Problems of Monetary and Fiscal Policies in Nigeria

Problems of Monetary and Fiscal Policies in Nigeria

Problems of Monetary and Fiscal Policies in Nigeria

It is about 21 years ago today since the introduction of a deregulated  economic system (ie allowing the market forces to determine the interest rate) in Nigeria ever since the inflation has  steadily been on increase in the economy. Owing to this development, real economic growth has not increased to an optimal level.

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In order to remedy this undesirable economic syndrome, several government policies have been put in place.  Such economic policies include monetary and fiscal, attracting different instruments for the purpose of this study, only interest rate and government expenditure will be analyzed as instruments of monetary   and fiscal policies.
Monetary  policy can be defined as that part of economic policies  which regulates  the level of money or liquidity in the economy in order to achieve some desired policy objectives, such as the control of inflation. (Bannock etal 1978: 309). It uses specific instrument like the open market operation (OMO), interest rate, special Bank Reserve Ratios, Exchange Rate (foreign), special Directives and moral suasion. According to Anyanwu (1995), “fiscal policy is taken to ref to that part of government policies concerning the raising of revenue through taxation and other means and deciding on the level of and pattern of expenditure for the purpose of influencing economic activities or attaining some desirable macroeconomic activities or attaining some desirable macroeconomic goals”. Fiscal policy therefore, uses taxation, borrowing (through balanced, surplus and deficit budgeting) as major instruments. Precisely, all the above mentioned instruments of monetary and fiscal policies will be analyzed in this study as an effort to curtail inflation. What  then is inflation?
According to Owosekun and Odama, (1982) “inflation is a sustained upward trend in the level of prices”. Adewunmi and Awoseka (2982) in their own view, approached inflation from the conceptual frame work of its cause, and opined that, it is the process resulting from the competition in attempting to maintain total real income, total real expenditure and total output at a level which has become physically impossible or attempting to increase any of them to a level which is physically impossible.
Generally speaking, inflation refers to a process whereby, prices of goods and services rise steadily resulting in diminishing purchasing power of a given nominal sum of money. There are many types of inflation. Examples include, cost-push inflation, demand –pull inflation, Running inflation and hyperinflation. Essentially, the introductory background of inflation has been given to afford both the researcher and the reader an opportunity to appreciate the Nigerian practical situation in the period under review.
It is intended to extensively analyse the impact of government economic policies (monetary and fiscal policies) on the rate of inflation in Nigeria since 19 years of a deregulated economic era. At the end of this research, such questions stated below should have been answered.
    Why is inflation steadily on the  increase, despite the intensive monetary and fiscal measures?
    Are all the theories of economic stabilization applicable to the Nigerian economy?
    Are there problems  inherent in the government policies on economic stabilization?, and
    Are there alternate policy measures to the conventional theories?.
Primarily, this research study has been designed to review existing literature on conventional theories on economic stabilization with emphasis on interest rate and government expenditure in relation to inflation. A careful synthesis will be drawn from the classical and Keynesian boundaries. The overriding principle of literature review will be within the context of theories, empirical evidence and practical realities of Nigeria economy.


Since the introduction of economic deregulation in Nigeria, inflation has become one of the major macroeconomic problems facing the economy. The government has introduced a lot of policy measures to control inflation in the country. Prominent among the measures are monetary and fiscal policies. Meanwhile, interest rates and government expenditure are the most frequently used instruments to achieve the stabilization goal of aforementioned  monetary and fiscal policies. Despite the intensified use of the policies, the rate of inflation in Nigeria is still very high . several questions have come to the minds of Nigerians as to whether government economic policies are not effective  in the curtailment of inflation. In the light of this crucial question, the researcher will attempt to see whether high interest rates can as well reduce the rate of inflation.


