Monetary Policy In Nigeria – The Role In Promoting Economic Stability In Nigeria
Monetary Policy In Nigeria – The Role In Promoting Economic Stability In Nigeria
Rapid and sustainable economic growth remains the quest of every society. Nigeria experienced serious economic problems from late 1970’s to mid 1980’s. The country’s balance of payments came under severe pressure and was in persistent deficit during the period. To place an order for the Complete Project Material, pay N5,000 to GTBank (Guaranty Trust Bank) Account Name – Chudi-Oji Chukwuka Then text the name of the Project topic, email address and your names to 08060565721.
To place an order for the Complete Project Material, pay N5,000 to
GTBank (Guaranty Trust Bank)
Account Name – Chudi-Oji ChukwukaAccount No – 0044157183
Then text the name of the Project topic, email address and your names to 08060565721.The government current expenditure expanded without appreciable increase in revenue leading to widening fiscal deficit, which were largely financed with bank credit with averse effects on the general price level.
The responsibility for monetary policy and implementation in Nigeria rest with the Central Bank of Nigeria [CBN]. Monetary policy in Nigeria has been conducted under wide ranging economic environments. The monetary and financial policies pursued in recent years have been designed to support the attainment of basic objective of the economic reform programme adopted in July 1986 to restore macro economic stability in the short term and induce the resumption of sustainable growth. This represents a strategic land mark in the history of economic stabilization as it marked the end of highly regulated regime and opened up a new chapter that reflected government efforts at deregulating the economy with increased emphasis on market forces.
The instruments available to the CBN during this period for the achievements of objective of monetary policy include both the direct and indirect instruments, which have been used in various degrees and at different stages of the country’s experiments with monetary policy.
The responsibility of any government in a country in its monetary policy consists of actions by the CBN with its monetary management and to ensure a stable internal and external value for the national currency. In this regard, it is important that the supply of money and credit to an economy is adequate to support desirable and sustainable growth without causing inflationary pressures and undue instability in the exchange rate, the ultimate objective being the improvement in the welfare of the citizenry.
The term money for the purpose of this study is a means of payment for goods and services. The dynamic functions of money have some international dimensions, as there is the technical device for financing transfer of capital. The value of money depends on the confidence people have on it, that they exchange it for sale of goods and services whenever they want to do so. To keep the value of money stable, its quality has to be controlled for money to perform its useful roles of store of value, standard for deferred payments, units of accounts and medium of exchange efficiently and effectively. It requires a skillful and careful management in order to ensure relative price stability, so as to motivate the financial sector and promote economic development in a changing world of complex economic and finance relations.
Monetary policy is a major economic stabilization weapon, which involves measures designed to regulate and control the volume, cost and direction of money and credits in the economy to achieve objectives, which can change from time depending on the economic fortune of a particular country.
Monetary policy formulation and its implementation has raised a very difficult task as well as practical problem in Nigerian economy.
Generally, the objectives of monetary policy was designed to deal with the following:
i. High rate of employment
ii. Maintenance of relative price stability
iii. Control of inflation
iv. Iv sustainable rate of economic growth.
v. Maintenances of healthy balance of payments position for the country in order to uphold the external value of the national currency.
vi. The enhancement of rapid economic development.
vii. Maintenance of relative stability of domestic prices, in practice one finds more often than not, in objectives conflict intractably. Hence, monetary management involves difficult trade offs among conflicting objectives in order to maximize the overall benefits to the society.
In the process of monetary management policy formulations, it is of utmost importance to specify the focus of policy; otherwise, it will be impossible to evaluate performance. For example the objective of price stability and in the short-run, which may not be sustainable in the long-run.
Monetary expansion may raise output of goods and services and level of employment and consequently lead to price stability in the long-run.
Standard tools have been devised to facilitate monetary management, but the major constraints it have is that, the tools are not universally applicable, there is a strong need for selection depending on each country’s’ problems or circumstances and stages of development and conditions suitable to the use of the instruments selected.
The ability of putting the economy in permanent state of excess demand as long as aggregate supply of goods and services do not move as rapidly as the aggregate demand due to supply inelasticities, irrelevant rules and related rigidities in the structural problems in developing countries include high dependency on imported goods, differences in productivity among sectors and the general rigidities in prices and wages. Structuralism came into conclusion in order to promote economic growth and development. That is to say that with out some measure of inflation, growth and development were unlikely to occur and be sustained.
In Nigeria, the CBN wielded the primary responsibilities of initiating, implanting, articulating and appraising a monetary policy. The result level of macro economic instability in Nigeria is as a result of the sustained pursuit of expansionary fiscal and monetary output. There have been some record of success and failure in the conduct of monetary policies. The role of these policies are shown by empirical result of their performances. A good examination of monetary result will be attain if independence is being granted to the people concern in the implementation of such policies.
In light of the prevailing economic situation, the government must decide the priority attached to any of these policies, so that one can categorically come to conclusion that all hope is not lost for Nigeria economy to recover from recession.
1.2 STATEMENT OF RESEARCH PROBLEM
The goals of every economy remains the same irrespective of the state of the economy (developing or developed) that is price stability and rapid and sustainable economic growth rate etc.
There is no economy that is totally protected from economic problems like high unemployment rate, balance of payment disequilibrium, inflation unsustainable growth rate, increase in printing of fake currency etc. The desire of economists to reduce the occurrence of these ills has led them to harness resources and efforts in developing appropriate policies to tackle these problems.
Monetary policy is one of such policies used by government to achieve laudable macro economic variables in engulfing these macro economic problems.
1.3 OBJECTIVES OF THE STUDY
The objectives of this study is as itemized below:
(i) To trace the causes of macro-economic instabilities in Nigeria.
