The Impact Of Monetary Policy In Nigerian Economic Development
Chapter One
Introduction
1.1 Background of the Study
Monetary policy as a technique of economic management to bring about sustainable economic growth and development has been the pursuit of nations and form articulation on how money affects economic aggregates. In Nigeria, monetary policy has been used since the central bank of Nigeria was saddled with the responsibility of formulating and implementing monetary policy by the Federal Government of Nigeria. Since its establishment in 1959, the central bank of Nigeria has continued to play the traditional role expected of the central bank which is to promote their social welfare (Ajayi 1999). This role is anchored on the use of monetary policy that is usually targeted towards the achievement of future employment, rapid economic growth, price stability and external trade balance. The role by the central bank of Nigeria has facilitated the emergence of active money market like treasury bills,- a financial instrument used for open market operation and for raising debt for government which has grown in volume and value becoming a prominent earning asset for investors and source of balancing liquidity in the market. Over the years, the major goals of monetary policy have often been the two later objectives thus: inflation targeting and exchange rate policy has dominated CBN monetary policies focus based on assumption that they
are essential tools of achieving macro economic stability. The economic environment that gave monetary policy before 1986 was characterized by the dominance of the oil sector in order to maintain price and payment position. Monetary management depended on the rise of direct monetary instrument such as credit ceiling, selective credit controls, administered interest and exchange rate as well as the prescription of cash reserve requirement and special deposits. The use of market based instrument was not feasible at that points because of the under developed nature of the financial markets and the deliberate restraint on interest rates.
However an unstable or crisis ridden financial sector will render the transmission mechanism of monetary policy less effective, (the transmission mechanism of monetary policy is the channel through which monetary policy affects the maintenance of strong macro-economic fundamentals). This is because it is only a period of price stability that investors and consumers can interpret market signals correctly. In this period of high inflation, the horizon of the investors is very short and resources of the investors are short; also their resources are diverted from long-term investment to those with immediate speculation. It is on this background that this study would investigate the effectiveness of monetary policy in Nigeria with special focus on major growing components.
1.2 Statement of the Problem
Ensuring rapid economic growth is the major macro economic goal of every economy. Economic growth is simply defined as a quantitative increase in a country’s output of goods and services (Onwukwe, 2003).
Monetary policy is of importance to every developing nation. But despite the various monetary regimes that have been adopted by the central Bank of Nigeria, the country experienced high volatility in inflation rates. Since the early 1970’s there have been episodes of high inflation in excess of 30 percent. The growth was often in excess of real economic growth. However, preceding the growth in money supply, some factors reflecting the structural characteristics of the economy were famines, currency devaluation and changes in terms of trade.
The first period of inflation in the 30 percent range was in 1976. One of the factors often adduced from this inflation is the drought in Nigeria, which destroyed agricultural production and pushed up the cost of agricultural food items and significant increase in the proportion of the average consumer budget. In addition, during this period, there was excessive monetization of oil export revenue, which might have given the inflation of monetary character.
The inflationary episode occurred in 1993, and persisted through the end of 1995. Though inflation gathered momentum towards the tail end of 1992, it reached 57 percent by the end of 1994, the highest rates since the eighties and at the end of 1995, it was 72.5 percent. As the third inflation, coincided with a period of expansionary fiscal deficit and monetary supply growth, the authorities found it too difficult to contain the growth of private sector, domestic credit and bank liquidity. There has been a continuous fall in the inflation rate since 1996 as a result of stringent monetary policies of the Central Bank.
For this research to be worthwhile, the research is interested in these problems such as: does monetary policy have significant impact on economic growth?
1.3 Objective of the Study
The main objective of this study is to assess the effectiveness of the monetary policies of Nigeria. However, the following specific objective would also be achieved;
To evaluate the impact of monetary policy of Nigeria economic growth;
To assess the monetary policies in Nigeria.
1.4 Research Questions
1. Do monetary policies have significant impact on Nigeria’s economic growth?
2. What are the effects of monetary policies on Nigeria’s economy?
3. Is there a systematic relationship between money and economic growth?
1.5 Significance of the Study
The result of this research work will be beneficial to both financial and non-financial institutions. It will help to give necessary information on the policy options which the government of Nigeria should adopt to make the economy friendly and attractive to foreign investors.
Furthermore, the study will be significant to the private sector, foreign investors, and as well as the individuals, as it will inform them on the macro-economic conditions of the country thus, helping them in policy formulation.
Finally, the study will be added to the already existing body of knowledge in the field of economics.
1.6 Scope/Limitation of the Study
The economy is a large component with a lot of diversity and sometimes complex parts. This study will cover all the factors that make up the monetary policy but shall empirically investigate the effect of the major ones.
Nevertheless, many constraints were encountered in the course of this research work. They include:
Lack of relevant statistical data; some of the data needed for this research work were not in existence.
Time constraint; time has been a limiting factor in this research pursuance.
1.7 Organization of the Study
This project is organized into five chapters. Chapter one deals with the introduction of the research project. Chapter two covers the review of related literature. Research methodology used in this study is explained in chapter three. Chapter four highlights data presentation, analysis and interpretation while chapter five discusses the findings, conclusions and recommendations made.
1.8 Definition of Terms
Indirect monetary policy: Monetary policy is a package of action designed to manage the growth of money supply during a period of its optimal target, through the indirect approach which involves the use of market-based instruments to effect changes in the availability and cost of credit. (Coplaston Federic Accounting Information (Vol. 889) New York 1992).
Cash research requirement: Cash reserve requirement is a monetary policy instrument that obliges banks to hold a specified proportion of their deposit liabilities as cash deposit with the Central Bank. (Darvin Charles, “Reserves Forecasting for open market Operations” 1985).
Open market operation (OMO): These are powerful and flexible monetary policy tools introduced by the Central Bank under a free market system. (Carlyle, Thomas economic and financial review (vol. 2), 1993).
The discount rate mechanism: This is the interest rate charged by the Central Bank on its loan. (Oresotu, F. O Economic and Financial review (Vol. 1, 1992).
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