The main purpose of this study is to examine the impact of monetary and fiscal policies on the rate of inflation in Nigeria since 1986. more especially, the objective of this research include among others the following:
(a)    To determine the relative impact of fiscal and monetary policies such as government expenditure and interest rate of inflation in Nigeria
(b)    To recommend alternative policy measures in controlling inflation in Nigeria.
The purpose of this study is to analyze the impact of the use of interest rates and government expenditure in influencing the rate of inflation. Thus, for the sake of clarity and adequate research work, the following hypothesis  are subject to empirical investigation.
1.    Ho: that changes in interest rate have no significant impact on the level of inflation.
Hi:   That changes in interest rate have significant impact on the level of inflation.
2.    Ho: That changes in government expenditure has no significant impact on the level of inflation.
Hi: That changes in government expenditure have significant impact on the level of inflation.
The theories of economic stabilization revolve round monetary  and fiscal policies and explain why several policy instruments relating to these theories have been experimented in Nigeria since 1986.
In this research study, an object appraisal of the actual implementations of the said policy measures will be made. This provides an opportunity for both the researcher, monetary authorities (CBN) and other related implementation agencies to adjust where necessary. Above all, when alternative policy measures are made, it will afford both the central bank of Nigeria (CBN) and the federal ministry of finance the opportunity to achieve a stable price level.
Economic stabilization is a topic which is very wide and that suggest why the researcher has mentioned numerous economic policy measures considering  the plan of this research, only  the interest rate among government expenditure has been examined (as they affect the rate of inflation). The research study is limited by several factors. These include time constraints, money and nature of data collection. In fact, the time allotted for this research was too short for proper investigations into the research  problems. Also, the research  is limited by financial constraint. As a result of this, inadequate finance hindered the quality of study. Conclusively, the nature of data used to analyse the research problem is that of secondary data which might have not been accurate.



The question of which theory to recommend in order to maintain rationality, on the issue of the way in which monetary and fiscal approaches should be carried out with respect to the cyclical behaviour of the economy, leads to stabilisation policy. According to the Oxford Dictionary of Economics by Black (2003:441)), stabilisation can be defined as ”Altering the behaviour of a system to induce it to return o equilibrium following disturbances, or to speed up the way it does so”. On the other hand, stabilisation policy is defined as the use of economic policies to reduce fluctuations, John (2003: 441).  However, stabilisation could also be referred to as any amount of intervention into the affairs of any economy in order to prevent extreme fluctuations.
Although the tem target other macroeconomic objectives like full employment, real optimal growth and balance of payment stabilisation in an ideal sense, means all conscious efforts made to avoid too much gap between the peak and through to minimise fluctuations. There is adequate literature on the concept of stabilisation policy. In this research work however, only the most relevant materials with respect to stabilisation policy in Nigerian economy have been reviewed in addition to the conventional theories.
On the basis of the uncertainty faced by policy-makers in the Nigerian context, the effects of policies and other exogenous shocks experienced due to a persistent inflationary trend, the most frequent policies used are monetary and fiscal. While monetary policy refers to deliberate government efforts made through the manipulation of interest rate an other relevant instruments. It can also be referred to, as the policy of monetary authority of a country with regard to monetary matters (Jhingan, 2005: 342). He further argued that, monetary policy in can underdeveloped country play san important role in accelerating development by influencing the cost and availability of credit, by controlling inflation, and by maintaining balance of payments equilibrium (Jhingan, 2003:342).
Samuelson (1976) leading research on the theory of stabilisation policies deserves much attention in this research stud, because of his focus on “interest and capital”. He established that a combination of  monetary and fiscal policies plays a vial role in not only stabilising an  economy (control of inflation), but determines the rate of capital growth. In the course of his analysis, Samuelson  recommended the  adoption o “Tight fiscal and easy monetary policies as  well “Easy fiscal and tight monetary policies” for economic stabilisation. However, he cautioned that, either of the above is a function of the economic peculiarities of the country in question. He use graphical illustrations for h two policies to make his analysis more effectively comprehensible as can be seen in the diagram below:

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In the diagrams (a) and (b), Samuelson explains that a combination of monetary and fiscal policies are the terminators of the rate of capital growth.  When capital growth takes place in any economy, te society is bound to build up quickly and achieve the basis of macroeconomic desires, (like full employment, increasing productivity and favourable balance of payment).
According to diagrams (a) and (b), by tightening fiscal and easy monetary policies, the economy attracts full employment of savings and investments at E. on the other  hand, when the second economy  uses “Easy fiscal policy (like low taxes and deficit spending) put at par with high monetary policy, the resultant effect is a low saving and investment  at an equilibrium of E1(  much less than E in investment).
Finally, he postulated that low saving and investment matches with high consumption, which does no augur well for a smooth growth of the economy. It is important to stress a this juncture that, whichever angle an economy approaches this policy, two problems are certain to arise (i.e. either inflation or declining productivity).
The question that is normally encountered by policy-makers is, “should inflation be curtailed at the expense of increasing productivity or should increasing productivity be enhanced despite the sad effects of inflation?” Considering the complexities inherent in the formation of stabilisation policies, the researcher deems a more expository and extensive literature of monetary and fiscal policies necessary.
Within the last 27 years of economic deregulation in Nigeria, the Central Bank of Nigeria (CBN) had relied heavily on the rate of interest as a policy instrument for achieving control over the supply of money. This apparently suggests why one of the hypothesis proposed in this study is that, changes in interest rate have no significant impact on the level of inflation in Nigeria. In doing this, security prices are caused to rise (contractionary) or fall ( expansionary) . Where the rate of interest is raised, the demand for loans and advances falls. When this happens, aggrete monetary demand falls which can check inflation this is best illustrated graphically as indicated below;