(ii) To show the role of monetary policy adopted by CBN to resort macro-economic stability.
(iii) To pinpoint the major causes of price instability and also point out remedies.
(iv) To enhance future policy formulation and implementation in Nigeria.
(v) Finally, to detect and recommend ways by which the economic situation of Nigeria can be improved by the achievement of other objectives above.
1.4 SIGNIFICANCE OF THE STUDY
The finding will show that money supply plays in the economy of Nigeria.
Secondly, the result or findings will assist the monetary authorities to determine whether to continue with the existing measures to initiate a review of the policy (either to change direction or to fine tune the existing policy) geared towards providing a sound and stable financial environment that is conducive for the attainment of both macro-economic stability and growth.
Lastly, the result of the study will assist government in an attempt to stabilize the economy to make use of effective and efficient monetary policies.
1.5 HYPOTHESIS OF THE STUDY
The hypothesis of the study is as stated below:
H0: b1 = 0 Null hypothesis
H1: b1 ≠ 0 Alternative hypothesis.
H0: b1 = 0: Monetary policy has no significant role to policy in
promoting economic stability.
H0: b1 ≠ 0: Monetary policy has a significant role to play in
promoting economic stability
1.6 SCOPE OF THE STUDY
This study covered the period between 1986 and 2004.
1.7 LIMITATION OF THE STUDY
The researcher encountered the following constraints in the process of the study:
(1) TIME CONSTRAINT: A study of this nature requires more time than that which was given to the researcher; but this was not available because of academic pressure and other programmes.
(2) ACADEMIC PROGRAMME AT THE TIME OF STUDY: The study was carried out by a student researcher, and base on this, at the time of this study there were a lot of disruptions more than what have been ever experienced by the researcher. As a result, the researcher never stayed at a place while writing. The motivating factors and joy that guides a researcher were not there hence the time for research and academic works could not be properly scheduled.
(3) FINANCIAL CONTRAINT: The financial strength of the researcher as at this same period was a set back as it made things a little more difficult as finance was inadequate for traveling in the gathering of data.
1.8 DEFINITION OF TERMS
MONETARY POLICY: Monetary policy involves measure designed to regulate and control the volume, cost, availability and direction of money and credit in an economy to achieve some specified macro-economic policy objectives.
MONETARY BASE: The monetary base is the sum of the cash reserves of the banking sectors held on deposit with the central bank and the currency in circulation outside the banking system.
MONETARY TRANSMISSION MECHANISM (MTM):
This shows how a change in a monetary instrument is transmitted to changes in the policy variables.
POLICY TARGET: These are variables for which the government seeks desirables values and are the (intermediate goals) of macro-economic policies.
POLICY INSTRUMENT: These are principally exogenous variables whose values are determined independently of other variables in the system and which government can manipulate (control directly or indirectly) to achieve desirable objectives.
INTERMEDIATE TARGET: These are variables used to influence policy variables.
SELECTIVE CREDIT CONTROL/GUIDELINES: These involves administrative orders where by the central banks, using guideline, instructs credit to specified sectors depending on the degree of priority of each sector.
ECONOMIC GROWTH: It refers to a steady increase in the per capital income of a country per capital income rise when total national income increases faster than population growth.
ECONOMIC DEVELOPMENT: This refers to economic growth accompanied by certain desirable economic changes. These desirable change include; improvement in the utilization of all sectors of the economy, like Agriculture, Industry, mineral resources, manpower training Entrepreneurship etc.
BALANCE OF PAYMENT (BOP): may be defined as an account of all monetary transactions of a country with foreign residents and government over a given period, usually one year.
INTEREST RATE: The rate of interest provides a link between the change in a monetary variables ( instrument) and the level of output, income and employment.
DISCOUNT RATE: The discount rate is the rate of interest the monetary authorities (as lenders of lat resort) charge commercial banks on loans extended to them.
INFLATION: Refers to a condition of general and persistent rise in price as a result of the excessive increase in the quantity of money.
CREDIT CEILING: Generally sets a limits to loans that can be granted by banks.
DEPOSIT CEILING: Sets a limit to the amount (especially of foreign currencies) an individual or organization can deposit into a bank account. These methods of monetary policy are usually enforced by law and the failure of a bank to comply with such directives normally attract a fine.
OPEN MARKET OPERATION: These involves sale or purchase of government securities in the open market depending on whether the economy is inflationary or deflationary respectively.
MORAL SUASIONS: An expectation by the central Bank that banks could reason along with it, appreciate the need of the economy and regulate their activities accordingly.
EXCHANGE RATE: This refers to the price of one currency (The domestic currency) in terms of another (The foreign currency). Exchange rate plays a key role in international economic transactions.
ECONOMIC STABILIZATION: This comprises of such goals as increasing the level of real output/income, maintaining some stability in the price level.
PORT FOLIO: The set of assets held by an individual (or institution. It generally refers to financial (including monetary) assets but there is in no need to regard it as excluding real assts.
MARGINAL EFFICIENCY INVESTMENT: This is the negative relationship between planned investment and the rate if interest.
LIQUIDITY: This is the excess of money supply over money demand.
2.1 CONCEPTUAL ISSUES
In the course of reviewing the available literature, we noticed that there are numerous volume of literature on the subject of monetary policies. Hence, there exist various definition and different opinions on the issues of monetary policy.
The level at which monetary and banking policies regulate financial and economic activities has been broadly discussed over the years while it is widely accepted that monetary developments affects economic and financial performance, there are different views on the level of their effect and the role through which this effect is being achieved.
As time goes on, in the course of this research on this review of different related literature, we shall pay attention to some specific contributors.
