Monetary growth was significantly restrained in 1986
and 1987, but virtually expanded in 1988 following the reflationary budget of
that year. Therefore, money stock growth moderated in 1989 but escalated again
in 1990 owing to significant external inflow following increase prices of
petroleum products. Monetary expansion became more rapid
between 1991 and 1994 because of the corresponding increase in the monetary
base. Narrow money (MI) declined by 4.5 percent in 1986 as against the 9.1
percent increase in 1985. contraction in narrow money was attributed largely to
the transfer of #4.2 billion to CBN from banks being Naira lodgement for
foreign payments arrears which the CBN
could not effect due to foreign due to foreign exchange scarcity.
Monetary restraint weakened somewhat
in 1987 following an increase in the fiscal deficit which was partly sourced
from the banking system. Consequently, M1. Rose by 17.3 percent,
exceeding 11.8 percent target for the year. In an attempt to moderate an excess
in money growth, CBN increased the liquidity ratio from 25.0 to 30.0 percent,
deregulated interest rates and increased its minimum rediscount rate from 13.0
to 15.0 percent so as to make funds more expensive and thereby discourage
marginal borrowers. However, in response to the reflationary budget of 1988,
the monetary authorities lowered the liquidity ratio, reduced he minimum
rediscount rate to 12.75 percent 15 percent and increase the credit growth
target to the domestic economy from 4.4 percent in 1987 to 1.1 percent in 1988.
As a result of the policy slippage
in 1988 and the subsequent increase in budget deficit and the monetary
aggregates, the monetary authorities tightened up monetary policy in 1989. It
therefore, increase the rediscount rate from 12.75 percent to 18.5 percent,
increased the cash ratio, raised the liquidity ratio for banks to 30.3 percent,
adjustment the capital adequacy ration from 1.12 to 1.10 and ordered the
transfer of public sector deposits in banks to CBN, when this was discovered to
the source of liquidity pressure. These concretionary measures impacted on the
money supply as the expansion of M1 moderated from 42.3 percent in
1988 to 21.2 percent in 1989. in 1990, M1 Rose again by 44.7
percent, largely due to the significant foreign exchange inflow form the
increase in petroleum prices.
In spite of intense pressure in the
financial sector, the CBN introduce the use of open market operations (OMOs) as
a tool of monetary control in just 1993, while it gradually dismantled the
direct credit controls.
In 1994, the volume of OMOs,
expanded significantly although its upward direction was threatened by the
sudden policy changes announced in the 1994 budget. An example of such changes
was the capping of interest rates which brought down the yield of treasury
bills for OMOs to 12.4 percent. Even with a slightly high average filed in
1995, the volume of OMO transactions was down compared to 1994. on the whole,
the OMO instrument was quite useful in checking the growth of bank reserve
during the period. Hence, the increased level of band and doubtful debts
substantial erosion of the general downturn of the economy resulted in the
increase incidence of financial distress in the economy.