In the graph drawn above, the vertical axis represents the rate of interest (i.e. the actual price for borrowed money).  While the horizontal axis represents the stock of money (that is, supply of money). The demand curve sloping from left to right shows the level of interaction between the demand for and supply of money at various interest rates. It should also, be noted that, for the above diagram, at an interest rate of IR1, the demand for money is MS1 (settling at an equilibrium position of E1). When the rate of interest increases to IR2, the demand for money contracts to M2 and the money supply accommodates this development accordingly. This is an indication that the demand for money and its supply are the determinants of interest rate. The reverse of this can be used to analyse a fall in interest rate which is expansionary in nature.
Government budgeting can be surplus when revenue exceeds expenditure, deficit when expenditure exceeds revenue and balanced hen he latter is equal to he former. To arrive at the three possibilities of government budgeting, we can represent the symbols GE and GR, ehre ‘E’ shows the level of government expenditure and ‘R’ shows the level of government revenue in any budget.
Therefore, E<R – Surplus government budgeting (contractionary)
E>R    – Deficit government budgeting (expansionary.
E = R  –     Balanced government budgeting.
Since the epoch of economic deregulation in Nigeria, government budgets have been surplus projections so as to stabilise the price level. It is in consonance with this philosophy that the second hypothesis that changes in government has no significant impact on the level of inflation has been tested in the study.
In accordance with the theoretical background surveyed for the major variables in this research, a synthesis of related literature on stabilisation policies can be made.
The focal point of concern in this study is to examine the relationships between inflation and the most frequently used instruments for monetary and fiscal policies. On the strength of this purpose, interest rates and government expenditure have been analysed in line with their application to the Nigerian economy.
Interest rate is the price of borrowed money, which has featured frequently as a dependable instrument of monetary policy since the deregulation of the monetary system in Nigeria. This, therefore, no doubt as to why monetary authorities have introduced high interest rate guidelines within this period to discourage borrowing. The final analysis is that when borrowing is discouraged, the supply of money in the economy reduces which in turn checks inflation.
Powell (1989), examines this on the assumption that “an ultimate objective of monetary policy is to control inflation in order to create the conditions in which the “true” ultimate objective of the policy, that is improved economic welfare can be attained this contention is relevant to this research and the Nigerian case, even though, Powell cautioned that the control of inflation has not always ben the  principle objective of monetary policy. This postulation however, is predicated on the premise that, if inflation is curtailed reasonably, all other macroeconomic indicators like, full employment, optimal real growth, favourable balance of payment and increase in productivity can be achieved.
Adam Smith and other classicists commented on this issue but with particular attention on free competition or non-governmental interference which gave little or no concession to inflation as obtainable in Nigeria context. While most of the classicists share J.B Say’s law of markets, Malthus s cited by Bannock et al, (1988) disagreed with Say’s position and were of the opinion hat “increased savings would not only lower consumption but would also increase output…
The challenge before policy makers in Nigeria today is that of controlling inflation effectively and at he same time ensuring efficiency in aggregate demand which supports or crushes out inflation. Monetary risks themselves share a common view that, prior increase in the stock of money, which obviously causes an increase in the rate of inflation, can be controlled by checking the growth of money supply.
In the light of this recommendation, Powell (1989 :321-323), submits that, “it is impossible to control money supply directly”. It should be noted at this juncture that, Powell’s aforementioned submission may not be the case in Nigeria in times of economic deregulation. The primary objective of literature review in this work is the existing gap between related literature on economic stabilisation policies at every considerable cost. This is informed by the fact that, the quantity theory of money in inflation control of the 18th century was out-fashioned in the 1930’s Keynesian revolutionary ideologies an some of the 1930’s Keynesian philosophies are already becoming irrelevant to Nigeria.
In addition to the out-datedness of some of the Keynesian revolutionary postulations, Milton Friedman’s research strongly reinforced monetary policy and was seen as a counter-revolution in the policies of economic stabilisation apart from that, it is also safe to say that, since monetary policy during the Keynesian era reflected on economic changes of UK in the 1970s, most of the policy measures experimented should reflect on the realities of economic change of Nigeria in an era of economic deregulation.
It is important to point out clearly in this analysis that monetary and fiscal policies in Nigeria today differ from what is obtained in the UK at the time of classical and Keynesian theories. Despite this, proponents of Keynesian theories did not locate the cause of inflation in the growth of the money supply and therefore, control of this variable was not an integral part of Keynesian monetary policy prescription.
This cannot be the case in Nigeria because unlike the Keynesian who regarded monetary and fiscal policies as independent policies, the effects of the stock money arising form an expansionary fiscal policy (budget deficit) will always be stimulant of inflation as argued by Powell. It is in view of the argument that he Keynesian postulation in the 1930s does no have valid applicability to the deregulatory economic era of Nigeria. In discussing issues of economic crises, Burns (1978: 91-93), observes “each of our countries has specific problems that are peculiar to the character of its own economy”. In nearly all of our countries however, the fundamental challenge to current stabilisation policies is the persistence of inflationary pressures”.
It is very necessary for government economic stabilisation policies to incorporate strictly the peculiarities of the Nigerian economy, the fact that the basis of conventional theories were propounded  on a sound footing not withstanding. Emphasis is made on the minimising of persistent inflationary trend because it has adversely affected all other macroeconomic indicators in the Nigerian system. According to Burns (1978:93-94), “the present worldwide inflationary trend must therefore, also be reorganised as evidence of the shortcomings of economic stabilisation policy”. To a large extent, the failure of stabilisation policies to curtail inflation in Nigeria may not be far from some of the weaknesses of the critical formulation from the onset. Burns (1978:93-95) blames it on “excessively expansionist monetary and fiscal policies or  the  failure of such polices to offset the effort of excessively  exuberant demand in the private sector”. This is truly representative of monetary and fiscal policies in Nigeria. More often than not, serious mistakes have been made in the pre and post deregulatory eras.
Two probable weaknesses are responsible for the failure of stabilisation policies like it was identified in the United States of America in 1965. Firstly, total unwillingness to address, as a matter of urgency, the need for restricting action on the fiscal and monetary front. Secondly, in th course of policy formulation (that is in Nigeria) there is always the tendency to over-rely on monetary restriction as a strategy to check inflation. It is only heavy reliance on a balanced programmes of fiscal and monetary restraints that we can achieve the desired policy objectives.
Why did the researcher say the earlier mentioned policy devices are partially workable in Nigeria? Burns (1969), say that, “severely restrictive monetary policies distort the structure of production. On the issue of the deficiency of monetary restraint, the researcher looks at  it in terms of the effects it exerts on spending which always take place “with relatively long lags”. There ae some distortions in the Nigerian economy like excessive demand, absolute decline in real output, unemployment, and economic suggestions. Inflation can hope to be cured when adequate stabilisation efforts are tailored towards the removal of these distortions.
The contrasting recommendations by the post Keynesian and monetarists economy in the early 80s are also relevant for review here. Powell (1989:95), describes the post Keynesians as “converts to supply side economics” with a slight difference. His further analysis of post Keynesians and monetarist is more particularly relevant here. While the Keynesians recommended increasing government intervention in fthe economy affecting such areas as “state finance, an extension of planning and the use of selective import roles—“ the monetarists focussed more attention on rolling back the state’ to abandon the mixed economy of the Keynesian years by a process of deregulation, privatisation and the freeing of markets.
With the failure of the free market system globally, the only alternative theoretical recommendation (considering the peculiarities of the Nigerian economy) is modified fiscal monetary stabilisation policy devoid of external interference. This argument is a diametrically opposition approach to current classical theories which grossly failed to provide empirical basis for appraisal due to insufficient implementation, unlike Keynesian before the 1980s.
For the purpose of juxtaposition in addition to conventional theories of stabilisation policies, the researcher has thoroughly reviewed existing literature by Nigerian economic analysts.


