The Role Of Monetary Policy In The Management Of Inflation In Nigeria

The Role Of Monetary Policy In The Management Of Inflation In Nigeria

Abstract

Monetary policy consists of optional measures designed by financial authorities to regulate and impact the force, cost and direction of plutocrat and credit handed to the frugality. This aspect of macroeconomic policy remains one of the keystones of profitable policy expression and perpetration. Monetary policy is applicable irrespective of the profitable frame in place.

With the relinquishment of the affectation, this study examine the impact of financial policy in Nigeria using econometric ways, a model that captures the impact of affectation on financial policy is specified and estimated using the ways of Ordinary Least Forecourt for the period of 1985- 2008.

The main findings arising in this study indicated that the demand for plutocrat has an inverse relationship between the position of interest rates and inflationary rates. The study also supported for the addition of partial adaptation scheme while modeling plutocrat demand functions and hence financial policy in Nigeria.

Chapter One

Preface

Monetary policy plays a veritably pivotal part in any frugality, being the channel through which fiscal coffers inflow from one member of the frugality to the other. It, thus, represents the major foundation of the ultramodern request frugality. Basically, there are three vital places for the financial policy videlicet; the Monetary Policy part, the fiscal stability part and the overall profitable part. Monetary policy in the current Nigeria environment, encompasses conduct of the central bank that affect the cost and vacuity of marketable and trafficker bank’s reserve balances and thereby the overall financial and credit conditions in the frugality( Akaku, 1993). The primary thing of similar conduct is to insure that overtime, the expansion in plutocrat and credit will be acceptable for the long run need of the growing frugality at stable prices.

The short- run ideal of financial policy still include, combating inflationary pressure, restoring a sustainable balance of payment, attainment of full employment position of coffers, indifferent distribution of income, maintaining a stable exchange rate at internationally competitive position. occasionally, changes in financial are accepted as part of combined conduct to remove obstacles to the growth of savings and effective allocation of investment.

As is frequently the case, the pursuit of these short- term pretensions tends to discord with the introductory thing of stable, long- term for illustration, a vigorousanti-inflationary station would generally bear the immolation of affair growth in the short term. The same might be the case where precedence is given to restoring a healthy balance of payments. also, a stable exchange rate ideal might call for a tighter control on aggregate demand which would in turn negatively impact affair. also, attaining the ideal of exchange rate stability at original currency, with attendant cost pressure on the price position. In sum, delicate trade- offs are essential in the conduct of financial policy, making the central bank, a target of review and colorful kind of pressures. Over the times, the objects of financial policy have remained the attainment of internal and external balance. still, stresses on ways instruments to achieve those objects have changes over the time. The major phase in the pursuit of financial policy that’s being examined was between 1992 to 2006. The profitable terrain that guided financial policy before 1986 was characterized by the dominance of oil painting sector, the expanding part of the public sector in the frugality and over reliance on the external sector. in other to maintain price stability and a healthy balance of payment position, financial operation depended on the use of direct financial instrument similar as credit ceilings, picky credit controls, administered interest and exchange rates, as well as the tradition of cash reserve conditions and special deposits. The use of request grounded instruments wasn’t doable at that point because of the underdeveloped nature of the fiscal requests and the deliberate restraint on interest rates.

still, as a result of the crash in transnational oil painting request in the 1980s and the attendant deteriorating profitable conditions, the Structural adaptation Programme( SAP) was espoused in July, 1986. This programme was designed to achieve financial balance and balance of payments viability by altering and restructuring the product and consumption patterns of the frugality, barring price deformations, reducing the heavy dependence on the crude oil painting exports and consumers good significances, enhancing thenon-oil import base and achieving sustainable growth. Other points were to explain the part of the public sector and accelerate the capabilities of the private sector.

Given the important part that well- performing financial programs has on financial policy, fiscal stability and overall profitable exertion, the Central Bank of Nigeria has put in place a set of public financial programs objects as a broad guideline and frame for all financial programs enterprise. In setting out the objects of the National Monetary programs, the thing is to insure that the system is available without interruption, meet as far as possible all stoner & requirements, and operate at minimal threat and reasonable cost.

