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EFFECT OF INFLATION ON CONSUMPTION PATTERN OF FARMING HOUSEHOLD IN NIGERIA

Abstract

This study investigates the effect of inflation on consumption pattern on farming household in Nigeria. The Nigerian economy had faced with inflationary trends over the years and the various government policies to deal with it eluded long- term solution needed to bring about increased living standard of the Nigerian citizenry. Hence, the need for an investigation into the multi-dimensional and dynamic factors that affect inflation with the view to make appropriate recommendations to curbing it. From the study, it was revealed that all explanatory variables (fiscal deficits, money supply, interest and exchange rates) significantly and positively impacted on the rate of inflation in Nigeria during the period under review. The explanatory variables accounted for 72% of the variation in inflation during the period with the error terms capturing 28% of the variation. This research contributes to the idea that the causes of inflation in Nigeria are multi-dimensional and dynamic, requiring full knowledge at any point in time to be able to proffer solutions to the inflationary trends in the country to lead to high productivity and increased living standard of the citizenry.

CHAPTER ONE: INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Increase in price level has always been compelling problem to both policy makers and the entire Nigerian citizenry. There is perhaps more debate on the question of prices than any other issue these days. This is not surprising since depending on which side of transaction an individual is on he/ she finds his welfare adversely or beneficially affected by a movement in one or more prices. The fact that price level leads to a fall in the standard of living, unpredictability of government policy actions and of macroeconomic relationships is no more an issue of dispute.

Adejoke (2013) opined that ’’the consequence of inflation can easily be inferred. Given constant set of prices today, a situation of relatively much more chasing the same bundle of goods and services tomorrow with constant real wage income simply implies adjustment in consumption patterns. The same bundle of goods and services consumed today cannot therefore be consumed tomorrow. Hence a decrease in consumption capacity and standard of living is imminent’’.

A great deal of evidence suggests that inflation is detrimental in the long run to economic growth. Specifically, the interest in understanding the inflation process across countries and how to control it derives mainly from its key economic costs that include: erosion of standard of living, distortion of the economic decision-making of private agent with regard to investment, saving and production that ultimately leads to slower economic growth Oluwaseyi (2013).

Price can be observed as an aggregate that has close interface and a continuous relation with real macroeconomic aggregate. Also, price increase in one sector of an economy can easily be transmitted to other sectors. And most often, the responsiveness of other sector may not be entirely proportionate. Given this inter-relationship therefore, an accurate evaluation of effects of government policy measures on diverse sectors and aggregate vis-à-vis inflationary consequences cannot be adequately and readily ascertained. It is within this context that the present study becomes highly important.

The persistent increase in general price level in Nigeria in the last two decades has posed a major challenge on monetary management yet a systematic macroeconomic account of the underlying shocks has attracted scant attention in the empirical literature. In addition, to achieve and maintain low inflation, Central Banks need to understand the dynamic nature of inflationary processes in their respective countries. These include the type of shocks that cause inflationary impulses and the nature of propagation mechanism.

Also, the persistent poor performance of the Nigerian economy as captured by the growth rate of real Gross Domestic Product (GDP) in the presence of high inflationary levels provides another key justification for this study. Therefore, there is need to assess the dynamics of inflation rate relative to real output growth rate in Nigeria.

There is no doubt that the past Jonathan administration has scored good marks in the area of agriculture. Former Minister of Agriculture and Rural development, Dr. Akinwumi Adesina, who superintends the sector at the national level, has driven the Federal Government’s transformation policy in the sector.

However, recent developments, especially the frequent clashes between herdsmen and farmers in the predominantly farming areas of the Middle Belt region which has resulted in the destruction of lives and farmlands, have become a major threat to efforts to boost food production. From Benue to Taraba, Nasarawa and Plateau in the North Central region and Zamfara and Kaduna States in the North West, clashes between farmers and herdsmen have left in its trail heavy losses of lives and property.

These losses of lives have adversely affected farming activities and other related businesses. This has resulted in a drastic reduction in farm outputs, a development that has heightened the fear of hunger. Already most farmers in the affected states have abandoned farms for fear of being attacked by the herdsmen.

For the predominantly farming communities of Benue and border communities of Nasarawa and Taraba states, farming is no longer business as usual. Several farmers have been displaced and dispossessed of their farms by armed men believed to be Fulani herdsmen. Agricultural and development experts are unanimous in their predictions that the gains recorded in the agricultural sector of the economy, especially in the area of food production, may suffer a serious setback as a result of the negative effects of terrorist activities on farmers in Benue and neighbouring states. The effects of the sustained Fulani war in the affected localities have led to farmers’ reluctance to go back to their farms even as the current farming season is far gone. Osagie (2013)

Nowadays, soaring food prices in major cities across the Nigerian states are being reported with adverse impact on household budgets. The Boko Haram insurgency in the North-east and pockets of conflicts in some states where basic food items for the nation come from are making food commodity prices to rise for a range of foodstuffs, from beef to fruits and vegetables, thus squeezing consumers still struggling with modest wages.