This study, “The impact of government monetary and fiscal policies on the rate of inflation” as it affects Nigerian economy have over the yeas recorded the opinion of others. For instance, Ajagi (1997), in his research work, observed that “the practical implementation of macroeconomic theoretical prescriptions run into the twin problems of clash of goods and hitches arising from value judgements”. Vividly surveying the issue, Ajagi (1997) illustrated that during the period of inflation, the theoretical prescription, is for government to embark on contractionary policies to curb inflation”. These analyses pose the questions of whether to curb inflation and forfeit real optimal growth o the reverse of it.
Since the issue of managing and operating the major sectors of the economy greatly suffers form a persistent inflationary trend, Keynesian approach is the most relevant macroeconomic policy, this, however, calls for modification as contained in Jon Keynes “theories in the UK (1930s). Suffice to caution that he degree of success of any policy will depend entirely on thorough and realistic crises in the distant and immediate parts. This again depends to a large extent on the disposition of manages of our economic resources, determination and enthusiasm of the Nigerian populace   to overcome the desperate situation on the ground. In views of the very grave economic crises facing the Nigerian economy now, some of the constitutional structures as well as theoretical frameworks borrowed from Western countries are no longer applicable. The validity of this argument id reinforced in research work on the causes and solution of the Nigerian economic crises spearheaded by Alksum et al (1985:217-218). Though this research work was undertaken before the deregulation of the Nigerian economy, its contentions are sill relevant to date. This analysts in reviewing the emptiness of the standard and irrelevance of some theoretical foundations of stabilisation policies of the Western countries asserted that “we can no longer rely on the established theories, formulae and methodologies, peddled in the literature on National Development Planning. “We can no longer afford to continue to sink with sterile intellectual justifications and relationships of clearly bankrupt system which cannot even minimally justify itself in practice”. This assertion deserves a close attention by every Nigerian (both positive and normative economists) if we are willing to take determined action to cope with inflation and ensure the achievement of other macroeconomic indicators.
Reviewing the policy instrument of a fiscal policy in 1982 economic stabilisation Act, Sada (2001) explained that “the all in federal revenue has had adverse effects on the living standard of Nigerians” of these sad effects, he specifically pin-pointed “a squeeze in public consumption, public spending and capacity for employment”. The disagreement between Sada’s work and this research stud is the act that, from 1985 – 2004, there has been a sharp rise in federal revenue (in nominal terms) which has unprecedentally brought about an increase in public expenditure (also in nominal terms) as can be seen in appendix I.
In the same appendix, federally collected revenue rose from N12595.8m, N25380.6m, N27596.7m, N53870.4,                 N 98102.4m, N100991.6m, N190453.2, N192769.4m, N201910.8m, N3901400m for 1986-2004. Accordingly, total public expenditure increased from N9076.8m, N6372.5m, N8340.1m, N15034.1m, N24929.5m, N29286.2m, N38453m, N54501.8m, N70918.3m, – N351260m for 1986 – 2004 respectively. Considering the numerous data enumerated from several sources to back up this study, it  is very clear that, the researcher has a more up to dat information on government efforts in the control of inflation tan Sada.
Another disagreement which calls for reconciliation in Sada’s work is his submission that the inflationary trend compounded the problems of survival for the average Nigerian. The rate of inflation accelerated from 9.9 percent in 1980 to a peak level of 20.8 percent in 1981.
In Sada’s research while federally collected revenue declined vis-à-vis a squeeze in public expenditure, inflationary trend remained steadily on the increase. Apart from non-presentation of sufficient and authentic data, Sada’s scope of only four yeas and furthermore, in the pre-SAP era. This research work is essentially different from Sada’s work for the facts that, it is backed up with authentic and sufficient data, it covers a reasonable period (when the Nigerian economy has undergone  numerous drastic changes and is investigating the probable causes of inflationary trend through direct use of secondary data from  the monetary authority (CBN).5.0    SUMMARY, FINDING, CONCLUSION AND RECOMMENDATIONS