During the course of the once ten times the Central Bank of Nigeria( CBN), in collaboration with the Bankers Committee, launched the first major action to contemporize the financial policy. The starting point was to automate the cheque clearing system and making it a veritable platform for development of electronic payment channels. Heretofore cheques recycling and calculations of the net agreement position of banks were done manually. The perpetration of the new procedures and rules grounded on MICR technology revolutionized the cheque clearing system. Accordingly, a Centralized Automated Clearing process was established in Lagos clearing zone, whereby with MICR Reader Sorters, necessary information on cheques are captured, erected into clearing lines and electronically transmitted to the clearing house, from where the net agreement position of sharing banks are automatically reckoned and also electronically transmitted to the Central bank for final agreement.

The part of financial policy in the operation of affectation is an important content that goes a long a way to help in nation structure. It can also be seen as an academic point of knowledge to scholars on the type of financial programs that live and the stylish that can help manage affectation.

A financial policy is a set of instructions and procedures used for the transfer of value and agreement of scores arising from the exchange of goods and services within a defined request. The ultimate thing of any financial policy is to insure that exchange of financial value is achieved with the least threat, vexation and cost. For a financial policy to be described as effective thus, it must be dependable, prompt, accessible, secure, and cost effective.

The I970s witnessed a burst of creativity in the establishment of electronic financial programs in the Western world, but there was a fairly slow rate of relinquishment by consumers and businesses. still, these original lapses didn’t discourage the inaugurators of these innovative modes of payment. moment, advancements in technology have made possible the preface of different electronic payment instruments, which were unheard of a many decades ago.

The Nigerian Monetary policy has not grown beyond the traditional reliance on cash. The use of cheque as a mode of payment is only beginning to gain some position of acceptance but dubitation and lack of trust is still relatively high. As a result, utmost Nigerians, and indeed commercial realities are antipathetic to accepting cheques as instruments of payment, preferring cash or at best, certified cheques. Cash still has its own limitations, which make it an insecure, clumsy and unreliable mode of payment, especially for high value deals.

The limited electronic payments ways in the Nigerian fiscal system have redounded in limited acceptance, and at times, total rejection from end druggies and other players in the payments process. still, because the Nigerian financial policy is an integral part of the global financial policy especially in this period of globalization, e­commerce, and technological advancements, the Nigerian financial policy must be reformed to meet global norms as well as the requirements of original consumers.

Over the times, the Nigeria financial policy has witnessed tremendous development form its rudimentary position during the early times of banking business to a fairly development system. The Nigeria financial policy and’ agreement system combines some rudiments of the sophisticated armature that features in advanced economics and some rudiments of primitive frugality. The system is generally cash- driven, as substantiated by the value of currency outside the banking system.

A nation’s financial policy is an integral part of its fiscal and financial structure. The effectiveness or else of the financial policy affects the frugality in numerous ways.

The financial policy is a vital link between the fiscal system and the real sector of the frugality’. The payment instrument in Nigeria is generally cash. The elevation of cash for sale purposes increases the volume of currency in rotation or high­ powered plutocrat, which renders financial control delicate, if not insolvable. There’s general agreement in the literature that an hamstrung financial policy distorts the transmission medium of financial programs, indeed when the design and objects are estimable( Nnanna, 1999).

The Nigerian financial policy is still at the rudimentary stage. According to a study by Accenture, at least 90 of deals are grounded on cash as the medium of value transfer.( Source See Proceedings of Smartcard Expo 2002). The lapses the system has suffered over the times as a result of itsover-reliance on cash has needed the call for a reform of the financial policy to reduce the position of cash in rotation and move it towards a near- cashless society.

REVIEW OF MONETARY POLICY IN NIGERIA

TheSub-Committee was set up at the February 2004 meeting of the Bankers’ Committee with a accreditation to review and enhance the effectiveness of the being financial policy.

The Members of theSub-Committee include ACCESS BANK, CBN, FIRST BANK, GTB, MAGNUM TRUST, NIB, NIBSS, STB, ZENITH BANK.

To achieve its accreditation, the Committee set out the following as guiding principles

Vision To establish a financial policy that’s secure, effective, dependable, cost effective and harmonious with world- class global stylish practices by April 1, 2006.

Mission To produce an effective financial policy that deploys dependable, secure and accessible Information and Communication Technology( ICT) tools to satisfy the fiscal sale requirements of the Nigerian frugality.

