Fiscal
dominance has militated against the effective implementation of monetary policy
in Nigeria. Fiscal dominance is characterized by a monetary authority whose
polices have been totally subordinated to the government. All outstanding debt
is backed by the monetary authority in the form of current and future seignior age revenues or that part of revenues accruing to the government
through the creation of money (as in quantitative easing). A case of complete
fiscal dominance would compel the monetary authority to fully accommodate the
fiscal authority whenever a budget deficit is financed with debt.
By definition, fiscal dominance
impedes the effective implementation of any monetary strategy aimed at
controlling inflation. Monetary policy is forced to turn its strategy around
because it has to ensure fiscal solvency to prevent a catastrophe. In order to
generate seignior age revenues. Clearly applying what is considered “normal”
monetary policy when there is a regime of fiscal dominance therefore risks
aggravating not just the fiscal situation but inflation dynamics too. Under
fiscal dominance, however, it will likely only made an aggressive pursuit of
the inflation target more likely and therefore more disruptive.
Data
Poor quality of data is constraint
in formulating monetary policy in Nigeria. The lack of high frequency and
reliable data renders econometric analysis difficult.
Oligopolistic Banking System
In Nigeria the money market is
oligopolistic in nature and this prevents timely adjustments to financial and
exchange rate changes. In Oligopholy you see things being
done contrary to the notion of a free market. In the oligopolistic banking
system in Nigeria, the biggest banks control a large and large share of
deposits. In essence, very few large banks control the preponderance of the liquidity
in the banking system. Thus dictate the interest rates in the market
irrespective of the central bank of Nigeria’s manipulation of the minimal
anchor discount rate of the MRR.
Dualistic Financial and Produce
Markets
The existence of large informal
credit market and exchange rate market in Nigeria has many implications on the
transmission mechanism of monetary policy. For instance, a divergence between
the official and parallel market exchange rates induces in the short-run, a
chain of speculative activities, which invariably undermine the efficiency of
monetary policy instrument.
Persistent Liquid Overhead
Among less developed countries,
Nigeria had the elevent largest external public debt in 1989 9and the largest
among sub Saharan countries). (Nigerian index). The country faces persistent
difficulties in serving its debt, in 1980’s debt rescheduling was almost
continuous. The secondary market price of Nigeria’s bank debt in mid 1989 was
only 24 cent on the dollar, indicating the markets were heavily discounting the
probability that Nigeria would pay its external debt. Despite several debt rescheduling in
the 1980’s and 1990’s, Nigeria’s debt over hang continued to dampen investment. Nigeria’s highly oligopolistic money
markets, financial repression of interest rates and exchange rates and sluggish
expansion in response to improved prices in export and import substitution
industries prevented timely adjustment to financial and exchange rate changes.
Policy Inconsistencies
This describes a situation where a
decision maker’s preferences change over time in such a way that what is
preferred at one point in time is inconsistent with what is preferred at
another point in time. In Nigeria, policy inconsistence has
always being a problem for instance, we have cases where projects, policies and
programmes were abandoned. The continuity of programmes and
policies as hindrances to monetary policy implementation is blamed on the
inconsistencies in the policy makers.
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