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Project Topic: The Impact of Money Supply on Inflation in Nigeria (1990 – 2007)


 Over the years, inflation has been a major economic problem that has been eating deep into the various sectors of the economy of Nigeria. The standard of living of the people has also been affected badly. This study is aimed at assessing the impact of money supply on inflation. The various monetary instrument used in regulating money supply were considered. In order to achieve the aim of this study, only secondary source of data collection was used. The data were extracted from journals, text books, newspapers, etc. The research department of central bank of Nigeria, Enugu zonal office was of immense help in this regard. The results gotten were systematically presented in tables while hypothesis raised was verified using regression analysis. The research revealed that money supply fluctuations has contributed to inflationary trend and when effectively regulated can curb the inflation. However, this ability has been hampered by factors such as; fiscal deficit financing by government through credits extension by CBN, lack of adequate autonomy of CBN, occasional non-compliance by banks to CBN guidelines. Recommendations such as minimizing or eliminating fiscal deficit, giving CBN full autonomy in every sense of it for effective operations to be provided.




Inflation has been a worldwide economic problem over the years. It is difficult to point out any country that has not felt this problem at varying degrees and at one time or the other. From Europe to America and from America to Asia and Africa, it is a common experience though at varying degrees.

From the account of Samuelson (1980:255-259), economic history tells of the hyper-inflation that took place in Germany (1920-1923). Countries like China, Hungary, Argentina, Brazil and Chile were not spared. Inflation distorts economic activities, causes uncertainty in the conduct of business activities and affects some group in the case of unforeseen inflation which tends to favour debtors and profit receivers at the expense of creditors and fixed-income receivers. The resultant distortional effect in the economy may inhibit the attainment of other economic objectives. The containment of inflation to an acceptable low level is the primary aim of government. The eradication of inflation entirely is a rare objective of government since as we shall see later; the achievement of such objective would hinder the attainment of the objectives.

It is expedient at this point to understand the meaning of inflation in order to be well prepared to appreciate the impact of money supply, the manipulation of money supply by government through her agencies like the Central Bank of Nigeria.

Hagger (1977:1) is of the view that inflation has been given various definitions by different economists. Inflation is generally used to describe a situation of rapid, persistent and unacceptable rise in the general price level in the economy resulting to a general loss of purchasing power of the currency. Some specialists have defined inflation to reflect the different types of inflation.

However, the researcher prefers to simply define inflation as a situation of persistent upward movement in the general price level. Similarly, inflationary period means a time of generally rising prices for goods and factors of production. Looking at the causes of inflation in Nigeria, the following factors are easily recognizable among other factors.

  1. The level of money supply
  2. The nature of government spending
  3. Deregulation of petroleum product prices with the resultant effect on cost of production
  4. Fluctuation in the supply of agricultural products whereby in periods of shortage/scarcity prices will go up
  5. Strong influence of imported inflation

There are about three approaches in measuring inflation.

They includes the following

  1. Implicit Price Index (IPI)
  2. Consumer Price Index (CPI)
  3. Wholesale Price Index (WPI)

A price index makes it easier to determine the actual effect of inflation on general price level. In Nigeria, inflation rates are measured with the Consumer Price Index (CPI).

Having made this introduction on inflation as an economic problem that requires serious attention and solution, it is proper here to briefly introduce the issue of money supply.

Money supply which is also referred to as money stock is regarded as the total value of money in the economy and this consist of currency (notes and coins) and deposits with the commercial and Merchant Banks. In Nigeria, there are two variants of money supply – M1, M2.

M1 is the narrow measure of money supply which includes currency in circulation with the non-bank and demand deposits (i.e. current account) at the commercial banks. M2 is the broad measure of money supply and includes M1 and savings and time deposits at the Commercial and Merchant Banks. Savings and time deposits are also called quasi money. M2, measures total liquidity in the economy. Excess liquidity is the amount of liquidity over and above the optimum level of liquidity determined by the level of output and prices according to Phillips (1992:5).

From the stand point of Samuelson (1980:270), all school of economics today agrees that changes in the supply of money are important for macroeconomics. In order to influence the level of money supply, various stabilization policies have been adopted by the government through her agencies (e.g. Central Bank of Nigeria) to control inflation via money supply adjustments.

Generally, these policies regarded as stabilization policies include the following according to Anyanwaokoro (1999:141)   (i) monetary policies (ii) fiscal policy and (iii) physical policy.

Fiscal policy concerns itself with the use of government spending and taxation to solve economic problem like inflation through its influence on money supply.