It is axiomatic to posit that the Northern region of the country has remained a major source of food supply to other parts of the country, especially the South. To be sure, about 90 percent of food items consumed in Lagos and other South-west states come from the North. For example, Ketu, Mile 12 and Oyingbo markets in Lagos, all get supplies from the North on a daily basis as countless trucks are seen unloading quantities of onions, tomatoes, pepper, fruits, potatoes, yams, vegetables and the likes at these markets. But this is no longer the case as the general insecurity in the Northern part of Nigeria is adversely affecting farmers in the area. Fewer trucks now come down to the South these days, because of the crisis and this is having its effects on prices of food. The effects of the crisis in the North is already being felt, not only by the consumers but the traders as well who depend on supplies from the North for their business.

Expectedly, the cost of foodstuffs, especially pepper and tomatoes has hit the roof. Housewives now complain that N500.00 worth of pepper for instance is no longer enough for a pot of soup for a family of four. While transporters are afraid to go to the North because of insecurity, Northern farmers are groaning too as traders from the South have not been going up North to buy the produce. Most crop farmers and those dealing in livestock in the North are fleeing their land en masse and migrating to neighbouring countries because of the crisis Osagie (2013). In September 2013, the Food and Agricultural Organisation of the United Nations (FAO) had warned that Sahel States in Northern Nigeria as are faced with severe food insecurity. The release mentions, “Poor families have used up their food stocks and are facing high food prices awaiting the next harvest.” Alarmingly, it points out that over 1.4 million children in the region are at risk of severe malnutrition in 2013. In certain products regrettably, the country’s ambitious Agricultural Transformation Agenda (ATA) seems to have been hijacked by unscrupulous operators across the country’s borders.

Therefore, this study is an effort to understand the possible effect of inflation on consumption pattern of farming on household in Nigeria. However, the problem that the research intends to study is to ascertain how inflation has affected the consumption pattern of farming on household goods viz -a- viz trying to proffer possible solutions to the problem of inflation.

1.2 STATEMENT OF THE PROBLEM

Since mid-1960s, inflation has become so serious and contentions a problem so serious and contentious a problem in Nigeria. Though inflation rate is not new in the Nigerian economic history, the recent rates of inflation have been a cause of great concern to many. During the period under review (1981–2014), there has been an upsurge in the inflationary rates leading to major economic distortions. The continued over valuation of the naira in 1980, even after the collapse of the oil boom engendered significant economic distortions in production and consumption as there was a high rate of dependence on import which led to balance of payment deficits. This resulted to taking loans to finance such deficits. An example was the Paris Club loan, which was a mere Five Billion, Thirty nine million dollars ($5.39billion) in 1983 rose to twenty one billion, six million dollars ($21.6billion) in 1999 (CBN 2001) The oil glut from 1981, that resulted into balance of payment deficits also led to foreign exchange crises that necessitated various measures of import restrictions.

These restrictions reduced raw materials for domestic production and spare parts for machinery operation. The resultant shortage of goods and services for local consumption spurred the inflation rate to rise from 20% in 1981 to 39.1% in 1984 (Itua, 2000). With the adoption of the Structural Adjustment Programme (SAP) in 1986, there was a temporal reduction in fiscal deficits as government removed subsidies and reduced her involvement in the economy. But as the effects of the Structural Adjustment Programme (SAP) policies gathered momentum, there was a fall in the growth rate of Gross Domestic Product (GDP) in 1990 from 8.3% to 1.2% in 1994, with inflation rising from 7.5% (1990) to 57.0% (1994) Again, the devaluation of the naira by the Central Bank of Nigeria (CBN) through the Second Tier Foreign Exchange Market (SFEM) led to a fall in agricultural outputs as machines and raw materials (mostly imported) were out of reach.

The devaluation reduced the aggregate real income and aggregate demand and at the same time raised the naira prices of goods whose production depended heavily on imported goods. Thus, unsold inventories accumulated in the face of consumer revolt. In this circumstance, the National Income (NI) fell and the price level rose (Osagie, 1989). In 1995, inflation rate rose to 72.8% due to increased lending rate, the policy of guided deregulation and the lagged impact of fiscal indiscipline. In addition to her contemporary fiscal and monetary policies, the Nigerian government had implemented various other policies aimed at curbing inflation in the country. One of such policies was the price policy (price control) in 1971 meant to control the soaring prices of essential goods but abolished in 1980 for its ineffectiveness resulting from the severe shortages witnessed during the oil glut in Nigeria (Udu, 1989).

