Impressively however inflation turned out to be in a

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high monetization of the economy and thus real GDP growth which in turn causes high inflation. Impressively, however, inflation turned out to be in a single digit in 2006 and 2007 but rose sharply to 15.10 per cent in 2008 which is a hindrance to the proposed inflation targeting. Figure 1 depicts the movement of real GDP, gross capital formation, money supply and inflation from 1970 to 2008. It is apparent that real GDP had been quite low in the 1970s up to the early 1980s which may be attributable to positive global crude oil price increase which increased the country’s foreign exchange earnings and thus led to a huge fiscal expansion that in turn had a burgeoning effect on the total value of goods and services in the country. Towards the mid 1980s to the end of the decade, gross domestic product took an upward trend albeit slight fluctuations. Furthermore, the chart indicates contrary to theory, a persistent divergence between the two variables up to the mid 1990s when a co-movement between growth in money stock and the rate of inflation is witnessed, as suggested apriori. This is particularly discernible precisely from the periods 1999 to 2003. From the graphic representation, it is also apparent that inflation responds to the growth in the broad money stock with a lag. Visual inspection of
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Money Supply, Inflation and Economic Growth in Nigeria 151 the chart suggests that in the early 1980s, headline inflation responded to changes in money stock after about a quarter. Thereafter, the lag varies ranging usually between two to three quarters between the late 1980s and the mid-1990s. Beginning from 1997, both variables record high frequency changes making co-movement less apparent. Further perusal of the chart reveals that, during this period inflation responded to changes in money stock at different paces. The Nigerian economy prior to the global economic slowdown in 2007 performed below projection, with an estimated GDP growth of 6.2 per cent 4 . This figure, below the set target of 10%, was still higher than the 6.0 per cent recorded in 2006. This growth was driven primarily by the non-oil sector, which grew by 9.6 per cent (CBN, 2008), largely attributable to the agriculture sector, which grew by 7.4 per cent, led by crop production, livestock and fishing. Other drivers of growth in non-oil GDP included wholesale and retail trade, building and construction and services, which recorded growth rates of 15.3 per cent, 13.0 per cent and 9.8 per cent, respectively. Industrial output fell by 3.5 per cent, attributable mainly to the 5.9 per cent drop in crude oil production occasioned by the Niger Delta crisis. By year-end 2007, the crude oil production shut-in stood at 0.9 million barrels a day. Official confirmation from the Nigerian National Petroleum Company (NNPC) showed that the country lost N16.9 billion to petroleum pipeline vandalism. There is a veritably traceable connect between money and prices. Although this link is known to many central banks, emphasis has remained much more faddishly on other variables as targets rather than money supply itself. It is expected that the focus of monetary policy should be on the management of the primary source of inflation which in itself is unrestricted fiscal, monetary and credit expansion by the government using the instrumentality of the bank.
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