Anyawu (1993), defined monetary policy as a measures designed to regulate and control the volume, cost, availability and direction of money and credit in an economy to achieve some specified macro-economic policy objectives. That is, it is a deliberate effort by the monetary authority (the central bank) to control the money supply and credit condition for the purpose of achieving certain broad economic objectives. Policy in the Nigeria context encompasses action of the Central Bank of Nigeria (CBN) that affect the availability and cost of commercial and merchant banks reserve balances and thereby the overall monetary and credit conditions in the economy. The main objective of such actions is to ensure that over time, the expansion of money and credit will be adequate to the long-run needs of the growing economy at stable prices.
According to Aderibigbe (1997), monetary policy is a transmission mechanism which operates policy through the effects of interest of credit on economic agents which respond to different yields of various financial assets, level of aggregates demand, exchange rate overall economic activities. This shows the flexible interests rate is not only desirable but it is a pre-requisite for effective and efficient conduct of monetary policy base on free market mechanism.
Wrightsman (1976), defined monetary policy as a deliberate effort by monetary authorities to control and regulate the money supply and credit conditions for the purpose of achieving certain macro-economic objectives. This indicate that it is a major economic stabilization weapon, which involves measures designed by the monetary authorities (CBN and federal government) to regulate and control the volume cost availability and direction of credit in an economy for the purpose of achieving certain broad macro-economic objectives.
Onyido (1999), in his views, defined monetary policy as an actions designed by the monetary authorities (CBN) to regulate the flow of money supply or expand the money supply depending on the economic conditions of the period in order for the target to be reached which will go a long way in achieving the goals of monetary policy is achieved,, the level of money become equal credit, inflation, interest rate and rate of growth of output.
Akaji (1998), defined monetary policy as an indirect interest, improve the allocation of credit, exchange rate and reduce the development and incursions of formal financial market to improve competition in the banking industry and to also enhance monetary policy managements depending on the economic condition and thrust policy.
In his view, Onyido (1999), said that “while some banking policy measures share same origin as monetary policy measures, other banking measures are mere follow up monetary policy money plays a vital role in efficient management of economic activities which will not cause a problem to the level of its supply whether it is too little or two much.
Onyido, Striving to sum all the above mentioned definitions, said that monetary policy “tries to pursue in order to achieve economic goal of high rate of employment, control of inflation, rapid economic growth and maintenance of healthy balance of payments though the control of the economy supply of money, credit and interest rate. Since the rate of interest is the cost of credit. In a broader sense he went further to say that “monetary policy regulates the money stock through the control of high powered reserves and rates of interest to maintain a stable internal and external balance of the nations currency as well as ensuring sustainable growth”. This is known as a realistic and consistent set of objectives within the general economic policy frame-work.
N.U. Onwukwe (2003), defined monetary policy as the deliberate control or regulation of money supply and or rates of interest by the central bank to try to effect a change in employment, inflation or balance of payments. Note that monetary policy by controlling interest rates, can effect changes in the capital account of a country’s balance of payments since relatively higher rate of interest in one country will attract funds from other countries in the short term.
However, monetary policy can be expansionary or concretionary. Expansionary monetary policy involves when the central Bank Increases money supply in order to force down interest rate. According to Keynes, the money demand curve is a downward sloping curve from left to right implying a negative relationship between money demand and interest rate while the money supply curve is perfectly interest inelastic because money supply in the opinion of Keynes is policy determined. Secondly, concretionary monetary policy occurs when the monetary authority reduce money supply in order to force up interest rate.
However, having looked at the various definitions of monetary policy which at the same time encompasses banking policies, there are some monetary policy that addresses the working of banking industries. We will move ahead to discuss the goals of monetary policies.
2.2 THE GOALS OF MONETARY POLICY
As in other economics, monetary policy in Nigeria is aimed at moderating inflation rate, promoting growth, reducing pressure on the external sector, stabilizing the Naira exchange rate, and inducing increased financial savings, investment and employment.
According to Onyido (1999), monetary policy refers to the achievement of macro economic goals, which change from time to time depending on the prevailing economic circumstances of a particular country.
However, due to conflicts in the attainment of these objectives, priorities are usually set in this direction. Thus, the ultimate targets of monetary policy are: price stability, full employment, sustained economic growth and balance of payment equilibrium (Jimoh 1994)
PRICE STABILITY: Onyido (1999), defined price stability as the pursuance of sustainable economic stability in domestic prices in order to avoid wide fluctuation of prices which can divide the economy and also to ensure the stability of the value of the domestic currency in international competitiveness. This goals has to do with keeping inflation in check i.e. controlling the rate at which prices of goods and services increase over time.
CBN Annual report (1998), states that the recent level of price instability, which the monetary policy seek to address is as a result of sustained pursuit of expansionary fiscal and monetary policies. The ability of putting the economy in a steady state of excess demand as long as aggregate supply of goods do not grow as quickly as aggregate demand, as a result of supply in-elasticities and presence of irrelevant rules and rigidities in the structure of productive sectors.
FULL EMPLOYMENT: It is the desire of government to provide ample job opportunities for the citizenry. The government wish that all those who are willing and able to work find job. In a similar situation, employment increase in money stock will bring interest rate down which in turn raise effective demand through the multipliers effect thereby enhancing employment, income and output. However, once full employment is reached, further increases in output would raise prices. This is what full employment is all about. As Keynes puts it, full employment is all about absence of involuntary unemployment.
However, it should be noted that full employment does not mean that one hundred percent (100%) of the labour force must be employed. At any point in time there must be some level of un employment co-existing with unfilled vacancies in the economy. This is unavoidable in any economy no matter how developed (onwukwe 2002).
