Abstract
The relationship between macroeconomic variables and economic development is a topic of significant interest and importance in the context of Nigeria. This abstract aims to explore the impact of macroeconomic variables on the economic development of Nigeria, focusing on key indicators such as GDP growth, inflation rate, exchange rate, and government spending. Macroeconomic variables play a crucial role in shaping the economic landscape of a country, influencing factors such as investment, employment, and overall economic growth. In the case of Nigeria, a country with a diverse economy and vast natural resources, understanding the relationship between macroeconomic variables and economic development is essential for formulating effective policy measures and promoting sustainable growth. By analyzing empirical data and statistical trends, this abstract seeks to elucidate the impact of macroeconomic variables on the economic development of Nigeria. Through a comprehensive review of literature and case studies, we examine the effects of GDP growth on income levels, the role of inflation rate in purchasing power, the implications of exchange rate fluctuations on trade, and the significance of government spending in infrastructure development. By shedding light on the interplay between macroeconomic variables and economic development, this abstract aims to provide valuable insights for policymakers, economists, and researchers seeking to enhance the economic performance and prosperity of Nigeria. Ultimately, this study contributes to the broader understanding of the factors driving economic development in emerging economies and the importance of macroeconomic stability in fostering sustainable growth.
Keywords: Nigeria Economic Development, Macroeconomic Variables Impact, Economic Growth Nigeria, Nigeria GDP Analysis, Inflation and Development Nigeria
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
1.2 1.2 Statement of the problem
1.3 Objectives of the Study
1.4 Research Questions
1.5 Research Hypothesis
1.6 Significance of the study
1.7 Scope of the Study
1.8 Organization of the study
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Concept of Macroeconomic
2.1.1 Overview of Macroeconomics
2.1.2 Nature of Macroeconomics:
2.1.3 Scope and Importance of Macroeconomics
2.1.2 Macro-Economic Variables (MVs)
2.1.2 Macroeconomics variables
2.1.3 Macroeconomic policies
2.1.4 A Broad View of Macroeconomic Policy Goals
2.2.6 Gross Domestic Product (GDP)
2.3 Related Theories
2.3.1 Classical Theory
2.3.2 The Keynesian Theory
2.4 Empirical Review
CHAPTER THREE: METHODOLOGY
3.1 Research Design
3.4 Method of Data Collection
3.5 Method of Data Analysis
3.5.1 Model Specifications
3.5.2 Independent and Dependent Variables
3.6.5 Decision Rule
CHAPTER FOUR
4.1 DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS
4.2CointegrationTest
4.3 Vector Error Correction Model (VECM)
4.3.1 Vector Error Correction Model (VECM)
4.4.1 Result of Pairwise Granger Causality Tests (2000-2020) With 2 Period Lag
4.5 Discussion of Findings
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings
5.2 Conclusion
5.3 Recommendation
REFERENCES
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Some of the macro-economic variables that can affect the economy of countries around the world with Nigeria inclusive are interest rate, inflation, exchange rate and foreign Direct Investment (FDI). kiAntwi, Ogoh (2013) opine that macroeconomic theory has identified different factors that can affect the growth of a given nation from the neoclassical , Keynesian and the new growth theories. These variables therefore comprise of interest rate, foreign direct investment, GDP per capita, investment, natural resources, human capital, innovation, technology, economic policies, governmental factors, foreign aid, trade openness, institutional framework, political factors, geography, socio-cultural factors, demography etc. Market capitulation and all share price index are also macroeconomic variables (Ezenwa, 2016).
Kamran, McPherson (2000) opine that interest rate and GDP are inversely related. When central bank issues a loan to commercial bank, interest rate is charged. Interest rate volatility is strongly related to inflation. The major reason for high interest rate is high inflation. When the atmosphere is favorable the low interest rate results to low inflation and this facilitates economic growth (Kamran, 2014). High interest rate decreases economic growth. There is mutual relationship between interest rate and growth rate. Accordingly, interest usually rises with increase in demand of credit and decreases with increase in supply of credit. Hence, through this process interest rate plays a major role in financial resources mobilization from deficit to surplus units and allocation of such resources efficiently among the deficit units and hence facilitating economic growth and development. Interest rate is capable of playing this role because any changes in rate will induce a shift in the portfolios of both banks and other economic units.
When interest rate increases it results to increase in interest bearing financial instruments issued by both the capital and money markets while a decrease in rates will bring about an increase in interest bearing financial assets and real investments. However, it is the manipulation of the above variables through effective monetary and fiscal policies that enables countries around the globe to achieve economic growth and development.
