1.1 Background to the Study
Inflation has remained a chronic problem for the Nigerian economy over the years. Inflation is not a new word in the world economy and not out rightly bad but the case of Nigeria is severe and if not properly checked it can destabilize the entire economic frame work. This problem has brought about reduction in 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 government to stimulate a fast rate of economic growth and development. Inflation trend since independence shows two distinctive period. Until 1969 we had 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 salaryAwards. The Nigerian economy seemed to have experienced moderate inflation prior to the advent of the structural Adjustment programme (SAP) in 1986. Inflation on its own is not bad as studies have shown that there exists a positive relationship between inflation and growth. However, 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. According to Ogwuma (1986) average growth rates falls slightly as inflation rate approaches 25-30 percent and growth rates become increasingly negative at a higher rate of inflation.
Manufacturing on the other hand involves the conversion of raw materials into finished consumer goods or intermediate producer’s goods. Manufacturing creates avenues foremployment, 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. According to Ogwuma (1986), the manufacturing sector plays a catalytic role in a modern economy and has many dynamic benefits crucial for economic transformation. Furthermore it creates investment capital at a faster rate than any other sector of the economy while promoting wider and more effective linkages among different sectors. The manufacturing sector in Nigeria has passed through four clear stages of development.
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 intenseeconomic 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 where government revenue fell 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.
However, despite these great reform efforts, the growth performance of the sector has been dwindling over the years. According to a National Bureau of Statistics report on the manufacturing sector 2014, since a peak of 7.83% in 1982, the contribution of manufacturing as a share of total economic output in Nigeria generally declined. Many factors have contributed to the variation in sector share through time, many of which show both the vulnerability of manufacturing to global economic pressures, as well as the impacts that policy changes can have in reshaping the sector. Prior to the oil boom of the 1970’s, manufacturing contributed approximately 10% to Nigeria’s economic output. Thereafter, increased revenues from oil caused the sector’s relative Gross Domestic Product (GDP) share to decline; growth persisted albeit at a slower rate. Furthermore, according to Central bank of Nigeria Annual report 2015, the index of manufacturing production which stood at 187.3 (2010=100), showed a marginal increase of 0.2 per cent, compared with the level in 2014. Similarly, the average capacity utilization of the manufacturing sector in 2015 rose by 0.1 percentage point to 59.9 per cent. The slow growth in the sub-sector was attributed to low investor confidence occasioned by depreciation in the value of the naira and inadequate electricity supply, particularly during the first half of the year. Food; beverages and tobacco; oil refining; and motor vehicles assembly sub-sector accounted, largely, for the decline in performance of the manufacturing sector.
It is in the light of the above that this present research project aims at examining the linkage between inflation and manufacturing sector growth in Nigeria.
1.2 Statement of Problem
The inflation-growth linkage has been on the front burner of academic discourse, attracting interest from research scholars and the academia.
Inflation they argue worsens the balance of payment positions, forces up interest rates thus discourages investment, inhibits and distorts consumer spending by rising domestic prices relative to foreign prices. Currency inflation on the other hand inhibits exports and stimulates imports thus depleting the nation’s scarce foreign resources. Furthermore, due to the inflationary conditions, savers find out that the value of their savings is eroded hence they are forced to add to their current consumption thus hindering capital formation and the nation’s economic growth.
Current inflation rates in Nigeria have tremendously complicated and continued to complicate the task for makers of government fiscal and monetary policies. An overview of inflation trend in Nigeria as published by the Nigeria Bureau of Statistics in the last two years showed that annual inflation rates grew from 8.04% in 2014 to about 9.02% in 2015 and doubled in 2016 by rising to 18.55%. Prior to now the inflation figures stood at 21.42%, 18.87% and 10.84% in 1981, 2001 and 2011 respectively (CBN Statistical Bulletin 2015).
Granted, the questions about the effect of changes in price level on economic growth have continued to attract the attention of researchers; whether inflation promotes growth or is inimical to sustainable growth have been vigorously argued. However, examining the responsiveness of the manufacturing sector to inflation has been largely neglected. The Nigerian economy is comprised of various sectors whose activities contribute to the total annual gross domestic product (GDP). Most studies have assessed the relation between changes inflation and the economy but only few have attempted to disaggregate the economic components to determine the specific effect of inflation on a specific priority sector of the economy. It is argued that a study on the economy as a whole might not provide salient information on some sectors of the economy, which could have aided in policy making (Modebe and Ezeaku 2016). Hence, we attempt in this present research effort to fill this knowledge gap by examining the link between inflation and the manufacturing sector growth in Nigeria from 1981 to 2016 thus relating inflation to some activity sectors of the economy rather than from the perspective of total growth which have been largely ignored over the years. In essence the study will seek to answer the following research questions below.
1.3 Research Question
The questions we are investigating here are:
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
1.5 Research Hypothesis
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 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 of 35years ranging from 1981-2016. The period was chosen in order to have serious investigation into the activities of the manufacturing sector.