The Economic Recovery Emergency Fund of 1986 where one percent (1%) of workers’ salaries was deducted monthly to build the funds was meant to curb inflationary trends in Nigeria. They gradually and greatly reduced the purchasing power of the working class. But the policy measures failed as the prices of goods and the profits of corporate bodies were not controlled. Therefore, as prices rose, the labour unions agitated for higher wages resulting in further higher prices (Agba 1994).

More so, various agricultural programmes like the “Operation Feed the Nation” and the “Green Revolution” where implemented to boost output to reduce prices of food items but yielded minimal results. Notwithstanding the various efforts of the Nigerian government to curb the inflationary trend, inflation continued to cause setback in the growth rate of the living standard of most Nigerians who are fixed income earners or unemployed (Agba, 1994). Inflation has had adverse effects on savings, investment, productivity and balance of payment in the Nigerian economy, hence the fall in the growth rate of the Gross Domestic Product (GDP) from 26.8% (1981) to 5.4% (2000) and 3.5% (2002).

The above explanations raise some research questions: (i) do the inflationary trends in Nigeria depend on the fiscal deficits? (ii) Is money supply a determinant of inflation in Nigeria? (iii) Does the real exchange rate determine inflationary trends in the Nigerian economy? and (iv) how does interest rate determine the inflation rate in Nigeria?

This study has been able to identify the fact that despite the various policies/programmes of the present governments to curb the inflation menace in Nigeria, it has continued to defile solution due to the fact that the sources of the inflationary trends are multi-dimensional and dynamic. As such, to be able to curb its menace, indebt knowledge of these multi-dimensional and dynamic sources is required. Therefore, the study is intended to x-ray these (multi-dimensional and dynamic) sources for a lasting solution to the inflationary trends as it affect consumption pattern of farming household in Nigeria nation.

1.4 RESEARCH QUESTIONS

This study provided answers to the following questions:

1. What is the level of consumption pattern of farming household in Nigeria?

2. Is there any correlation between inflation and consumptions of goods and services in Nigeria?

3. How has inflationary rate negatively impaired the Nigeria economy?

4. Is there a general price increase on consumables in Nigeria?

1.5 OBJECTIVES OF THE STUDY

The major objective of the study was to assess the effect of inflation on consumption pattern of farming household in Nigeria. However, the specific objectives on the other hand are:

a. ascertainment of the level of consumption pattern of farming household items in Nigeria.

b. determine the extent to which inflation has affected consumption of farming household items.

c. to found out the causes of inflation on the prices of goods and services in Nigeria.

d. identify the challenges poses by the general increase in the prices household items.

1.6 HYPOTHESES OF THE STUDY

The relevant research hypotheses for this study are specified in null forms as follow:

H01: There is no significant partial adjustment process of the dynamics of inflation rate in Nigeria.

H02: Broad money supply growth rate does not significantly influence inflation rate in Nigeria.

H03: There is no relationship between inflation and consumption pattern of farming household in Nigeria.

1.7 DEFINITION OF UNFAMILIAR TERMS

The following unfamiliar terms are defined either as generically used in the field of study:

Inflation – it is a sustained increase in the general price of goods and services in an economy over a period of time.

Consumption pattern – is the combination of qualities, quantities, acts and tendencies characterizing a community or a human group’s use of resources for survival, comfort and enjoyment

Farming – is growing crops or keeping animals by people for food and raw materials.

Household – it consist of one or more people who live the same dwelling and also share at meals or living accommodation and may consist of a single family or some other grouping of people.

1.8 SIGNIFICANCE OF THE STUDY

Why has inflation continued to rise despite the substantial increase in the nation’s GDP? Is it that successive governments neglected the issue of unemployment and inflation or has the problems defied all economic theories? These are questions that need immediate answers, because inflation on consumption pattern of farming of farming household in Nigeria is one of the current issues that is affecting our country and which is being discussed by both experts and lay-men alike.

Therefore, this study will be of paramount importance to economic decision-makers, as it will equip them with the knowledge and skills needed to tackle the pressing issue of inflation in our country. Also, to those who would like to carry out further research on this topic, it would be of valuable help in the course of their research.

1.9 METHODOLOGY

The method used to conduct this study was discussed under the following subheading: research methodology, research design, research instruments, validity and reliability test and method of data presentation and analysis

1.10 DATA SOURCES

The time series data required for this study (inflation rate, real Gross Domestic Product (RGDP), broad money supply, fiscal deficit, interest rate, and exchange rate of naira vis-à-vis U.S dollar) were sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin, December 2014 and Annual Abstract of Statistics from National Bureau of Statistics (NBS).

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Full Project – EFFECT OF INFLATION ON CONSUMPTION PATTERN OF FARMING HOUSEHOLD IN NIGERIA

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