EFFECTS OF INFLATION ON INVESTMENT IN NIGERIA, 1987-2011

EFFECTS OF INFLATION ON INVESTMENT IN NIGERIA, 1987-2011

ABSTRACT

Economists tend to emphasize that inflation causes economic damage by distorting investments and consumption decisions. These distortions could result from households and businesses’ uncertainty about the effect of increases in prices of goods and services. When inflation is stable, people are likely to have the same anticipation of its future level, however, when inflation is volatile, future expectations will be uncertain thereby hindering the ability to forecast with certainty. Investment is an indispensable aspect of any economy as it drives the productive sectors of the economy, however, the confidence to invest is eroded in at an atmosphere of uncertainty in future prices of goods and services as a result of inflation, it poses economic problem to that economy. The problem posed by inflation on investment affects both the private and public sectors of the economy. It triggers prices of goods and services if not properly managed as well as reduce the zeal for investment; it increases the cost of doing business such as increases in transaction cost, information cost and these inhibit economic growth and development. It is against this background that this study examined; the impact of inflation on core credit to the private sector of the Nigerian economy, the impact of inflation on foreign exchange availability for private sector investment in the Nigerian economy, the impact of inflation on non-infrastructural investment of the public sector of the Nigerian economy and the impact of inflation on infrastructural investment of the public sector of the Nigerian economy. Time series data for 25years, 1987-2011 were collated from Central Bank of Nigeria published annual reports and statistical bulletin for the country aggregate data.  Four hypotheses were formulated and the least square (LS) regression was used to estimate the effects of Inflation on Investment in Nigeria. The annual rate of inflation was adopted as the independent variable for the four hypotheses while dependent variables were Core Credit to the Private Sector, Foreign Exchange for Import, Non-infrastructural Investment and Infrastructural Investment for the four hypotheses. The findings from the study revealed inflation has negative and non-significant impact on the core credit to private sector in Nigeria (coefficient of inf = -1.216, t-value = – 0.948). Inflation has positive and non-significant impact on the foreign exchange availability in Nigeria (coefficient of inf = 0.013, t-value = 0.291). Inflation has negative and non-significant impact on the non-infrastructural investment in Nigeria (coefficient of inf = -0.33, t-value = – 1.107). Inflation had negative and significant impact on infrastructural investment (coefficient of inf = -0.386, t-value = -3.637). The study thus recommends among others that monetary policy authorities should ensure that policies that will assist in maintaining a stable general price level are pursued. This will guarantee a steady growth in Nigeria.