Physical policy refers to the sue of force or direct control e.g. the use of price control and setting up of government task forces as a means of dealing on economic issue like price stability. This policy though applied in Nigeria in the past was not very popular because it promoted illegal and secret dealings otherwise known as “black market”.

Monetary policy on the other land tries to solve economic problems by the manipulation of money supply and interest rate. Monetary policy has continually been used by the central Bank of Nigeria to control the amount of money in circulation and at the same time reduce the price of goods and services in the economy. The monetary policy instruments used in Nigeria can be classified briefly as follows:

  1. Direct Tools of Monetary Control
    1. Interest rate policy
    2. Directives
    3. Moral suasion
    4. Stabilization securities

      2. Indirect or Market Based Tools of Monetary Control

  1. Open market operation
  2. Reserve requirement
  3. Discount rate policy

Apart from influencing the level of money supply, these monetary policy instruments serves as a guide to the banks in channeling their credit to different sectors of the economy. This is done to ensure that the proffered or more productive sectors of the economy are given priority in the allocation of bank credits and that such sectors are assisted to increase the output of essential goods and services.

It should be noted however that the decision to regulate the expansion in the aggregate loans and advances of banks is on the realization that uncontrolled and unregulated expansion in banks’ loans and advances could tend to influence inflationary pressures in the economy.

However, the current deregulation of the economy does not mean that the monetary authorities have removed their hands from the system entirely. They actually monitor the various variables in one way or the other so as to make the achievement of set target possible. Under a deregulation policy, market forces play a decisive role.


Over the years, inflation has been a major economic problem that has drastically affected almost every sector of the economy of Nigeria. The inability of the government to judiciously and dexterously manage and regulate the supply of money has also affected critically the standard of living of the people of Nigeria.

The consistent upward movement of money supply (M1 and M2) was attributed partly to the mode of financing government deficit which usually induce monetary expansion, exchange rate depreciation and rising inflation; CBN (1994:17) currently, inflation is doubt-digit and the surplus naira in circulation, scarcity of food and fuel are part of the problem. And the economic team appeared not to have the tools to building a viable economy where local resources would enhance economic growth. This is a preview of difficult times ahead if nothing serious is done to fame money supply and inflation in Nigeria.

The government through her monetary authority (i.e. Central Bank of Nigeria) faces the task of formulation and implementation of the monetary policies with the view of controlling or directing the level of money supply among other objectives. Bearing in mind the fact that any error in either the formulation or implementation of the policy usually gives rise to a negative multiplier effect n every facet of the economy, the task becomes an onerous one.

The issue of effectiveness of these monetary instruments used by CBN requires some attention. This is borne from the fact that inflationary trend over the years has not shown satisfactory result. This study is undertaken to examine the impact of money supply on inflation in Nigeria over the 1990-2007 period.


The following questions are put forward for the purpose of the study.

  1. How has the volume of money supply affected the inflation rate in Nigeria?
  2. How effective has the monetary policy instruments been in regulating the level of money supply?


In the light of the problems identified in the proceeding section, the objectives of research are as follows:

To determine the impact of money supply and the rate of inflation in Nigeria over the 1990-2007 period.

To determine the extend of effectiveness of monetary policy instruments in regulating the level of money supply in Nigeria during the period 1990-2007.


In this research, the following hypothesis has been stipulated.

  1. Ho: The volume of M2 (money supply) does not affect the inflation rate in Nigeria


The scope of this study is mainly on the Nigeria economy. However, reference could be made to other economies where it is deemed necessary for better comprehension of issues discussed. The study therefore covers issues on money supply, inflation, various instrument used to regulate money supply with the aim of influencing inflation among other objectives.

The scarcity of current data may limit the research to the period relevant data are available and accessible.

Finally, due to demand by other academic engagement, the time allotted to this study was relatively short for the intention of the research.


The importance of this study can not be over-emphasized. The knowledge of the fact that an inflationary period is a discomforting time makes this study one that attracts high level of attention.

The exposition will assist the policy makers especially the Federal Government and the Central Bank of Nigeria in knowing the effect of these policies and how best to apply them to the bank and other financial institutions in combating inflation in the country.

It will equally assist them in making necessary reviews (from time to time) that will keep the inflationary rate at an acceptable level.

This study will also arouse the concern of the banks in acting with higher degree of seriousness in the implantation of stipulated policies of the supervising authority with the help of identified problems and constraints, the policy makers will be in position to know possible avenue for improvement.

Ultimately, the society at large will benefit when possible solutions are adopted and implemented.

—This article is incomplete———–This article is incomplete———— It was extracted from a well articulated quality Project, Research Work/Material

Project Topic: The Impact of Money Supply on Inflation in Nigeria (1990 – 2007)

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