Impact Of Inflation On The Manufacturing Sector Of The Economy

5 Chapters
|
75 Pages
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7,845 Words

Inflation exerts a profound influence on the manufacturing sector of the economy, significantly affecting its operations, costs, and competitiveness. As prices rise across various inputs such as raw materials, labor, and energy, manufacturers face heightened production expenses, thereby squeezing profit margins. This escalation in costs often prompts firms to adjust pricing strategies, potentially leading to decreased consumer demand and reduced sales volume. Moreover, inflationary pressures may hinder investment in technological advancements and infrastructure upgrades essential for enhancing productivity and maintaining competitiveness within the global market. Consequently, the manufacturing sector must implement proactive measures, including cost-cutting initiatives, efficient supply chain management, and innovation-driven strategies, to mitigate the adverse effects of inflation and sustain long-term growth and viability.

ABSTRACT

This study analyses the linkage between inflation rate and manufacturing sector of the Nigerian economy over the period of (1981-2011). The study used data sourced from the Central Bank of Nigeria (CBN). The ordinary least square technique (OLS) was used to specify and examine the relationship between the variables Government expenditure, inflation rate and money supply which are the independent variables and the manufacturing index which is the dependent variable for the first model. The independent variables for the second model are consumer price index, Nominal interest rate and exchange rate while the dependent variable is the manufacturing index. The explanatory power of the models was given by the R2 of 11.799% for the first model and 62.85% for the second model and was subjected to the t-test and f-test to test the significance of the independent variables. The second model based on the result, we found out that it was more significant than the first model. The research revealed that inflation has a positive effect on the manufacturing sector in Nigeria. This goes a long way to say that increase in inflation leads to increase in the manufacturing output and that manufacturers should not to be discouraged by the increase in inflation rate, and depreciating value of Naira.

TABLE OF CONTENT

Title page
Approval page
Dedication
Acknowledgement
Abstract

 

CHAPTER ONE:
1.0 INTRODUCTION

1.1 Background of the study
1.2 Statement of problem
1.3 Research Question
1.4 Objective of the study
1.5 Research hypothesis
1.6 Significance of the study
1.7 Scope of study
1.8 Limitation of study
1.9 Definition of terms

CHAPTER TWO:
2.0 LITERATURE REVIEW

2.1 Characteristics of manufacturing sector in Nigeria
2.2 Concept of inflation
2.3 Types of inflation
2.4 Theories of determinant of inflation
2.5 Determinants of inflation in Nigeria
2.6 Trade openness and manufacturing sector
2.7 Global economic down turn and the manufacturing sector Performance in the Nigerian economy
2.8 The Dynamics of money supply and inflation in Nigeria

CHAPTER THREE:
3.0 RESEARCH METHODOLOGY

3.1 Research design
3.2 model specification
3.3 Estimation Procedure
3.4 Source of data
3.5 Statistical tool and evaluation techniques

CHAPTER FOUR:
4.0 DATA PRESENTATION AND ANALYSIS

4.1 Presentation of results
4.2 Interpretation of results

CHAPTER FIVE
5.0 SUMMARY CONCLUSION AND RECOMMENDATION

5.1 Summary
5.2 Conclusion
5.3 Recommendation
Bibliography
Appendix

CHAPTER ONE

INTRODUCTION
1.1 BACKGROUND OF THE STUDY

Inflation has remained a chronic problem for Nigerian economy for some time. Inflation is not a new wood in the world economy and not out rightly bad, but the case of Nigeria is severe and i t will destabilize the entire economic frame work if it is not properly checked. This problem has brought about reduction of 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 country’s government to stimulate a fast rate of economic growth and development since 1951 when it was introduced. Inflation trend since independence shows to distinctive period. Until 1969 we had a 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 salary
Awards (Adigun, M.S 1985 “Reviving the Nigeria economy”)
The Nigerian economy seemed to have experience moderate inflation prior to the advent of the structural Adjustment programme (SAP) in 1986. Inflation on it own is not bad as studies have shown that there exists a positive relationship between inflation and growth. But 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. Average growth rates falls slightly as inflation rate across a variety rates more towards 20-25 percent. The growth rate declined more steeply as inflation rates approaches 25-30 percent and growth rates became increasingly negative at a higher rate of inflation (Ogwuma, P.A. 1986; Gains and pains of inflation in the manufacturing sector of the Nigerian economy”
Manufacturing involves the conversion of law materials into finished consumer goods or intermediate or producers goods manufacturing creates avenues for
employment, 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. The manufacturing sector in Nigeria has passed through four clear stages of development. T
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 intense economic 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 here government revenue fall 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 (Enu, 1993: the Nigeria economy after structural adjustment programme “problems and prospects”)

1.2 STATEMENT OF PROBLEM
Inflation worsens the balance of payment positions. Inflation has helped forced up interest rates thus determining investment and so by doing reduces the real values of aggregate consumer wealth such as government debt and money. It has inhibited and distorted consumer
spending by rising domestic prices relative to foreign prices, the currency inflation inhibits exports and stimulates imports thus, depleting the nations scarce foreign resources.
Due to the inflationary situation savers find out that the value of their savings is eroded hence they are forced to add their current consumption thus hindering capital formation and the nation’s economic growth. Inflation militates against long term savings plan of the consumer and hence becomes a function in improving a sub optimal lifetime consumption pattern upon the consumer.
Current inflation rates in Nigeria have tremendously complicated and continued to complicate the task for makers of government fiscal and monetary policies. Even when they believe that rate of inflation is really the public does not. This inflation not only makes it harder for policy makers to diagnose the factors affecting aggregate demand.