ECONOMIC GROWTH: ensuring rapid economic growth is another major goal of monetary policy. Economic growth can be difned as a quantitative increase in a country’s output of goods and services (Jimoh 2002).
According to Anyanwu, “In order to obtain sustainable high level of output, a goal has to be pursued not with in adequate output, but rather with adequate output where all resources are employed.”
As noted by Simon Kuznets’ defined as country’s economic growth as “a long-term rise in the capacity to supply increasingly diverse economic goods to its populations. This growing capacity based on advancing technology and the institutions (and Ideological adjustments that it demands”.
Achieving rapid economic growth is desirable because of its welfare arguments. It has been widely recognized that rising levels of per capital income allow for the achievement of higher level of private consumption, the provision of larger volume of such public goods as education, national defense, amenities etc.
BALANCE OF PAYMENT EQUILIBRIUM: The goal of monetary policy has been to maintain equilibrium in the balance of payments. The achievement of this objectives has been necessitated by the phenomenal growth of international liquidity. Also, it is recognised that deficit in the balance of payment will retard the attainment of other objectives. This is because a deficit I the balance of payment leads to a sizeable outflow of gold (Mishkin 19992). Balance of payment is widely de signed into current and capital account.
Balimo (1999), noted that an efficient payment system may be likened to a lubricant without which the wheel of commerce would ceased to grind. This shows that an efficient payment system is the sine-quo-non for the implementation and transmission mechanism of a successful monetary policy in the economy.
As noted by P. A. Ogwuma (1996), for the achievement of these broad objectives efforts are made to identify the inter mediate level and growth of money stock as well as creating a sound financial structure through which monetary control is carried out.
Johnson (1999), states that a good payment system should be able to facilities the settlement of transaction in respect of goods and services as well as debts, increase speed, lowers the cost and risk and grease the engine of growth by providing the necessary momentum for the right level of economic activity through the smothering of transactions and minimizing delays in transaction time and cost.
2.3 CONFLICTS AMONG OBJECTIVES
According to S. N. Ibeabuchi (1992), in an attempt to attain objectives though inter-related can hardly be achieved without conflict.
For instance, an expansion of any fiscal monetary policy may help to bring down the level of unemployment, but could serve to aggravate the problem of inflation. On the other hand, restrictive monetary policy may help to resorts price stability but could bring about a rise in unemployment and a fall in output objectives are not compatible because, if the Philips curve for example which postulates a negative link between inflation and unemployment and by implication the Philips curve is seen in the short run while in the long-run also, it vanishes away. This is because improvement in employment could only be attained at the curve in the cost of making inflation independent.
Policy conflicts arises in monetary policy when the government takes or adopts measures that would enganger the achievement of objectives.
On conflict resolution, Anyawu (1993), said that monetary policy objectives are not mutually attained, trade-offs among them must be recognised. This implies that to bring down inflation, it will be utmost importance to sacrifice economic expansion and accept a lower growth rate and this goal attained should be ranked with respect to its relative importance.
2.4 INSTRUMENTS OF MONETARY POLICY
S. N. Ibe Abuchi (1992), pointed out hat the objective of monetary policy is for the promotion of free market oriented economy in which available resources would be efficiently utilized for greater economic performance. In order to achieve this set of goals, a choice has to be made on the use of desirable instruments in light of prevailing economic circumstances in which the monetary policy is being implemented. There are widely two categories of instruments used in affecting baking policies. These are direct and indirect instruments.
2.4.1 DIRECT INSTRUMENTS
Ahmed (1992), noted that underdeveloped financial environment, the instrument of monetary and banking policies are limited to direct measures which set monetary and credit target at a desirable levels. The following are direct monetary instrument, which involves intermediate variables that would achieve the desired goals of economic stability.
(a) MORAL SUASION: The central bank governor use his position of office to appeal to banks to exercise retrains in credit expansion under hard economic recession. The CBN involves the use of power persuasion to control the lending operations of banks and other financial institution. The CBN in her holding regular dialogues with banks, commercial, merchant and industrial banks and agencies with a view to keeping them informed on current policy implementation, development and securing their co-operation on all aspects of monetary policy in order to enhance macro economic performance.
(b) BANK RATE POLICY: The bank rate is the minimum lending rate of the central bank at which it rediscounts first class bills of exchange and government securities held by the commercial banks. When the central bank funds those inflationary pressures have started emerging within the economy, it raises the bank rate. Therefore, borrowing form the central bank becomes costly and commercial banks borrow less from it. The commercial banks, in turn, raise their lending rates to the business community and borrowers borrow less from the commercial banks. There is contraction of credit and prices are checked from rising further.
On the contrary, when prices are depressed the central bank lowers the bank rate and then, it will be cheep to borrow from the central bank on the part of commercial banks.
(c) SECTORAL ALLOCATION OF COMMERCIAL AND MERCHANT BANK CREDIT: This is an instrument that is generally used in under-developed countries. This measure is an instrument that is generally used in underdeveloped countries. This measure is aimed at ensuring that priority is accorded the growth sectors of Agriculture, manufacturing enterprises, solid minerals and manufacturing industry in the allocation of credit with a view to stimulate growth in the non-oil sector.
(d) STABILIZATION SECURITIES: The CBN is empowered to issue stabilization securities with banks at given interest rate designed to reduce commercial banks excess cash holding and their credit expansion. This instrument was first employed between 1976 and 1979 and are now currently is use. The use of this instrument will depend on the system’s response to open market operations.
