CHAPTER ONE

1.1              BACKGROUND OF THE STUDY

Every country in the world aim at achieving economic growth and development. This is only possible if a country has adequate sources. In developing countries especially those in sub-saharan Africa. The resources to finance the optimal level of economic growth and development are in short supply.

            Inflation, economic growth and interest rate concepts that are central and interrelated in Macro economic. A proper understanding of these concepts is therefore very necessary in order to get a good grasp of how inflation and interest rate has effected growth in Nigeria over the past eleven years. Is from this view that gives what have been expressed by various people to the theoretical and empirical relationship that has been estimated between them.

            Inflation is said o occur when the genral level of prices rises rapidly and persistently over a givebn period of time. This is undesirable to the public and policy makers. From this of view of the public inflation causes uncertainty about future prices. This effect decisions on expenditure, savings, investment and misallocation of resources. It also allows substantial in distributions of income and wealth from savers to borrowers. To policy makers, inflation hampers economic growth and development as it discourages investment and savings. These factors explain why policy makers put in lots of efforts to reduce inflation and why several authors focus attention on this issue. Inflation is now one of the intractable problems facing the Nigeria economy.

            Having registered low rates of inflation in years immediately after independence. The country experience double digit in 1960. this was as a result of the civil war. The next period of high inflation was (1974- 1979), when the wage freeze was discontinued as recommended by  Udoji salary review commission.

Reduction of the high inflationary pressure is considered one of the most critical Macro- economic objectives in Nigeria. A number of approached to the explanation of the phenomenon of inflation have been suggested and tested in the economic literature. Thus such concept of inflation has been suggested in the economic literature. Thus such concept of inflation has been popularized including Demand Pull inflation which occurs when aggregated demand rises faster than aggregated supply another form of inflation is cost push which occurs when price increase, its originated from supply side of economy either through profit push or wages push resulting from trade union action. For structural inflation, it seeks to explain the long term tendency of prices especially in the industrialized western countries.

            There do also exist monetarists. It explains and observes inflation rate in different countries to respective growth rate of money supply. Inflation can be transmitted from one country to another, this is usually referred to as imported inflation and occurs when a country engages in international trade. Inflation has various effect on the economy as a whole of which economic growth and interest rate are of great important. These three variables are interrelated. There are many indicators of economic growth, for the purpose of this research study.

            Finally, the relationship between inflation, interest and economic growth will be fully examined. It should be noted that interest rate are to help in mobilization of financial resources and to the promoting or promotion of economic growth and development. Interest rates effect the level of consumption on the hand, it is one of the major tools of monetary policy. It was regulated and controlled by the central bank of Nigeria.

            The direct and magnitude of changes in market interest rate are of primary importance to economic agents and policy makers. Economic growth is an increase in the average rate of output produced per person, usually measured on per annum basis. Interest rates are the rental payment for the use of credit by borrowers ad return payment with liquidity by lenders.

STATEMENT OF PROBLEM

The effect of inflation and interest rate on economy growth in Nigeria is quite a serious problem. The country experiences on inflation is no longer the problem but the fact that inflation problem seems to have reached the crisis dimension. Changes in interest rate determines the rate of inflation. The nominal interest rate is a function of the real interest rate and inflationary expectation.

            Since independence, we have been suffering from inflation and interest rate till central bank interned their new system abolished all control on interest rate and allow banks to fix their own interest rate.

OBJECTIVES OF THE STUDY

The broad objectives of the study are mainly.

To critically identify how inflation and inter rate has effected growth in Nigeria economy.to identify the major determinant of inflation in the country since 1972-2004.To analyze the factors affecting the economy and their implications on the economyTo suggest and recommend ways of imploring Nigeria economy.To determine inflation and interest rate problem on the level of employment.To analyze the impact of fluctuation of inflation and interest rate affect on the economy.

RESEARCH QUESTIONS

1.                  What is the causes if inflation and interest rates problem in the Nigeria economy?

2.                  What are the major determinants of inflation in the country since 1992 –2004?.

3.                  Hoe do you analyze the factors affecting the economy and their implications?

4.                  How can imploring the economy be suggest and recommend/

5.                  What is the state of inflation and interest rate problem on the level of employment?

6.                  Is the impact of fluctuation of inflation and interest rate affecting the economy?.

RESEARHC HYPOTHESIS

For the purpose of evaluating or in order to efficiently and objectively analyze to achieve the above objective, the hypothesis is formulated thus:

1a. Ho:      Inflation rate has no significant impact on the GDP of economic growth in Nigeria

B. Hi:        Inflation rate has significant impact on the GDP of economic growth in Nigeria

2a Ho:       Interest rate has no significant impact on the GDP of the economic growth in Nigeria.

B. Hi;        Interest rate has significant impact on the GDP of the economic growth in Nigeria.

SIGNIFICANCE OF THE STUDY

The nature of Nigeria economy has made it to be unbearable for the people existing in the country over the years, Nigeria economy is having unbalance of payment that could be easily financed for domestic product and hence external borrowing becomes inevitable. The adverse effect of external debt and economic growth related problems on the Nigeria economy are becoming unbearable.

            So the study will be of importance to educate Nigerian’s by revealing to them that one of the major reason why Nigeria economy is growing very slow could be trace back to inflation and interest rate problem. It should be noted that interest are to help in mobilization of financial resources in the promotion of the economic growth and development rather  than going outside the country seeking for fund to borrow.

Further more, this studying will be of good help to the Nigeria government, especially the present government to know that inadequate supply of locally produced and imported commodities, the high price of imported commodities, the high price of imported goods arising from increases in foreign prices being instability of foreign exchange, thereby effecting our economy and its growth. In order to curtail the total outstanding inflectional and interest rate problem the next step should be fellow because it is obvious that Nigeria economy growing alarming rate yearly.

It must be added, that this study is of relevant not only to Nigeria but it almost all the countries confronted with economic problem especially as a result of various common features.

SCOPE OF THE STUDY

                        SCOPE- the study is designed to cover the role of inflation and interest rate in Nigeria economy. The main factor such as investment and savings, which have influenced their management as the various changes which have been taken places in their structure since the commencement of financial sector reforms. It also provide some insight into the problems of inflation in Nigeria, discuss the major factors underlay it and some measures taken to minimize the impact of inflationary pressures.

DEFINITION OF TERMS

A.  INFLATION:       Inflation is defined as persistent rise in general prices over long period of time.      

B.  INTEREST RATE: This is the payment for use of capital borrowed.

C.  ECONOMIC GROWTH: Is a long-term rise in the capacity to supply increasingly diverse economic goods to its population. This growing capacity is based on advancing technology, the institutional and ideological adjustment that it demand refers to increase in real output or real per capacity output of economy.

D. ECONOMIC DEVELOPMENT: A multidimensional process involving the reorganization and reorientation of entire economic and social system.