1.3 RESEARCH QUESTION
The questions we are investigating here are:
What significance does inflation have on the manufacturing sector of the Nigerian economy? What is the effect or impact of inflation on the money sector of the Nigerian economy? Does government expenditure have positive effect on the manufacturing sector of the Nigerian? Is there any relationship between interest rate and the manufacturing sector of the Nigerian economy? What is anti-inflationary policies pursued at present and in the past by Nigerian government?

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. To investigate empirically the relationship between inflation and the manufacturing sector.
2. To assess the impact of government expenditure on the manufacturing sector
3. To determine the nature of the relationship between interest rate and manufacturing sector of the Nigerian economy.
4. To review the past and present anti-inflationary policies of the Nigerian government

1.5 RESEARCH HYPOTHESIS H0:
inflation does not have any significant impact on the manufacturing sector of the Nigerian economy H1: inflation has a significant impact on the manufacturing sector of the Nigerian economy. H0: interest rate does not have any significant impact on the manufacturing sector of the Nigerian economy. H1: interest rate has a significant impact on the manufacturing sector of the Nigerian economy.

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 oaring from 1981-2011. The period was chosen in order to have serious investigation into the activities of the manufacturing sector.
The multiple regression models will be employed in determining the functional relationship between inflation and the research variables.

1.8 LIMITATION OF STUDY
In carrying out the investigation sources of data posed a problem of its own. It is difficult to lay hands on up to data statistical data for empirical analysis especially in developing countries such as Nigeria. In any case one had to mean the best use of what was available.
Resulting from the short time limit couple with the financial constraints, the researcher was limited to primary and secondary sources.
Generally the researcher suffers frustration owing to administrative logistics. Below are some of the identifiable limitations.
1. Unpublished data were rarely made available to researcher by government officers who avoid violation of the official secrecy act.
2. Secondary data on the subject was stale and scanty in most of the libraries visited including the state library.

1.9 DEFEINITION OF TERMS
INFLATION: It is a persist tendency for prices and money wages to increase. The dictionary of economics said “inflation is measured by the proportional changes over time in some appropriate price index, commonly a consumer price index or a GDP deflator” inflation occurs when the general price level is rising.
MANUFACTURING SECTOR: Is s sub-set of the industrial sector (others being processing draft and mixing sub-set)
Manufacturing involves the conversion of raw materials into finished consumer goods or intermediate or producer goods.

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Impact Of Inflation On The Manufacturing Sector Of The Economy:

Inflation can have both positive and negative impacts on the manufacturing sector of the economy. The extent of these impacts depends on the rate and stability of inflation, the ability of manufacturers to adapt to changing economic conditions, and various other factors. Here are some of the key ways in which inflation can affect the manufacturing sector:

  1. Cost of Inputs: When inflation occurs, the prices of raw materials, energy, and other production inputs tend to rise. This can increase the cost of production for manufacturers, squeezing profit margins. Manufacturers may be forced to pass these increased costs onto consumers in the form of higher prices for their products, which can lead to reduced demand.
  2. Uncertainty: Rapid or unpredictable inflation can create uncertainty in the business environment. Manufacturers may be reluctant to invest in new equipment or expand their operations if they are unsure about future costs and prices. This can lead to reduced capital expenditures and slower growth in the manufacturing sector.
  3. Interest Rates: Central banks often respond to high inflation by raising interest rates to cool down the economy. Higher interest rates can increase borrowing costs for manufacturers, making it more expensive to finance investments in new equipment or facilities. This can hinder the sector’s expansion.
  4. Competitiveness: If inflation is significantly higher in one country compared to its trading partners, the country’s manufactured goods can become less competitive in international markets. This can lead to a decrease in exports, hurting the manufacturing sector.
  5. Wage Pressures: Inflation can also lead to demands for higher wages from workers who want to maintain their purchasing power. Labor costs are a significant part of manufacturing expenses, so rising wages can further squeeze profit margins.
  6. Demand Fluctuations: High inflation can lead to fluctuations in consumer demand. When inflation is moderate and stable, consumers can adjust to price increases gradually. However, hyperinflation or very high inflation can disrupt consumer spending patterns, making it difficult for manufacturers to predict and meet demand.
  7. Asset Values: Inflation can affect the value of assets owned by manufacturing companies. For instance, if a company holds a significant amount of cash, its real value will decrease during periods of inflation. Conversely, assets like real estate may appreciate in value during inflationary periods.
  8. Supply Chain Disruptions: Inflation can disrupt global supply chains by affecting the cost and availability of imported goods and components. Manufacturers heavily reliant on imported inputs may face challenges in securing necessary materials.
  9. Investment Decisions: High or uncertain inflation can lead manufacturers to prioritize short-term cost-cutting measures over long-term investments in research, development, and innovation.
  10. Government Policies: Government responses to inflation, such as price controls or subsidies, can have varying effects on manufacturers, depending on their specific circumstances and the effectiveness of these policies.

In conclusion, the impact of inflation on the manufacturing sector is complex and multifaceted. While moderate and stable inflation can sometimes be accommodated by manufacturers, high or erratic inflation can pose significant challenges, impacting costs, profitability, competitiveness, and investment decisions. Policymakers and businesses need to carefully monitor and manage the effects of inflation to ensure the stability and growth of the manufacturing sector within the broader economy.