The most
popular instrument of monetary policy was the issuance of credit rationing
guidelines, which primarily set the rates of change for the components and
aggregate commercial bank loans and advances to the private sector. The
sectoral allocation of bank credit in CBN guidelines was to stimulate the
productive sectors and thereby stem inflationary pressures. The fixing of
interest rates at relatively low levels was done mainly to promote investment
and growth.
Occasionally, special deposits were imposed to reduce
the amount of free reserves and credit creating capacity of the banks. Minimum
case ratio were stipulated for the banks in the
mid. 1970-s on the basis of their total deposit
liabilities, but since such cash ratios were usually lower than those
voluntarily maintained by the banks, they proved less effective as a restraint
on their credit operations.
From the mid-1970s it became increasingly difficult to
achieve the aims of monetary policy. Generally, monetary aggregates, government
fiscal deficit, GDP growth rate, inflation rate and the balance of payments
position moved in undesirable directions. Compliance by banks credit guidelines
was less than satisfactory. The major
source of problems in monetary management were the nature of the monetary
control framework the interest rate regime and the non-harmonization of fiscal
and monetary polices. 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. The rigidly controlled interest rate regime, especially the low levels of
the various rates, encouraged monetary expansion without promoting the rapid
growth of the money and capital markets. The low interest rates on government
debt instruments did not sufficiently attract private sector savers and since
the CBN was required by law to absorb the unsubscribe portion of government
debt instruments, large amounts of high-powered money were usually injected
into the economy. In the oil boom era, the rapid monetization of foreign
exchange earnings resulted in large increases in government expenditure which
substantially contribution to monetary instability. In the early 1980s, oil
receipts were not adequate to meet increasing levels demands and since
expenditures were not rationalized, government
resorted to borrowing from the central bank to finance huge deficits.
This had adverse implications for monetary management.
The objectives of monetary policy since 1986 remained
the same as in the earlier period, namely: the stimulation of output and employment and the promotion of domestic
and external stability. In line with the general philosophy of economic management
under SAP, monetary policy was aimed at inducing the emergence of a market
oriented financial system for effective mobilization of financial savings and
efficient resources allocation. The main instrument of the market-based
framework is the open market operations. This is complemented by reserve
requirements and discount window operations. The adoption of a market based
framework such as omo is an economic that had been under direct control for
long, required substantial improvement in the macroeconomic, legal and
regulatory environment.