However, the prolonged use of the direct tools have had adverse effects on both the economy and the effectiveness of monetary policy in Nigeria. Thus, a decision was taken to change the strategy of monetary management to the indirect approach involving the use of market-based tools. The plan in this direction involved the deregulation of interest rates, partial deregulation of the market for government debt instruments, and institu tional frameworks and the reduction of excess liquidity in the economy (see Ezeuwi, 1994).
(2) INDIRECT INSTRUMENTS
J. A. Olekah (1992), state that indirect instruments have not been used for control purposes but rather are usually used in market base economics where money stock can be controlled through manipulation of the monetary base. The monetary base is the total bank reserves plus currency in the hands of non-bank public while the money stock is a process which results from a complex interaction of the behaviours of various economic agents management of various of indirect control is made possible through the use of the following tools.
(2) OPEN MARKET OPERATION (OMO): This refers to the sale and purchase of securities in the money market by the central bank with the aims of influencing bank reserves interest rates and ultimately credit growth of the banking system. When prices are rising and there is need to control then, the central bank sells securities. The reserves of commercial banks are reduced and they are not in a position to lend more to the business community.
By so doing, future investment is discouraged and the rise in prices is checked, contrary wise, when reversionary forces start in the economy, they lend more investment, output, employment, income and demand rise and fall in price checked.
(2) CHANGE IN RESERVE RATIO: This weapon was suggested by Keynes in his treatise on money and the united state was the first to adopt it as a monetary device. The variables reserve ratios are designed to influence the liquidity and credit operations of banks through changes in their reserves. Here every bank is required by law to keep a certain percentage of its capital deposits in the form of a reserve fund in its vaults and also certain percentage with the central bank. When prices are rising, the central bank raises the reserve ratio. Bank are required to keep more with the central bank. Their reserves are reduced and they lend less. The volume of investment, output and employment are adversely affected. In the opposite case, when the reserve ratio is lowered, the reserves of commercial banks are raised. They lend more and the economic activity is favourably affected.
(2) INTEREST RATE POLICY: Interest rates was introduced again I 1994 budget with a view to reversing the persistent increase in the rate of bank credit which the commercial banks should operate from season to season’s being prescribed by the CBN.
2.5 THE THEORETICAL FOUNDATION ON MONETARY POLICY
In order to appreciate the role of money and monetary policy in the economy, it would be wise to review the varied changing views on monetary influence. These roles are achieved directly as well as indirectly through feedback fro the economy. Generally, when the quantity of money supplied changes in relatives to money demand either because of monetary measures, there are changes in relative price and wealth.
Irving Fisher (1932), in his quantity theory of money, opine that, like other classical writers the short-run monetary control was dictated by interest rates which were sticky but in the long-run the demand of influence was real cash balance.
Irving fisher further assumed that the rise in commodity prices would precedes the increase in interest rate which was regarded as a main channel of the firms operating cost. Also, the risk in commodity prices would lead to an increase in the firms profits followed by increase in business investment, demand deposit. Loan demand and money stock which lead to a greater increase in community prices investment and profits. Since interest rate is regarded as part of the operating cost of production, excess reverses for lending would run-out and even faster than commodity price thereby leading to a rise in the cost of production. This would in turn lead to a decline in investment and profit. Summarized the factor which determine the velocity of money in circulation and from there obtain the amount of money needed to undertake a given level of money transaction per-period.
In his equation of exchange, he specified that:
MV = PT ———————————- (1)
Where M = actual money Stock, V = the transaction velocity of circulation of money. P = the average price level and T = The number of transaction made per the period. Fisher, now imposes the assumption that the equilibrium values of V, (the velocity of money) and T (the volume of transaction) will be fairly constant in the short-run and invariant with respect to changes in the quality of money.
Given this assumption, the equation (1) can now be re-written as:
Mv = PT —————————————— (2)
Where bars (-) signify that v and t are constant. Given that m is exogenous, there must be proportional relationship in equilibrium between money supply (m) and the general piece level.
According to Keynesian monetary transmission mechanism (1936), given the assumption that the economy is at less than full employment, the built-in-policy transmission mechanism works through the financial system to real sector an interest relationship de-emphasizing the role of money.
Keynes in his contribution said that if for instance, the economy is initially at equilibrium and there is an open market purchase of government securities by the CBN, the operation (OMO) will increase the commercial banks reserve (k) and raises the banks reserves earning asset ratio.
The bank then operates to restore their equilibrium by extending new loans such new loans create new demand deposit, thus, increasing the money supply (m). Given the public liquidity preference, a rising money supply causes the general level of interest rate (r) to decline. The falling interest rate will in turn, stimulate investment and businessmen expected profits expressed as the marginal efficiency of investment (MEI).
On the other hand, monetarists have theory of price level. According to them, output is taken as a fixed datum and price level is regarded as a variable to be determined by the economic system.
Friedman (1966), stressed that monetarist opined that inflation is always every-where a monetary phenomena. Thus, price tends to rise when the rate of money stock is greater than the rate of real output of goods and services.
Silber 91969), observed that declining interest rates induces expanded investment expenditures causing successive rounds of new final demand spending, causing GNP to rise by a multiple of the initial change in investment. To sum this up, we have:
OMO R MS r I GNP
Combination of falling interest rates and rising income serves to increase the over-all demand for money so that demand meets up with the money supply. The money market is back to equilibrium when this happens and at this time, there is no longer any pressures on interest rates to fall and income to rise, surplus of money is totally eliminated.
Monetarist opined that people react by getting rid of the excess balances of transactions needs of different sectors within the economy and increases the purchase of goods and services for security purpose. Transaction in security affects the relative prices and interest rates. A fall in interest rate encourages investment spending. Therefore, the monetarist viewed the money supply as a variable affecting income directly and also monetary policy is effective in regulating inflation by restricting money stock. Hence, the monetarist transmission mechanism is shown as:
OMO Spending GNP
Where OMO is open market operation, MS is money supply and GNP is gross national product.
