over-dependence on imported consumables which further degraded the level of
income generation of Nigeria, as jobs are being transferred from the importing
countries (Nigeria) to exporting countries.
Putting all these into perspective, there is the need to properly
analyse the role of the macroeconomic determinants in growing past and current
income, and specifically how their effect on past income robs-off on current
income. This thus forms the rationale for this research work.
1.7 Scope of the Study
The study focuses on the effect of
macroeconomic determinants on economic growth in Nigeria. For the purpose of
this study, the years considered span a period of thirty-five years from 1981
to 2015. Data was sourced from CBN statistical bulletin and the World Bank
data. Lack of sufficient published
materials such as books and journals in the library relevant to the research
topic. This forced the researcher to rely on e-books which are time consuming
in terms of ease of access. Also, time constraint might be another major
limitation to the study given that the researcher is restricted to carry out
the study within a short period of time.The study focuses on those
macroeconomic variables such as exchange rate, interest rate, inflation rate,
unemployment rate and economic growth. These variables form the area of
interest of this research work although we have other macroeconomic variables
that affect economic growth in Nigeria.
1.8 Significance
of the Study
The
focus of the study is the Nigerian economy considering various macroeconomic
determinants and their effect on economic growth in Nigeria. In order to
achieve the macroeconomic goals of attaining rapid growth of the economy and
the alleviation of poverty, unemployment and inequality, government authorities
and its agencies come up with various policies aimed at ensuring a sound
economic system which can translate into economic growth. This study would
therefore be beneficial in providing appropriate suggestions to the government
authorities as well as its agencies as to those macroeconomic variables that
affect economic growth in Nigeria.
As at 2010, about 61% of
Nigeria’s population of about 160 million live below poverty line of United
State Dollar (US$) 1.25 a day (National Bureau of Statistics, 2013).This study
aimed at studying those macroeconomic variables that would help in achieving a
sustainable level of economic growth which would in turn transform the lives of
a majority of the Nigerian populace and improve living conditions in the
country. This research also serves as a guide to finance experts, economists
and policy makers in formulating appropriate policies and providing advice that
will serve the interest of the country at large. This study would also be of
immense benefit to researchers who would be interested in undertaking similar
researches in the area of interest in future and can therefore form a reference
point for them in carrying out their inquiries as economic growth has become a
very interesting issue in Nigeria currently in the face of the current economic
recession the country is facing. This makes it necessary for studies relating
to the area of economic growth to be carried out to get the Nigerian economy
out of the current problems which it faces.
1.9 Operationalization of Variables
Yit = 
0 + 1X1it
+ 2X2it
+ 3X3it
+ 4X4it
+ 5 X5it
+ 
it 1.1
0 + 1X1it
+ 2X2it
+ 3X3it
+ 4X4it
+ 5 X5it
+ it 1.1
Economic growth (RGDP) = f(macroeconomic
variables)
Y = Economic Growth (RGDP) (Dependent
Variable)
X = Macroeconomic determinants (Independent
Variables)
Where;
X1 = Past RGDP
X2 = Inflation (Consumer price
index)
X3 = Interest rate
X4 = Exchange rate
X5 = Unemployment rate
0=
Intercept, 1-
5=
Coefficient of the independent variables
1.10 Operational Definition of Terms
Exchange rate: This is the rate at
which a unit of currency is exchanged for other currencies. It is the price of
one country’s currency in terms of another. It is also regarded as the value of one country’s
currency in relation to another currency.
Inflation: This is the continued
increase in the general price level of goods and services without a
corresponding increase in the value of such goods and services. It is the rate
at which the general level of prices for goods and services is rising and consequently,
the purchasing power of naira is falling.
Interest rate: This is the amount charged, expressed as a
percentage of the principal by a lender to a borrower for the use of assets. It
is the amount of interest due per period as a proportion of the amount lent,
deposited or borrowed (called the principal sum).
Gross Domestic Product: This is the monetary measure of the market
value of all final goods and services produced in a country in a given period
usually a year. It is the aggregate measure of production equal to the sum of
the gross value added of all residents and institutional units engaged in
production (plus any taxes and minus any subsidies on products not included in
the value of their outputs).
Unemployment: This is the phenomenon that occurs when a
person who is actively searching for work is unable to find work. It occurs
when people who are without work are actively seeking paid work.
Economic growth: This is an increase in the output that an
economy produces over a period of time. It is the increase in the inflation
adjusted market value of the goods and services produced by an economy over
time
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