EVALUATION OF MONETARY POLICY IN NIGERIA AND ITS IMPACT ON ECONOMIC GROWTH

EVALUATION OF MONETARY POLICY IN NIGERIA AND ITS IMPACT ON ECONOMIC GROWTH

ABSTRACT

Monetary policy play special roles in any developing country and one of the special roles is to control the supply of money with the purpose of promoting economic growth and price stability. Monetary policy in a simplified analysis amount to the determination of the optimal quantity of money or in a “dynamic” sense, the optimal rate of growth of money stock in an economy, but there is more to monetary policy than the determination of the optimal stock or growth rate of money. The main thrust of this study was to examine the impact of monetary policy on macroeconomic outcomes in Nigeria, so as to draw useful lessons from her inception. In demonstrating the application of ordinary least method, the multiple linear regression analysis will be used with gross domestic product, inflation rate while exchange rate, interest rate and monetary supply as the explanatory variables. The data for the study was therefore obtained from the Central Bank of Nigeria publications. The result gotten shows that while exchange rate, interest rate and money supply is significant in impacting the economy, inflation proves otherwise. Hence they study recommends amongst others that Monetary policies should be used to create a favourable investment climate by facilitating the emergency of market based interest rate and exchange rate regimes that attract both domestic and foreign investments, create jobs, promote non oil export and revive industries that are currently operation far below installed capacity.

CHAPTER ONE

1.0          INTRODUCTION

1.1       Background of Study

Central Bank of Nigeria was established in 1959 with the primary function of regulating stock of money in a way to promote social welfare (Ajayi, 1999). This function is tied to the use of monetary policies which aim to achieve core macroeconomic objective of full-employment equilibrium, rapid economic growth, price stability, and external balance (Fasanya et al, 2013; Adesoye et al, 2012). Thus, inflation targeting and exchange rate policy have dominated CBN’s monetary policy focus based on supposition that these are vital tools of achieving macroeconomic stability (Aliyu and Englama, 2009).

The economic conditions that influenced monetary policy before 1986 were mainly dominated by the oil sector, the increasing role of the public sector in the economy and over-reliance on the oil sector. In order to maintain price stability and a healthy balance of payments position, monetary authority relied on the use of direct monetary instruments such as credit ceilings, selective credit controls, administered interest and exchange rate, as well as the recommendation of cash reserve requirements and special deposits. The use of market-based instruments was not viable due to the underdeveloped nature of the financial markets and the deliberate restraint on interest rates (Ajayi, 1999).

After 1986, with the CBN’s amended Act, the apex bank assumed full autonomy and discretion in the conduct of monetary policy and consequently, the focus of monetary policy during this period shifted considerably from growth and developmental objectives to price stability (Adeoye, et al. 2014). However, Ebiringa, et al. (2014) conceded that monetary policies implemented lately in Nigeria have been designed in fast tracking economic reform programmes with the aim of providing favorable financial system infrastructure and environment to support sustainable economic growth. The most widely use instrument of monetary policy was the issuance of credit rationing guidelines, which basically set the rates of change for the components and aggregate commercial bank loans and advances to the private sector. The sectoral allocation of bank credit in CBN guidelines was to induce the productive sectors and thereby arrest inflationary pressures. The setting of interest rates at reasonable levels was done mainly to promote investment and growth. Periodically, special deposits were enforced to reduce the amount of free reserves and credit-creating capacity of the banks. Minimum cash ratios were stipulated for the banks in the mid-1970s on the basis of their total deposit liabilities, but since such cash ratios were usually lower than those maintained by the bank, they proved less efficient as a restraint on their credit operations.

In general terms, monetary policy refers to a combination of measures designed to regulate the value, supply and cost of money in an economy, in line with the expected level of economic activity (Okwu et al, 2011; Adesoye et al, 2012; Baghebo and Ebibai, 2014). For most countries, the objectives of monetary policy include price stability, maintenance of balance of payments equilibrium, promotion of employment and output growth, as well as sustainable development (Folawewo and Osinubi, 2006). These objectives are necessary for a nation to attain internal and external balance, and the promotion of long-run economic growth (Imoughele, 2014).

The importance of price stability derives from the harmful effects of price volatility, which undermines the ability of policy makers to achieve other laudable macroeconomic objectives. There is indeed a general consensus that domestic price fluctuation undermines the role of money as a store of value, and frustrates investment and growth. Empirical studies (Ajayi and Ojo, 1981; Fischer, 1994) on inflation, growth and productivity have confirmed the long-term inverse relationship between inflation and growth.

With the achievement of price stability, the conditions in the financial market and institutions would create a high degree of confidence, such that the financial infrastructure of the economy is able to meet the requirements of market participants. Indeed, an unstable or crisis-ridden financial sector will render the transmission mechanism of monetary policy less effective, making the achievement and maintenance of strong macroeconomic fundamentals difficult. This is because it is only in a period of price stability that investors and consumers can interpret market signals correctly. Typically, in periods of high inflation, the horizon of the investor is very short, and resources are diverted from long-term investment to those with immediate returns and inflation hedges, including real estate and currency speculation. It is on this background that this study would investigate the effectiveness of the monetary policy in Nigeria with special focus on major growth components.

1.2       Statement of the Problems

The failure of the monetary policy in curbing price instability has caused growth instability as Nigeria’s record of growth and development has been very poor. An examination of the summary of the long-term pattern reveals the following secular swings: 1965-1968 Rapid Decline (Civil War Years), 1969-1971 Revival, 1972-1980 Boom, 1981-84 crash, 1985 – 1991 Renewed Growth, 1992-2010 Wobbling, (CBN, 2010).

 Despite the various monetary policy systems adopted by the Central Bank of Nigeria over the years, the menace of inflation to Nigeria’s economic growth still persist. Nigeria has experienced high level of instability in inflation rates. Since the early 1970’s, the country have recorded more than three incidence of high inflation in excess of 30 percent. The high rate of inflation is associated with growth of money supply, which  was often in excess of real economic growth.

Furthermore, the dualistic nature of Nigeria financial and product market constitutes a major restriction in the formulation and efficient implementation of monetary policy. The informal sector in Nigeria accounts for a greater percentage of the GDP, thus the existence of a large informal credit market and exchange rate market in Nigeria has many consequences for the transmission mechanism of monetary policy. Furthermore, the payment system is a fundamental medium that connect the financial and the real sector of the economy. In Nigeria the payment system is primarily cash base and the prominence of cash for transaction purposes increases the level of money/currency in circulation which renders monetary control difficult.

In the light of the above therefore, this study intends to subject these issues to empirical examination in order to evaluate the effect of monetary policy on economic growth in Nigeria.

1.3       Objective of the Study

The main objective of monetary policy is to achieve price stability and finally economic growth. This study intends to evaluate the impact of monetary policy on economic growth in Nigeria using major growth components. However, the following specific objectives will be pursue:

(i)            To assess the impact of the monetary policy on economic growth in Nigeria.

(ii)           Examine the effect of monetary policy on price stability (inflation rate)

TOPIC: EVALUATION OF MONETARY POLICY IN NIGERIA AND ITS IMPACT ON ECONOMIC GROWTH 

Format: MS Word

Chapters: 1 - 5
Delivery: Email

Number of Pages: 50

Price: 3000 NGN

In Stock

Buy the Complete Material Now