In Nigeria today, because of the state of the economy, the Central bank of Nigeria (CBN) has been rolling out different monetary policies to make sure that Nigeria comes out of recession through manipulation of Monetary Policy Rate (MPR) which drives other interest rates in the economy and it has continuously intervened from time to time in foreign exchange supply to reduce the exchange rate and beef up the value of Naira. The inflation rate is said to be high because it is more than a single digit. What is globally accepted is single digit inflation rate. The foreign Direct Investment flows into the economy is at its lowest ebb because of the state of the economy and the operating business environment which is not very attractive to investors.
Kamran (2014) are of the view that inflation is politically expensive for government of any country. They further observed that studies have shown that inflation is harmful for economic growth. Inflation has n negative effect on GDP growth. Monetary authority in Pakistan uses M2 ie broad money as instrument for control of inflation. To control of inflation, it is important to recognize the factors that cause inflation. For control of inflation price stability is necessary, which is responsibility of state bank of Pakistan. From the co-integrating analysis it is concluded that in long run inflation would have positive relationship with money supply and has negative relationship with economic growth (Shim,1995). FDI drives economic growth through increase in productivity levels. Foreign direct investment has been acknowledged as the most crucial factor in enhancing economic development and the standard of living for emerging economies like Nigeria.
1.2 Statement of the problem
The problem with Nigerian economy is policy inconsistency. When the new administration took over two years ago they said that they inherited empty treasury. In an attempt to revitalize the supposedly battered economy they introduced some monetary and fiscal policies. They tried to do so many things at the same time i.e. from implementation of Treasury Single Account (TSA) to Bank Verification Number (BVN) and Port reforms etc. One of the monetary policies that CBN introduced which affected the economy adversely was stopping importers to use their domiciliary accounts to transact international businesses. They were not allowed to send money abroad through their domiciliary accounts and to worsen the situation there was shortage of foreign exchange for the importers to use to import goods and services from abroad. We easily forget that Nigeria is still an import dependent economy and the trend cannot be reversed overnight. The eventual introduction of flexible exchange rate did not help matters because the exchange rate to dollar keep escalating resulting to untold hardship to the masses. The inflation rate was on the increase and at a particular time, UN forecasted that inflation rate would hit 20% by December, 2016. However, the rate has dropped but it is still in double digit mark.
Dr. Moses Tule Director in monetary policy department of Central Bank of Nigeria(CBN) in early part of this year opines that Nigeria is actually experiencing Stagflation that is a situation where the economy is not experiencing any growth. He observed that recession and inflation are the major components of stagflation. He also said that at the moment we are experiencing fiscal and current account deficits and in this situation that there is no way that monetary policy committee would have reduced the Monetary Policy Rate(MPR) which is the rate at which CBN discounts all banks’ instruments. It is the benchmark interest rate. It was of note that the reprising of petroleum products and removal of subsidy were considered as some of the factors that brought the economy to its present state apart from the crash of oil prices in international market. Nigeria is a mono-product economy and it depends so much on revenue from crude oil as its major foreign exchange earner. Oil price (OPEC Basket) each year is the variable on which Nigeria’s budget estimate is based. In the preparation of 2017 budget, oil price was initially fixed at $42.50 per barrel before it was finally adjusted to $44.50 per barrel. There is presently volatility in oil prices at international market with oil price (OPEC basket) dropping to $42.52 a week ago. The budget was predicated on crude oil price benchmark of $44.50 per barrel as against $42.50/$ adopted earlier, 2.2million barrels per day oil production level, exchange rate of N305/$ as against N350/$ initially adopted. Inflation rate was put at 12%. Out of N7.44Trn , the capital expenditure will gulp N2.24Trn which is 30% of the budget while N5.20Trn will be expended on recurrent expenditure and it is 70% of the total budget estimate (Ezenwa, 2017).
It was observed that our GDP was experiencing a free fall and it even fell by 800% at a time. It was observed that the oil sector’s contribution to GDP is 8% while another 60% contribution to GDP is oil related. The remaining 32% is what other sectors contribute. It therefore means that our GDP is essentially dependent on oil and gas. Dr. Moses was of the opinion that CBN has injected more than N5Trn into the economy at the time. CBN was however accused of causing why JP Morgan delisted Nigeria’s bond from their index. It was stated that it is because they wanted CBN to adopt flexible exchange rate which it later implemented in May this year as against what supposed to have been done.
Hence, due to volatility of our foreign exchange, unfavourable operating environment, insecurity and lack of critical infrastructure, foreign capital flows that come through foreign direct Investment ( FDIs) to the economy was almost zero. However, a stable financial system is needed to accelerate economic growth which can be achieved through financing of large, small and medium scale enterprises (SMEs ) by commercial banks.