Pest Keynesian, stated that the lost of capital is the main process by which changes in money supply influence the real economy. While the non-monetarist argue that monetary policy is not as effective as compared to fiscal policy in determining total money spent in the economy. The monetarist led by friedman said that despite their differences still hold a strong view that:
(1) Movement in the quantity of money is the most reliable measures of monetary policy.
(2) Monetary authorities can influence the movement in the business cycle and also in the money stock.
(3) Emphasing economic stabilization programmes, the change in the money supply are the main primary determinant of changes in total spending.
(4) Monetary policies are transmitted to a real economy though a relative price process which affects real and financial assets the above view form a basic of monetary policy in Nigeria economy.
2.6 MECHANISM FOR THE CONDUCT OF MONETARY POLICY
Aderiran (1999), explains that the conduct of monetary policy is done through institutional arrangement and for this process usually provided with relevant laws which defines the relationship between the CBN and government in light of the rapid changes in the economy and suggestions on what can help in sustaining or maintenance of macro economic stability in Nigeria’s monetary system and ensuring growth and development in the economy. The conduct of monetary management passes three inter-related stages, namely policy formulation, implementation and review.
Ogwuma (1994) in his contribution said that when institutional frame work is in place, monetary policy is formulated by first appraising the current past and present and by making forecast- on the likely future trend in the absence of policy changes. He further mining the recent condition analysis of wide range of data in the economy and the appraisal of current policies.
The second stage is the development of forecast, aimed at determining the future forecast, aimed at determining the future course of the economy in the absence of policy change. From the results, the constraints, priorities for corrective actions are noticed. The last consist of developing and evaluating the policy options for getting and of the likely problems in the medium and short term.
2.7 CBN MONETARY MANAGEMENT TECHNIQUES
Legal frame work for CBN monetary policy Adediran (1999) explain that “if confidence is lost in a country’s currency notes, coins, direct and indirect instruments are used as an effective means of payment and maintenances of economic stability, such country without doubt, will find it difficult if not impossible to formulate any meaningful economic policy for the good of its subjects, most government therefore deem it necessary to put in place effective machinery and laws to ensure the integrity of their monetary system and its instruments.
According to CBN annual report (1998) CBN as the main source of legal authority in its discharging of its responsibilities in the CBN Decree No. 24 of 1991 and banks and other financial institutions Decree (BOFIO) No. 25 of 1991.
Decree has empowered the banks as an agency of the government, change with the sole responsibility of maintaining sound financial structure and monetary stability. The other objectives are also to avoid conflicts of interest, excessive risk taking and possible abuses in their credit and investment operations.
Adediran (1999), noted that since the establishment of CBN in 1958, the objectives of the CBN is written in section 18 of CBN ordinance 1958 have remained widely the same, but the strategies and arrangement for achieving such objectives have changed, in character and scope.
In general, the methods of achieving these objectives have broadened in comparison with the dynamics of the legal institutional and macro-economic environments.
According to CBN Report (1998), CBN Decree No. 37 (Amendment) of 1998 empowered CBN to formulate and implement monetary and exchange rate policy approved by the federal government. In the same vein, the president (Head of state) who has authority to amend, accept or reject such a proposals, while the CBN initiates monetary and Banking policies, they are implemented by the president (federal government) only when it is approved.
In 1998, the CBN (amendment) Decree No. 37 of 1998, granted the bank monetary and banking policy proposals (CBN governor) to report direct to the presidency rather than through the minister of finance. Since then, the CBN proposals have been sent direct to the president. They are still subject to consideration by various council the national council of state and the provisional Ruling council.
According to (1995) monetary policy circular No. 29), after the approval of the CBN policy proposal by the federal government, the necessary measures are communications in form of circular issued by CBN penalties are meted to banks for failing to comply with the prudential guidelines, minimum paid-up capital requirement which are also stated in the circular. To monitor the activities of the bank and other financial sectors operators, the CBN with cooperation of Nigerian Deposit Insurance corporation (NDIC) conduct an inspection of all licensed commercial and merchant banks which are expected to submit regular returns in their operations to the CBN. The examinations and returns from the institutions as well as current economic development permits an evaluations of the extent of compliance with the circular. There is the need to take a review of policy measures as a result of the general effects of the policy packages on the economy.
As a preview to understanding the monetary policies administered in Nigeria, I will briefly review the economic policy measures of 1998 that prevail in the country.
The economic policy measures adopted in 1998 were designed primarily to consolidate and build on the gains of maintaining macro-economic stability in the previous two years. The dominant strategy for achieving these objectives remained the use of market based instruments of monetary policy and addressing problems of unemployment and poverty from the supply side. Macro-economic stability was some how threatened, as the collapse of crude oil prices in the international market weakened commitment to fiscal prudence, resulting in substantial increase in the budget deficit.
Moreover, output growth showed reduction in the rate of inflation and strengthening of the external sector intensified. These policies were to be implemented against the back drop of the federal governments commitment to further deregulation of the economy. The specified target for the year were to :
(i) Ensure accretion of US $600 million to official external reserves.
(ii) Achieve a real gross domestic product (GDP) growth rate of not less than 40% (percent).
(iii) Maintain price and exchange rate stability with inflation rate not exceeding 9.0% (percent).
