THE MACROECONOMIC DETERMINANTS OF ECONOMIC GROWTH IN NIGERIA

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THE MACROECONOMIC DETERMINANTS OF ECONOMIC GROWTH IN NIGERIA

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.

Keywords: Macroeconomic determinants, Economic Growth (GDP), Inflation rate, Exchange rate

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.

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