In the Nigeria frugality, the study of Affectation, interest Rate and exchange rate as well as the financial and financial development yield a mixed result, for illustration, while interest situations in over a decade and credit to the private sector has grown at unknown annualized position of about 39 percent( advanced than the target of 30 percent under requirements), thereby, prodding rapid-fire position growth of thenon-oil sector, the inflationary pressure have been worrisome. The broad plutocrat force( M2) has growth at about 22 percent at the end September( as against the target is for end period 2006). The rise in M2 reflected the increase in aggregate credit( net) to the domestic frugality as well as the rise in net foreign means, through the magnetization of the 2004 redundant crude earning and increase standard oil painting price for financial 2005.

The foreign exchange request remained stable, and the Naira has appreciated against all major currencies in all requests. At the Das request, the Naira/ Dollar rate has appreciated to about Ni29.55( down from N132.85 at the morning of 2005), and theinter-bank rate also of appreciated to about N132( down from N137). The Naira has also appreciated against the pound sterling and the Euro in both the functionary and parable requests.

Statement Of The Problem

The direct approach to financial operation was in vogue. Under this approach, the most popular instrument of financial policy was the allocation of credit rationing guidelines, which primarily set the rates of change for the factors and aggregate marketable bank loans and advances to the private sector. The sectorial allocation of bank credit in CBN guidelines was to stimulate the productive sector and thereby stem inflationary pressures. The fixing of interest rates at fairly low situations was done substantially to promote investment and growth. sometimes, special deposits were assessed to reduce the quantum of free reserve and credit- creating capacity of the banks. minimal cash rates were also quested for the banks in themid-1970s on the base of their total deposit arrears.

With the relinquishment of fiscal liberalization programme under the aegis of SAP and the changes from direct to circular approach to financial operation, this study investigates the part of this programme on financial policy in Nigeria. Especially, the introductory question to be addressed in this study is how effective is the conduct of financial policy upon the liberalization of the fiscal sector in Nigeria? To what extent could financial policy be reckoned upon for the achievement of macroeconomics objective in Nigeria?

These questions are veritably important because deregulation and changes in fiscal requests in recent times have had wide counteraccusations for the conduct of financial policy in several countries. Sample and well- conducted connections between plutocrat and nominal income that was under the regulated frame have supposedly broken down in the changed fiscal terrain.

With affectation in the fiscal sector in Nigeria, the assessment of its impact of this policy change on financial policy becomes pivotal. This is so because financial policy is greatly reckoned upon for the achievement of macroeconomic objects in Nigeria. It’s an irrefutable fact that the main ideal of any country is to achieved growth in the frugality which transcend into enhancement in the standard of living of the people, to this end, sweats are made to maintain effectiveness of its financial policy. This study, still, seeks to address the effect of financial policy on financial policy and its use as a tool used for the operation of affectation within the ménage association, society and the frugality of Nigeria as a whole.

Applicable Exploration Questions

The study came applicable due to the increase in affectation in the developing countries which Nigeria is one of. Certain questions are needed to achieve the end of this exploration; these questions include

1. What are the places of CBN in the Nigeria financial policy?

2. Does financial policy have effect on affectation?

3. Is there any relationship between financial programs and Gross Domestic Product( G D P)?

4. Does affectation has goods on individual assiduity and frugality as a whole?

5. Is financial policy not effective in controlling affectation?

6. Does financial policy have effect on plutocrat force?

7. What’s the view of the CBN concerning the value of the Nigeria currency( Naira)?

Significance Of The Study

In Nigeria, development in the financial policy since the eighties has been more positive but affectation on the other hand has been on the rise except for the fact that lately the Central Bank of Nigeria( CBN) had decided to regulate the system. Hence it’s peremptory to carry out exploration similar that can bring about a link between the financial policy and operation of affectation. thus the significance of the subject can be trace to

· The need to give a link between financial policy and affectation operation.

· The need to enhance the effectiveness of Nigeria financial policy is an trouble towards meeting global norms.

· The need to show financial policy instrument and channel and the core principle of financial policy.

There’s no mistrustfulness that effective and effective payment is a necessary prerequisite for the development and functioning of any frugality. Indeed, an effective financial policy is most essential in any frugality and determines to great extent its growth. thus, the Central Bank generally takes a keen interest and oversight in the functioning of a financial policy in order to maintain the stability and growth of the fiscal system and to manage affectation.

Objects Of The Study

The study of the part of financial policy in the operation of affectation in Nigeria is of consummate significance and the end of the study is as follow

To show how effective and effective financial policy can induce profitable growth and to estimate financial policy in Nigeria.

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