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5.1    SUMMARY
Research efforts have been intensified on the appraisal of government monetary and fiscal policies and their impact on the rate of inflation in the perod under review. Enough data have been collected ffor the years on intersest rate, government revenue, government expenditure and the rate of inflation for 1985-2004. The Ordinary Least Squares (OLS) techniques of regression analysis was used to determine the degree of relationship between interest rate, government revenue, government expenditure and the rate of inflation using multiple regression approach.
In literature review, theories of monetary and fiscal policy instruments have been examined. In the course of reviewing related literature, theories of economic stabilisation have been compared and contrasted ranging from one economy to another and the views of Nigerian economy and to another and the views of Nigerian economic analysts. However, two hypotheses have been tested to backup the claim tat government monetary and fiscal policies have no significant impact on the rate of inflation growth in Nigeria. As a matter of empirical result, the null hypothesis of the research study ahs been rejected and the alternative hypothesis accepted.
The findings of this research work were drawn form the evidence provided by both the theoretical and empirical result.
Based on the data collected and analysed, the following findings were made on the implication of government monetary and fiscal policies.
1.    There is a linear relationship between interest rate and inflation, but the former has not played a significant role in controlling the later.
2.    Despite frequent changes in interest rates (upward changes) inflation has steadily been on the increase, see appendix I.
3.    The researcher observed that monetary authorities have not been able to effectively implement the administratively fixed interested rate regime for 1985-1987 (appendix I).
4.    In the face of rising interest rates, there has been an unprecedented increase in demand for credit facilities by both private and public sectors in order to cope with the over-valued exchange rate.
On the fiscal policy guidelines, statistical data collected and analysed yielded the following findings;-
1.    Despite the manipulations in government revenue and expenditure over the years inflation since 1985.
2.    That government expenditure and inflation have a positive relationship but the former exerts an insignificant impact on the later.
3.    That government revenue and inflation relates negatively but it exerts an infinitesimal impact  on the rateof inflation in Nigeria.
A theoretical analysis of interest rates and government expenditure ahs sown that, these instruments are workable in controlling inflation.  However, the results and the data analysed and hypothesis tested led to the rejection of the claims “that  interest rates has no significant impact on inflation” and that government expenditures have no significant impact on inflation growth in Nigeria”. It is therefore safe to conclude that, although findings of this work have refuted the claims of the hypothesis, theories of  economic stabilisation should be employed with moderation.
Government economic policies are useful in controlling the rate of inflation if they are administrated in accordance with their theoretical prescriptions and the peculiarities of the economy. It is worthy t know hat, the Nigerian economy like many other developing economy is dynamic and as such we cannot expect the price level to be stable. Meanwhile, a “galloping inflation’ is not of any benefit to the economy. Accordingly, the following recommendations are hereby made: –
Interest rate and government expenditures are useful strategies for achieving monetary and fiscal policies. These economic policies should therefore be retained with moderations since our economy has not yet attained a fully developed money market a strictly regulated interest rates philosophy should be re-introduced in the economy.
In trying to solve the macroeconomic problem of this country, government should be wise in their fiscal policy to solve more problems than it creates. This is so, because, in solving one macroeconomic problem, you are on the other hand creating another.
Finally, government should adopt tight fiscal and easy monetary policy as well as easy fiscal and tight monetary  policies in order to achieve economic stabilisation.

Problems of Monetary and Fiscal Policies in Nigeria

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