Ariyibi (2014) posits that between April, 2013 and now, Central Bank of Nigeria (CBN) has made some pronouncements which impacted negatively on income generation of commercial banks. They issue new policies which amongst them are increase in cash reserve requirements(CRR) for private and public deposits, statutory payment of a minimum 30 percent monetary policy rate on savings, attaching a risk weight of 125% on loans and advances extended to oil and gas by commercial banks and 20% of their portfolio in oil and Gas: Progressive reduction in commission on Turnover (COT) from 5per mile to 3per mile in 2013,2per mile in 2014,1 per mile in 2015 and 0 per mile in 2016. These measures are to ensure that there is stability in the banking system so that commercial banks can effectively finance large, Small and medium Scale Enterprises (SMEs) and other business organizations. CBN sometime last year issued operational guidelines and categorized banks as; large commercial banks with international operations called Tier 1 banks and are required to have a minimum cash reserve requirement of 15 percent while systematically important banks (SIBs) are to add 100 basis points additionally which brings their CRR to 16 percent effective April 2015.CBN also requires Nigerian banks to adopt Basel 11 Accord with effect from October 2015.The adoption of Basel 11 translates to additional capital charge on market and operating risks (Ariyibi, 2014).
Other factors that affected banks are implementation of treasury single account (TSA) in which Ministries ,Department and Agencies (MDAs) are expected to transmit any amount they generate to their respective TSAs account with Central Bank of Nigeria (CBN), restricting banks to focus on their core line of business, Implementation of Bank Verification Numbers (BVNs) in which companies and individuals are restricted to use their true identities with regard to their bank account numbers instead of having multiple bank accounts with fictitious names. All these policies and best practices have made the commercial banks to experience lower liquidity and earnings resulting to mass sacking of their staff. Even technological development has also affected the way banks are doing business because bank customers now transact businesses through their phones. People do all sorts of transactions with their phones without entering the banks. All these measures in one way or the other affect banks’ liquidity and poses to problems for lending to operators in different sectors of economy.
1.3 Objectives of the Study
The main objective of this study is to evaluate the impact of macroeconomic variables on economic development of Nigeria.
Specific objectives are:
1. To determine the effect of interest rate on gross domestic product
2. To investigate the impact of inflation on gross domestic product
3. To examine the effect of exchange rate on gross domestic product
4. To ascertain the effect of foreign direct investment on gross domestic product
1.4 Research Questions
The researcher shall intend to find answers to the following research questions
i. What is the impact of interest rate on gross domestic product?
ii. To what extent does inflation affect gross domestic product?
iii. What is the relationship between exchange rate and gross domestic product
iv. To what extent does foreign direct investment affect gross domestic product?
1.5 Research Hypothesis
The following hypotheses would be stated and tested in this study
H01: interest rate has no significant impact on gross domestic product
H02: inflation has no significant effect on gross domestic product
H03: There is no significant relationship between exchange rate and economic gross domestic product
H04: foreign direct investment has no significant impact on gross domestic product
1.6 Significance of the study
This study is timely because of the state of Nigerian economy. The main trust of the study which has to do with macroeconomic variables is critical for the stability and sustainability of Nigeria as a country. We must get the management of these variables right for the country to come out of recession. The development and growth of the economy depend on how well our fiscal and monetary policies are issued based on these variables. Employment creation, large, small and medium scale enterprises (SMEs) will be impacted upon positively with the effective manipulations of macroeconomic variables. Essentially, the entire financial systems and the economy are affected negatively if these variables are not well managed.
The study will impact on the Nigerian economy if the findings and recommendations contained would be accessed and used by policy makers. The study will also be useful to scholars, students, corporate organizations and individuals who may lay hand on it because of current issues captured in the background of the study, the literature review and findings that would be established.
The study is also targeted at closing the knowledge and theoretical gaps by providing theoretical and conceptual approaches towards enhancing knowledge in macroeconomics and macroeconomic variables, economic development , operation of interest rate and its relationships with transmission mechanism in the entire financial system, through publications in international and local journals.
1.7 Scope of the Study
The study is focused on impact of macroeconomic variables on economic development of Nigeria. Related literature on macroeconomic variables and how they relate with economic growth and development would be examined.
The study will also evaluate economic development through its gross domestic product (GDP), and relate them to macroeconomic variables such variables as interest rate, inflation, foreign exchange rate and foreign direct investment to establish their impacts. A review of theoretical and conceptual framework, methodology and empirical study relevant to this research would be made. Time series data for the period 2000 to 2019 would be sourced.
1.8 Organization of the study
The organization of the study entails the summary of each chapter in the research work. Chapter one is also known as the introductory section. This chapter covers the background of the study, statement of problem (The problems the research intends to solve), objectives of the study, research questions and hypothesis and significance of the study (Beneficiaries of the study). Chapter two covers the review of relevant literature relating to the macroeconomic policy and Economic development (2000 to 2019). Chapter Three unveiled the research methods or techniques used by the researcher in order to arrive at a research result. Chapter Four covers the area of data presentation, data analysis and data interpretation. Chapter Five covers the conclusion, recommendation and reference aspect of the study.
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