CHAPTER ONE

INTRODUCTION

1. BACKGROUND OF THE STUDY

The National Bureau of Statistics in Nigeria realized a statement in the 2ndquarter of 2017 that Nigeria has witnessed an increase in economic development to the tune of 0.055%, but how much of this development is felt by an average Nigerian in the face of high inflation and interest rates is already a puzzle. The researcher’s motivation to study this area hinge on the fact that; One, interest rate is one of the most essential components of the Nigerian economic system that affect the borrowing cost and borrowing is an imperative source of financing businesses and production which may lead to economic growth. Two, interest rates affect the return on savings, if the interest on savings is encouraging; individuals would be encouraged to save more idle cash which may pave way for availability of lendable funds in the bank consequently economic development would be improved. Three, interest rates are fundamental element of the total earnings of a lot of investments. Four, certain rates of interest give an introspection of what the economic and financial market activity would be in the future. Based on these vantage roles interest rates play in the Nigerian economy, it is imperative to continuously study this area to find out how well or otherwise interest rates affect the Nigerian economy Aminu and Anono (2012), opined inflation as an indefinitely continuous increase in the price level of wide range of goods and services in an economy over a given time frame. They attributed inflation to a popular view that it is excess money in circulation chasing the few commodities available. The structuralist argued that inflation is vital for economic growth while the monetarist postulated that it wakens economic growth (Doguwa, 2012). Inflation is an indicator of economy growth, but excess growth may be harmful as it can result in hyperinflation, conversely, an economy with no inflation will be stagnant. Thus, having the right level of economic growth and inflation is quite plausible which can be viewed as mild inflation. Creeping or mild inflation can be assessed as having favourable influences on economic growth. However, zero inflation is detrimental to other economic sectors with falling price, profit, and employment. Generally, galloping inflation has influences that are unprecedented on an economy since it distorts and disrupts the price mechanism, and discourages savings and investment leading to the break down on morals (Hossain et al, 2012). The Nigeria inflationary trend has been favourable exclusively spanning from mild to running away inflation. Doguwa (2012) reveals that growth is affected negatively by inflation when it attains 10.5 to 12 percent in Nigeria. Based on the Statistical Bulletin (2005) of the CBN, it was recorded that inflation rose from 13.8percent in 1971 to 16.0percent in 1972 which was accounted for by the era of oil glut and the introduction of economic regulations following the civil war. The excess oil in the early 1980’s that resulted in increase in the prices of oil in the local market signified another era of inflationary trend in Nigeria recording 23.2percent in 1983 as well as 39.6percent in 1984. This brought about the Structural Adjustment Programme in 1986 that brought about another inflation era in the late 1980’s. In line with Adelowokan (2012), the main challenge in the post SAP period was the fluctuation in the rate of exchange that resulted in high instability of output, increase in price of goods, low wage rate and high unemployment rate which consequently placed heavy burden on the indigent. Also, between 1992-96 the rate of inflation rose from 57 percent to 72.8 percent. High rates of inflation instability have been recorded in Nigeria and as such should be of major concern and effectively monitored by the monetary authorities

1. STATEMENT OF THE PROBLEM

The increase in overreliance on imports of Nigeria economy has made it necessary to constantly assess the extent in which the instabilities in the rate of exchange brings about an inflationary pressure in Nigeria (Adeleye et al., 2017). Taguchi, (2002) defines exchange rate as the rate at which a domestic currency is traded for a foreign currency. The exchange rate instability modeling has notable ramifications for some budgetary as well as monetary issues as it evades to the vacillations in the rates of exchange over a time horizon (Thorlie et al, 2014). It is viewed as the risk linked with sudden volatilities that cannot be predicted in the exchange rate level (Adelowokan 2012). The major problem this study attempts to solve is to evaluate the influence of inflation, interest and exchange rates on economic development within the study duration. The inflation, interest and exchange rate influence on economic development is quite a serious challenge. The experiences of different countries on inflation is no longer the problem but the fact that inflation problem appears to have attained the crisis dimension. Changes in interest rate determine the rate of inflation. The nominal rate of interest is a function of the real interest rate and inflationary anticipation.

1.3 AIM AND OBJECTIVES OF THE STUDY

The aim of the study is to determine the effect of interest rate and inflation on the Nigeria economy. The objectives of the study are to:

1. Determine the relationship between interest rate, inflation and the Nigeria economy
2. Determine the causes of inflation and their effects on the Nigeria economy
3. Determine the extent to which interest rate and inflation affect the Nigeria economy

1.4 RESEARCH QUESTIONS

The following research questions guide the objectives of the study:

1. What is the relationship between interest rate, inflation and the Nigeria economy?
2. What are the causes of inflation and their effects on the Nigeria economy?
3. To what extent do interest rate and inflation affect the Nigeria economy?

1.5 STATEMENT OF THE HYPOTHESIS

H0: there is no significant relationship between interest rate, inflation and the Nigeria economy

H1: there is significant relationship between interest rate, inflation and the Nigeria economy

1.6 SIGNIFICANCE OF THE STUDY

The study on the effect of interest rate and inflation on the Nigeria economy will be of immense help to the Nigeria economy and corporate bodies towards the effect of interest rate and inflation on the Nigeria economy. The study findings of the study will also establish a correlation between interest rate, inflation and the Nigeria economy. The study will also serve as a source of information to Nigeria government and other researchers and contribute to the body of the existing literature on the interest rate, inflation and the Nigeria economy.

1.7 SCOPE OF THE STUDY

The study covers on the effect of interest rate and inflation on the Nigeria economy from year 2000 to 2020

1.8 LIMITATION OF THE STUDY

TIME CONSTRAINTS: One the challenges experienced by the researcher is the issue of time; the research will simultaneously engage in departmental activities like seminars and attendance to lectures. But the researcher was able to meet up with the deadline for the submission of the project.

FINANCIAL CONSTRAINTS: Every research work needs funding; however lack of adequate funds might affect the speed of the researcher in getting materials for completion of the project.

1.9 DEFINITION OF TERMS

INTEREST RATE: The interest rate is the amount a lender charges for the use of assets expressed as a percentage of the principal. The interest rate is typically noted on an annual basis known as the annual percentage rate (APR). The assets borrowed could include cash, consumer goods, or large assets such as a vehicle or building.

INFLATION:  inflation is a general rise in the price level of an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services

GDP: Gross Domestic Product