MONETARY POLICY AND CAPITAL FORMATION IN NIGERIA

MONETARY POLICY AND CAPITAL FORMATION IN NIGERIA

ABSTRACT

This study tries to assess the monetary policy on the development of the Nigerian economy in the period of increased deregulation of economic activities. Activities of CBN as well as its role in the promotion of economic stability and development were examined. The study looked at areas such as the monetary policy tools, Nigerian economic development, problems and prospects of monetary policy implementation in Nigeria among others. The findings of the study revealed that the CBN monetary policy impacted moderately on the development of the Nigerian economy. Recommendations have been put forward on ways of addressing the challenges facing CBN in the implementation of monetary policies and also ways of consolidating on the successes recorded by it in achieving economic stability and development.

CHAPTER ONE

1.0       INTRODUCTION

1.1       BACKGROUND TO THE STUDY

Economic development is the back born of development in any society. Countries of the world are classified as developed, developing and under-developed based on their level of economic development. Governments formulate laws to regulate and control the conduct of economic activities of their countries in order to provide enabling environment for economic growth and development. In Nigeria, governments formulate policies and guidelines with a view to achieve economic growth and development. Central Bank is charged with the task of implementing the monetary policies of the government. Since its establishment in 1958, the objectives of the Central Bank of Nigeria have remained broadly the same, but the strategies for achieving these objectives have changed in consonance with the varying legal, institutional and macroeconomic environments. Over the years, the objective of monetary policy had been the attainment of internal and external economic balance. However, emphases on techniques/instruments to achieve those objectives have changed over the years. There have been two major phases in the pursuit of monetary policy, namely, before 1986 and since - 1986. The first phase placed emphasis on direct monetary controls, while the second relies on market mechanism. 1986 was characterized by the dynamics of the oil sector, the expanding role of the public sector in the economy and over dependence on the external sector. In order to maintain price stability and healthy balance of payments position, monetary management depended on the use of direct monetary instruments such as credit ceilings, selective credit control, administered interest and exchange rates, as well as the prescription of cash reserve requirements and special deposits. The monetary control framework, which relied heavily on credit ceilings and selective credit controls, increasingly failed to achieve the set monetary targets as their implementation became less effective with time. As a result of drastic fall in oil market internationally, economic conditions in Nigeria worsen, and this informed the introduction of Structural Adjustment Programme (SAP). It was designed to achieve fiscal balance of payments viable by altering and restructuring the production and consumption patterns of the economy, eliminating Price distortions, reducing the heavy dependence on crude oil exports and consumer goods imports, enhancing the non - oil export base and achieving sustainable growth. The main strategies of the programme were deregulation of external trade and payment arrangements, the adoption of a market-determined exchange rate for Nigeria, substantial reduction on market forces as a major determinant of economic activity. The main instrument used is the Open Market Operations (OMO). OMO is the primary indirect monetary policy instrument for promoting non-inflationary economic growth and development and other policy goals. It is the buying and selling of Treasury

securities agency obligations and bankers acceptances by the Central Bank in the financial market in order to influence the volume of liquidity and level of interest rates which ultimately will affect money supply in the economy. The adoption of a market based framework such as OMO in an economy that had been under direct control for long, required substantial improvement in the macroeconomic, legal and regulatory environment.

In order to improve macroeconomic stability, efforts were directed at the management of excess liquidity; thus a number of measures were introduced to reduce liquidity in the system. These include the reduction in the maximum ceiling on credit growth allowed for banks, the recall of the special deposits requirements against outstanding external payment arrears to CBN from banks, abolition of the use of foreign grantee/currency deposits as collaterals for Naira loans and the withdrawal of public sector deposits from banks to the CBN. Also, cash reserve requirements were increased in 1989, 1990, 1996 and 1999. Capacity utilization in the Teal sector, poor performance of major infrastructural facilities, large budget deficits, rising level of unemployment and inflation. In addition, the economy bad grave problems of dependence, reliance on a single commodity (oil), weak industrial base, low level of agricultural production, a weak private sector, high external debt overhang, inefficient public utilities, low quality of social services and an unacceptable rate of unemployment are all the undesirable conditions in the Nigerian economy.

This study focused on measures taken by Central Bank of Nigeria to salvage our economic system. Pertinent questions included: what are the monetary policies adopted by Central Bank of Nigeria? What actions have CBN taken to enhance development in the financial sector and real sector of the economy to foster economic growth and development in Nigeria?

1.2       STATEMENT OF THE PROBLEM

The main thrust of this study is the evaluation of the impact of CBN monetary policy on the development of the Nigerian economy. The Nigerian economy is characterized by capacity utilization in the real sector, poor performance of major inftastructural facilities, large budget deficits, rising level of unemployment and inflation. In addition, the economy had grave problems of import dependence, reliance on a single commodity (OIL), weak industrial base, low level of agricultural production, a weak private sector, high external debt overhang, inefficient public utilities, low quality of social services and an unacceptable rate of unemployment are all the undesirable conditions in the Nigerian economy.

This study focused on measures taken by Central Bank of Nigeria to salvage our economic system pertinent questions include: what are the monetary policy adopted by Nigeria (CBN)? What are the impact of these policies to the development of Nigerian economy? What actions have CBN taken to enhance development in the financial sector and real sector of the economy to foster economic growth and development in Nigeria? Answers to these questions are provided as solution through the efforts of this research study.

1.3 OBJECTIVES OF THE STUDY

The objective of this study is to evaluate the impact of Central Bank of Nigeria's monetary policy to the development of the Nigerian economy. This study examined the soundness of these policy measures and their impact on the public sector.

It is intended to provide better understanding and appreciation of the monetary policies, the tools used towards the achievement of these policy measures and their impact on the development of the Nigerian economy as well as solutions to the problems of implementing these monetary policies.

To achieve the above objectives, the research examined;

1.            The monetary policies used from 1999 to 2004.

2.            To bring out their strengths and weaknesses.

To suggest measures that would enhance improvement in our future monetary policies in Nigeria.

TOPIC: MONETARY POLICY AND CAPITAL FORMATION IN NIGERIA

Chapters: 1 - 5
Delivery: Email

Number of Pages: 58

Price: 3000 NGN

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