CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Inflation, a sustained rise in the general price level, is widely regarded as a threat to long-term growth, and one of the main ways it harms growth is through its effect on investment. Investment is a central driver of long-run growth, and a stable macroeconomic environment supports it by giving private investors a predictable setting in which to plan. High and volatile inflation undermines that predictability. Several mechanisms are usually cited. Economies that have not adjusted to a given rate of inflation suffer relative price distortions. Where nominal interest rates are controlled, real rates become negative and volatile, which discourages saving. Exchange rates tend to lag behind domestic prices, so that real exchange rates swing. Tax collections, based on past nominal incomes, fail to keep pace with prices (the Tanzi effect), which widens fiscal deficits and can squeeze public investment. Above all, uncertainty about future inflation lowers the efficiency of investment and discourages potential investors, who may delay commitments until the uncertainty is resolved.

Recent Nigerian evidence is consistent with this view. Bitrus (2025) examined the effect of monetary policy on private sector investment using data for 1981 to 2023 and found that both the exchange rate and inflation had negative and significant long-run effects on private investment, while the money supply had a significant positive effect. His threshold analysis also indicated that lending rates above about 28 per cent were harmful to investment. Onoh et al. (2026), studying 1990 to 2024, found that inflation had a negative and statistically significant long-run effect on foreign direct investment, because sustained price instability erodes real returns and raises uncertainty. Mogbeyiteren and Abina (2024) found that public capital expenditure had a delayed but positive and significant effect on growth, whereas credit to the private sector showed a negative and significant relationship at a three-year lag, which they interpreted as pointing to difficulties in the credit channel. Together these studies suggest that inflation, credit conditions and public investment are closely linked in Nigeria.

Several factors drive inflation in Nigeria, including excess demand, rising production costs, limited output and monetary expansion. The practical concern of households is whether their incomes keep pace with their expenses, of businesses whether the prices of their products keep pace with their costs, and of government how to keep inflation low while administering policy effectively. The Central Bank of Nigeria (CBN) has price stability as its main policy objective. Recent experience shows how large the swings can be. Headline inflation fell from 34.80 per cent in December 2024 to 15.15 per cent in December 2025, according to National Bureau of Statistics data (Hallmark News, 2026). Yet the Monetary Policy Committee noted in November 2025 that inflation remained at double-digit levels even as it decelerated, and it kept the Monetary Policy Rate at 27.0 per cent (CBN, 2025b). Earlier in 2025 the Committee had also pointed to the effects of recent exchange market reforms (CBN, 2025a).

Studies of how inflation affects investment in Nigeria remain comparatively few, and most examine a single channel, such as private investment alone (Bitrus, 2025) or foreign direct investment alone (Onoh et al., 2026). Given continued efforts to attract investors and the importance of price stability to the CBN, there is a case for examining the effect of inflation on several types of investment at once. This study therefore examines the impact of inflation on private credit, foreign exchange availability and public investment in Nigeria.

1.2 Statement of the Problem

Inflation affects the private sector, government and households, directly and indirectly. It raises transaction and information costs, which inhibit growth and development. When inflation makes nominal values uncertain, investment planning becomes difficult, and individuals and firms become reluctant to enter long-term contracts because relative prices cannot be predicted. This reluctance reduces investment, with adverse effects on growth. Inflation also reduces the real return on assets, discourages saving and weakens returns on investment, and recent Nigerian evidence confirms a negative long-run effect on private investment (Bitrus, 2025).

Inflation can also affect investment through the banking system by reducing the credit available to businesses. A higher inflation rate lowers the real return on assets. Lower real returns discourage saving but encourage borrowing, so that new borrowers entering the market tend to be of lower quality and more likely to default. Banks, unable to separate good borrowers from bad, may respond by rationing credit, and simply raising nominal interest rates can make the problem worse by driving low-risk borrowers out of the market. Where interest rate ceilings exist, raising rates may not even be possible. Recent studies show how severe the borrowing environment has become: Bitrus (2025) identifies persistent inflation, scarcity of foreign exchange and high lending rates as serious concerns for private sector performance.

Whatever its cause, persistent inflation weakens the intermediation function of financial institutions, lowers investment and, with it, present and future productivity and real economic activity. Public investment is also at risk, since delayed effects of capital expenditure on growth (Mogbeyiteren & Abina, 2024) can be eroded when rising costs reduce what each unit of spending can deliver. It is against this background that the study investigates the effect of inflation on investment in Nigeria.

1.3 Objectives of the Study

The main objective is to investigate the impact of inflation on investment in Nigeria. The specific objectives are to examine the impact of inflation on:

1. core credit to the private sector of the Nigerian economy;
2. foreign exchange availability for private sector investment;
3. non-infrastructural investment by the public sector; and
4. infrastructural investment by the public sector.