In pursuit of the above goals, the following specific policy measures were adopted:
a. Monetary and credit policy measures: The stance of monetary continued to be restrained but disposed to ensure adequate resource flow to the private sector for productive activities.
b. Monetary policy instruments:
(i) Cash reserve requirement: The specified reserve ratio for all commercial bank remained at its 1997 level of 0.8 percent, while the base for calculating the ratio countries (demand, savings and time deposits), certificate by non-Banking public. The exempt remained in force.
(ii) Liquidity ratio: The minimum liquidity ratio applicable to commercial and merchant banks was also retained at 30.0% in 1998 while the base on which the ratio would be applied remained the total deposit liabilities. Also, discount house were required to invest a minimum of 60.0% if their total deposit liabilities in treasury bills down from 70.0% in 1997.
(iii) Discount window operations: The CBN discount window facility continue to be use strictly in line with the banks roles as lender of last resort and signal the direction of change in interest rate movement. Thus, transactions were geared towards the facilitation of OMO in the form of short term, largely over night loans, counteract by the borrowing institutions holdings of government debt instruments and other eligible securities approved by the CBN.
Resolving financial sector distress, efforts to resolve the distress in the banking sectors were to be intensified during the year. The applicable distress resolution options were taken over. Restructuring, sale and out right liquidation of terminally distress banks that failed to recapitalize on the 31st of December 1998.
Furthermore, the effectiveness and capacity of the supervisory authorities were beefed up. To this end, it was decided that any bank who failed to comply fully with the new minimum paid up capital requirement of five hundred million Naira (#500,00,00) may have their licenses revoked.
2.8 CBN PRE-ADJUSTMENT PROGRAMME POLICY
Generally, pre-adjustment programme are designed to achieve a certain growth target in some credit or monetary aggregate as noted by O.O. Akanji (1998), for instance, a country where there is a shift to market orientation which often take place, the target for a particular monetary aggregate may become in appropriate and therefore may have to be revised.
Market economics that used direct controls on interest rates and bank specific credit ceiling to achieve monetary target may suffer from in desirable effects of such policies on resource allocation. For these reasons, the informal financial market could wax strong monetary control through reserve money management.
2.9 MONETARY AND BANKING POLICIES
CBN Report (1998) explains that economic policy measures adopted were designed primarily to maintain macro-economic stability and sound financial structure. For instance, there was a vast number of instruments used in the execution of monetary and banking policies which includes the following: OMO, Liquidity Ratio, Cash Reserve Requirement, Interest rate regulation, stabilization securities, discount window operation, moral suasion and general directives.
2.10 EXTERNAL SECTOR POLICY
External sector policies in 1998 were designed to strengthen the balance of payment position as well as foster exchange rate stability. The external sector position weekend considerably as the overall BOP’s recorded a huge deficit of U.S $2,873 million in contrast to the modest surplus of U.S $15.0 million observed a year earlier.
Paul Ogwuma (1994), in his word of caution, said that the role of CBN policies on the ultimate target to economic policy is generally difficult to establish due to the fact that monetary and banking policy are mainly employed in combination with other policies such as fiscal, exchange policies, and trade income. The deficit reflects the poor performance of the oil sector, which brought about the fall in the international oil price. In general, all the sector of the economy felt the impact of fall in the international price of crude oil. The fiscal operation of the federal government ended in a substantial deficit. In addition to the weak domestic demand for goods and services, capacity utilization was adversely affected by competition from cheap imports, breakdown of competition of infrastructures and the energy crisis.
Although, in-spite of the renewed demand presume on the foreign exchange market, the exchange rate in parallel with bureaux d-change which depreciates significantly.
2.11 BANKING SECTOR REFORM AND STRUCTURAL CHANGES
Ogwuma (1997), observed that Nigeria’s Banking sector experienced a high growth momentum since independence in 1960 through 1985 in terms of its development, structure and contribution to overall performance. This sector mainly provide service that are important for a modern economy. It provides a good and an acceptable means of exchange which facilitate trades, production process in the country through mobilization and channeling of domestic saving. Nevertheless, the banking sector did not move to the level of sophistication necessary to enable it perform well. This could be traced to the problems of inadequate legal frame work, attitude of the absence of good lending policies which paved way to skeptics, demise of experience, poor quality service and absence of qualified personnel.
According to J.O. Aderigbe (1997), the banking sector reform gathered momentum in 1990 where the monetary authority measures in the banking system. This was designed to enhance the capital base of banks and promote a more professional approach to bank lending, provision of performing loans.
In 1991, CBN, Banks and other financial institutions (BOFI) Decrees was established for a new legal framework for banks and other financial institutions and this is being done to enhance the supervisory responsibilities and autonomy of the CBN. Also, in the same year, there was a licensing policy which encouraged or increased the number of commercial and merchant banks from 41 in 1986 119 in 1991. the aim was to promote a more competitive banking environment and efficiency in financial intermediation.
Lastly, in 1989, the Deposit insurance co-operation of Nigeria (NDIC) was established for banks with the main objectives of protecting depositors from bank failures and strengthening public confidence in the banking system. With the distress in the banking system, the supervisory and regulatory authorities have designed resolution opens which are now being implement.
2.12 THE PERORMANCE ROLE OF MONETARY POLICY
According to 1998 Annual Report of CBN, a review of monetary development in the past three years shows that the growth in domestic liquidity of broad money stock (M2) grw rapidly. Accelerated growth of broad money shows a sharp increase in narrow money (M1) which was the target variable while (M2) rose by 21.2% against a target of 17.7% between 1995 and 1997 aid recorded a low growth rate of (5.4%) in 1998. It expanded also in 1998 by 17.2% which is slightly higher than the target of 10.2%.
