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.
Interest rates are crucial elements in the transmission of monetary policy actions to economic activities. The interest rate policy in Nigeria for example has changed within the time frame of regulated and deregulated regimes. However, the impacts of this variable on the economic growth of Nigeria have remained controversial (Acha & Acha, 2011). The Nigerian economy has at different times witnessed enormous interest rate swings in different sectors of the economy since the 1970s and mid 1980s under the regulated regime. The preferential interest rates were based on the premise that the market, if freely applied would exclude some priority sectors (Anyiyang, 2012). Prominent among the preferred sectors were the agricultural, manufacturing and solid mineral sectors which were accorded priority and deposit money banks were directed to charge preferential interest rates on all loans to encourage the upsurge of small-scale industrialization which is a catalyst for economic development (Udoka, 2000). However, rising interest rate over the last three years have started to hurt the Nigerian economy. Thus it is necessary to establish the link also between interest rate and economic growth in Nigeria.
Exchange rate management has been a topical issue among academics and policy makers for a very long time (Azeez & Kolapo, 2012). Exchange rate has been defined as the price of one currency in terms of another (Mordi, 2006). The increase or decrease of real exchange rate indicates strength and weakness of currency in relation to foreign currency and it is a standard for illustrating the competitiveness of domestic industries in the world market (Razazadehkarsalari, Haghiri & Behrooznia, 2011). In Nigeria and indeed any developing country, the price of foreign exchange plays a critical role in the ability of the economy to attain optimal levels in production activities (Rasaq, 2013). Rapid or persistent growth is likely to involve positive changes in the nature of economic activity which exchange rate fluctuation could encourage (Okorontah & Odoemena, 2016). However, negative fluctuations in the exchange rate of a country can hamper economic growth. It is therefore imperative to study the relationship between exchange rate and the economic growth in Nigeria.
It is a widely accepted view in economics that the growth rate measured by the GDP of an economy increases employment and reduces unemployment (Fuad, 2011). However, unemployment and slow growth continues to be two of the major challenges facing every country regardless of the state of their economic and social development (Madito & Khumalo, 2014). While the level of unemployment affects the rate of GDP-Growth, it also serves as an indicator of the country’s state of the economy as it indicate how well the economy utilizes its resources (Madito & Khumalo, 2014). Achieving a low level of unemployment rate is therefore one of the goals of many governments in the world which is also one of the policy goals of the Nigerian government, as it is believed that this can help attain a better level of growth in the country.
The focus of this research work therefore is to examine the extent to which macroeconomic factors affect the rate of economic growth in Nigeria. It should be noted that changes in macroeconomic conditions affect the performance of the economy as a whole and thus a nation’s financial health. It is therefore very important to ascertain the link between these macroeconomic conditions and economic growth.