1.4 Research Questions

The following research questions guide the analysis:

1. To what extent does inflation affect core credit granted to the private sector for investment in Nigeria?
2. To what extent does inflation affect foreign exchange availability to the private sector for investment in Nigeria?
3. To what extent does inflation affect non-infrastructural investment by the public sector in Nigeria?
4. To what extent does inflation affect infrastructural investment by the public sector in Nigeria?

1.5 Research Hypotheses

The following null hypotheses are tested:

1. H01: Inflation has no significant effect on core credit granted to the private sector for investment in Nigeria.
2. H02: Inflation has no significant effect on foreign exchange availability to the private sector for investment in Nigeria.
3. H03: Inflation has no significant effect on non-infrastructural investment by the public sector in Nigeria.
4. H04: Inflation has no significant effect on infrastructural investment by the public sector in Nigeria.

1.6 Significance of the Study

The study will benefit the following groups.

Investors. It will help investors understand how inflation affects returns and build portfolios that can withstand rising prices.

Firms. Businesses can use the findings to make investment decisions that protect or improve profitability.

Government. It will give government information on how inflation affects public investment, supporting decisions on where to direct spending and how to protect the real value of capital projects.

Monetary authorities. It will give the CBN and related agencies basic evidence for designing policies that contain inflation and so promote growth and development.

Researchers. It will add to the literature on inflation and investment in Nigeria and serve as reference material.

General public. It will inform decisions about saving, investment and consumption in an inflationary environment.

1.7 Scope of the Study

The study covers 2000 to 2024. This is the most recent 25-year period for which complete annual data are available, and it lies wholly within the era in which prices are determined largely by market forces following liberalisation. It also spans the exchange market and monetary policy adjustments of 2023 to 2025, during which inflation reached its highest levels in decades before easing (Hallmark News, 2026). The analysis is confined to the effect of inflation on investment, as measured by private sector credit, foreign exchange availability and public investment.

1.8 Operational Definition of Terms

Inflation: A continuous and persistent rise in the general level of prices of goods and services in an economy over a period of time.

Investment: The commitment of money or capital to real or financial assets in order to earn a return, whether as interest, dividends or capital gains.

Gross domestic product (GDP): The total value of goods and services produced within a country in a given year.

Deflation: A continuous and persistent fall in the general level of prices, often caused by a contraction in the supply of money or credit.

Inflationary expectations: The beliefs of economic agents that inflation will occur in the future.

GDP price index (deflator): A price index covering all the goods and services that make up GDP, used to convert nominal GDP into real GDP.

Nominal GDP: The value of GDP measured at current prices, without adjusting for inflation.

Real GDP: The value of GDP after adjusting for inflation.

Financial assets: Intangible assets that give the holder a claim on the income from real assets, such as shares and bonds.

Real assets: Tangible assets such as land, buildings, machinery and plant.

REFERENCES

Bitrus, G. (2025). Impact of monetary policy on private sector investment in Nigeria. ADSU International Journal of Applied Economics, Finance and Management, 10(1). https://ajaefm.adsu.edu.ng/index.php/journals/article/view/138

Central Bank of Nigeria. (2025a). Monetary policy communiqué No. 156 (20 February 2025). https://www.cbn.gov.ng/Out/2025/CCD/Central_Bank_of_Nigeria_Comminique_No.156_20_February_2025.pdf

Central Bank of Nigeria. (2025b). Monetary policy communiqué No. 160 (25 November 2025). https://www.cbn.gov.ng/Out/2025/CCD/MPC%20Communique%20No.%20160%20%20November%2025%202025.pdf

Hallmark News. (2026, April). Nigeria's poverty rate climbs to 63% despite falling inflation – World Bank [Report citing National Bureau of Statistics inflation data]. https://hallmarknews.com/nigerias-poverty-rate-climbs-to-63-despite-falling-inflation-world-bank/

Mogbeyiteren, O. L. B., & Abina, A. P. (2024). Public and private sector expenditure and Nigeria's economic performance: An ARDL analysis. Journal of Capital Development in Behavioural Sciences, 12(2), 94–120. https://journals.lcu.edu.ng/index.php/JCDBS/article/view/1283

Onoh, C. F., Chimezie, C. D., & Zubair, Z. A. (2026). Inflation indicators and foreign direct investment in Nigeria: An empirical analysis of multiple price-level effects. Journal of Economic and Social Research, 12(2), 1–25. https://bsum.edu.ng/journals/jesr/vol12n2/article.php?id=345