The initial deliberation which a moderating effect has a declined in growth which was in line with the low inflation figure of 16.8, 15.0 and 15.6 percent observe in 1996, 1997 and 1998 respectively. This is as a result of expansionary fiscal policy which bring about a decrease in interest rate in the economy.
Ogwuma (1994), noted that a high unstable environment is envisaged by the developments of some variables to excessive growth in monetary aggregates.
The growth of m1 which over the period was the intermediate target targets policy increased from the initial target since 1988. This was from a result of the re-inflationary package of the particular year.
According to Onyido (1997), interest rate plays a crucial role in the efficient allocation of resources aimed at facilitating development and growth in an economy, market interest rates rose steeply in an environment of high inflationary rates and as a result of actions taken by the monetary authorities to counter large injection of liquidity resulting from financing government deficits. For example, in 1989, an interest rate rose steeply following the right of transferring public sector deposits from commercial and merchant banks to CBN. Norminal interest rates continue to rise in 1990, but generally declined due to the moderating effect in the following year.
CBN 1995 Annual report stress that money stock grew from 47.8 and 65.2 percent in 1994 and 1995 respectively.
S.N. Ibeabuchi (1995), observed that in 1994, CBN achieve a massive reduction of rits holding of treasury bill through OMO which has a moderating effect on the growth of base money and money supply. He slow down that occurred in the growth of base monetary and money stock were both traceable to the decline in the growth of government borrowing from the CBN.
The average saving deposit rate of commercial banks rose marginally from 6.1% in 1997 to 6.2% in 1998 and reached 5.2% at the end of December. Tune deposits rates fell from 10.4% in 1997 to 10.2% 1998 for commercial banks and from 6.7 to 10.8% for merchant banks. The lending rates rose even steeply by 1998. The maximum lending rates applied to most credits banks, average 8.4% commercial banks and 13.8% for merchant bank as against the respective level of 7.9% and 12.3% in 1997.
The inter-bank rates is the most sensitive rate in the market rate which rose from average rate of relative stability in the first half of the year of 1997 from 18.0% in 1997 to 32.5% in June 1998 before it finally dropped to 16.3% in December. They were generally positive in 1997 to June 1998 but exhibited a fall in the second half of the year 1998. The fall was due to the liquidity effect released during the out standing stock of stabilizing securities to commercial banks. Albert, there was a significant drain in excess reserves, but underlying growth in primary money arising from government borrowing from CBN to finance deficit could not be totally removed by the volume of OMO attained during this period.
IMPLICATION OF THE RESULTS
In the light of the tests above, it is necessary to discuss the various implications to the government the general public and various policy-making authorities. The results obtained from the model’s stated in this research is meant to have implication in the Nigerian economy. Based on the results, it is seen that change in the money supply will lead to change in the price level. This means that an increase in money supplied to the economy determines the price level in that economy. Deducing from the result it can be also said that the growth of the economy could be control with money supply. Since a percent change in money supply brings about a significant change in the GDP, and GDP is one of the measures use to determine the rate of growth in an economy. Furthermore, the result also shows that the level of money supply can not be used to explain the rate of inflation in the entire economy. It rather means that other macro economic aggregates for example high rate of employment which increase the public disposable income, general increase in the price level. Lastly, the result of change in money supply can be said to have a significant impact on general price level and GDP but it is not the major cause of high inflation rate in Nigeria.
5.0 SUMMARIES, CONCLUSION AND RECOMMENDATION
5.1 SUMMARY OF FINDINGS
The findings show that the general price level is positively related to change in money supply. Therefore, it can be stated that change in money supply play a vital role in regulating general price level.
Also, the findings indicate that there exists a positive linear relationship between money supply ands income (GDP). This means that increase in money supply result a significant increase in national output. So in this case, variation in money supply play an effective role in the regulation of national output.
Furthermore, the third model result shows the existence of negative relationship between money supply and inflation rate. This mean means that as money supply increases, inflation decrease; which signifies that it is not only money supply that increase the rate of inflation in Nigeria. High inflation rate could be caused by other macro economic aggregates in the absence of money supply.
It can be deduced from the above, that monetary policy plays a major role in promoting economic stability, poor policy implementation on the part of the monetary authority is the only constraint faced by the economy.
Monetary policy has been an important instrument in promoting economic stability in the economy. It influences economic variable in spite of factors militating against it. Monetary policy has been also an invaluable weapon for stimulating economic development.
The operation of monetary policy instrument depends on the objectives of the regulating authority. Its success is greatly dependent on the execution of such policy by the monetary authority and other financial institutions.
The role of CBN in managing the economy still remain a contentious issue. It should not be assured however, that monetary authority alone could achieve all these goals. Rather it should be stressed that the attainment of all the goals requires co-ordinated effort of monetary authority and government agencies who have responsibility of fiscal policy, import reduction policy, debt management policy, income policy and exchange rate policy.
Finally, for Nigerians to achieve a stable economy. They should strictly adhere to the recommendations below. If not, the situation might get more critical than what it is today.
5.3 POLICY RECOMMENDATION
In the light of the above study I wish to forward the following recommendation for further policy implementation.
(i) CBN should exercise influence that would affect the behavour of monetary aggregates namely money supply, bank credit, interest rate in the over all liquidity of the economy.
(ii) There should be a commitment to pragmatic approach in dealing with the problems facing the banking industries in order to ensure an enthronement of sound banking environment and restoration of full public confidence in the financial sector. This confidence will attract lost credit back to the banking sector and hence reduce the level of money in circulation to enhance effective utilization of monetary policy to correct macro-economic instabilities.
(iii) CBN should be given some level of independence that will allow her formulated monetary policy work in order to save policies from unnecessary intervention by the government and to also save time in solving the alarming economic problems.
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