THE ROLE OF CENTRAL BANK IN DEVELOPING NIGERIA ECONOMY

THE ROLE OF CENTRAL BANK IN DEVELOPING NIGERIA ECONOMY

Abstract

This study examined the role of the central bank in the development of the Nigerian economy (1986-2010). Secondary data were used in this study. This hypothesis was tested to examine the importance of the relationship between monetary policy instruments, exchange rates and interest rates on Nigeria’s economic growth. The analytical technique used was simple regression analysis and Student’s t ratio was used for testing. From testing, it was observed that there are positive and negative relationships between the variables. Hence the researcher concluded that monetary policy is an efficient tool for economic growth in Nigeria. And therefore recommended that effort should be made to improve on the quality and the timeless of data generated within and outside the financial sector, so that actions could be taken without much delay in controlling adverse situations.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The role of the central bank in promoting national economic policy and development has in recent years become a topical international economic policy issue. Although the empirical evidence on the relationship between central bank operations and macroeconomic stability proxied by price stability is not conclusive (Folawewo and Osinubi, 2006), the prevailing wisdom supports the need to accord a central bank a reasonable degree of autonomy that will give it substantial discretion to conduct its monetary policy in a manner that will help achieve its assumed central mandate of maintaining domestic price stability, defined as a regime of relatively low inflation rate and an environment free of inflation expectations.
While monetary policy’s aim at long-run price stability is critical to fostering sustainable economic growth, central banks’ role in promoting growth and, more generally, a healthy economy goes beyond the conduct of monetary policy (Sanusi 2002). Central banks play an important role in maintaining and enhancing the safety and soundness of Alicia and Rio 2003 banking and financial systems through their involvement in financial regulation and oversight of payment system operations.

The Central Bank of Nigeria (CBN), like most central banks in developing countries, performs non-traditional central banking functions such as promoting economic development, especially during its founding period in the 1960s and 1970s. increase. CBN’s contribution in this regard has been focused on creating a financial environment and institutional framework that is conducive to mobilizing and directing financial resources for productive investment. Thus, during its first decade of existence, the bank focused on the task of facilitating and transforming the fundamental financial fabric of the economy. This includes the issuance of monetary and capital market instruments such as Nigerian Treasury Bills and Federally Developed Shares. In addition, it provided technical assistance and seed funding for the development of money and capital market institutions to other relevant institutions. CBN’s initiatives to promote long-term bank lending to the economy included establishing various refinancing and guarantee programs focused on priority areas of the economy. Two of these schemes are the Agricultural Credit Guarantee Scheme Fund (ACGSF) and the Export Refinancing Scheme.

1.2 Problem Description

Given the age of the Central Bank of Nigeria, one of the main objectives of Nigeria’s key monetary policy is price stability. However, despite the various monetary regimes adopted by the Central Bank of Nigeria over the years, inflation remains a major threat to Nigeria’s economic growth. In Nigeria, the inflation rate fluctuates greatly. Since the early 1970s, high inflation above 30% has occurred four times for him. Money supply growth often outstrips real economic growth, so money supply growth correlates with episodes of high inflation. However, before the money supply increases, we observe several factors that reflect the structural characteristics of the economy. Some of these are supply shocks caused by factors such as famine, currency depreciation, and changes in the terms of trade. The first stage of inflation near 30% (12-month moving average) he was in 1976 (CBN, 2009). One of the factors often cited as the cause of this inflation is the drought in northern Nigeria. The drought has devastated agricultural production, driving up the cost of agricultural commodities and significantly increasing their share of the average consumer’s budget. There may also have been over-monetization of oil export earnings during this period, which gave inflation a monetary character. Moreover, in the late 1980s, after the structural adjustment program, the effects of wage increases had a costly effect on inflation. In the long run, the combination of the structural features of the economy and the growth of the money supply led to permanent price increases. Inflation peaked at 39.6% he in 1984 when economic growth was relatively slow. At the time, the government was under pressure from a group of debtors to reach an agreement with the International Monetary Fund that included the devaluation of the country’s currency as a condition. Anticipation of an imminent devaluation fueled inflation as prices adjusted to parallel exchange rates. Over the same period, excess money growth was around 43% and government credit increased by more than 70% of his (CBN, 2010). Alternatively, the cause of inflation can also be traced to the deterioration of the country’s foreign trade conditions at the time. The episode of inflation in Nigeria may therefore have been preceded by structural or substantive factors, followed by a financial expansion. The third episode of hyperinflation began in his last quarter of 1987 and from 1988 he accelerated into 1989. This episode relates to the fiscal expansion accompanying the 1988 budget. The expansion was initially financed by loans from CBN, but was later sustained by increased unsterilized oil revenues (due to higher oil prices after the Gulf War). In addition, external debt was repurchased with new local currency debt in a debt conversion involving a debt/equity swap. However, a sharp monetary contraction initiated by the authorities in mid-1989 pushed inflation down to 13%, one of the lowest points in 1991 (CBN, 2010). A fourth round of inflation occurred in 1993 and lasted until the end of 1995. Inflation, which he picked up towards the end of 1992, reached 57% by the end of 1994, the highest since the 1980s, and reached 72.8% by the end of 1995 (CBN, 2009). Like the tertiary inflation, it coincided with a phase of widening budget deficits and an increase in the money supply. the authorities decided it was too difficult.

Since 1996, inflation has fallen steadily as a result of tight central bank monetary policy. However, it increased to 16.5%, 23.8%, 11.6% and 15.1% in 2001, 2003, 2005 and 2008 (CBN, 2010; CBN, 2011). Structural factors have proven important in inflationary spirals. Falling oil revenues (supply shock) led to lower real incomes, severely affecting distribution. Inflation surged as workers demanded higher nominal wages while producers raised markups. In addition to these factors, the government also faced transfer problems to meet its debts. Nigeria’s development record was so poor that monetary policy’s failure to curb price volatility led to erratic growth. In striking contrast to most developing countries, GDP in 2000 was not significantly higher than it was 35 years earlier. As many economic indicators show, the Nigerian economy has gone through different stages of growth. GDP growth recorded negative growth in the early 1980s (-2.7 in 1982, 7.1 in 1983, -1.1 in 1984). The growth rate he increased steadily from 1985 to 1990, but plummeted to 2.5% and -0.2% in 1986 and 1987 respectively. Growth was volatile in the 1990s, with the exception of 1991, when the contraction rate was -0.8%. However, since 2001, the growth rate has been relatively high. Looking at long-term patterns reveals the following long-term fluctuations:
1965-1968 rapid decline (Civil War era), 1969-1971 revival, 1972-1980 boom, 1981-1984 collapse, 1985-1991 regrowth, 1992-2011 shake. The main purpose of this study is to assess the effectiveness of the CBN’s monetary policy over the years. This will go a long way in assessing the extent to which monetary policy has impacted Nigeria’s growth process, using key monetary policy objectives as a benchmark.

1.3 Purpose of the survey
The main objectives of the research are to:

Me. Examine the nature of the relationship between monetary policy instruments (policy rate, exchange rate, and interest rate) in Nigeria’s economic growth.

ii. We offer some recommendations based on our research findings.

1.4 Research hypothesis

H0:
The role of the Central Bank of Nigeria does not have a significant impact on gross domestic product.

H1:
The role of the Central Bank of Nigeria has a significant impact on gross domestic product.