INTRODUCTION
1.1 Background
of the Study
Since its establishment in 1959, the
Central Bank of Nigeria has continued to play the traditional role expected of
a Central Bank, which is the regulation of the stock of money in such a way as
to promote the social welfare (Ajayi, 1999). This role is anchored on the use
of monetary policy that is usually targeted towards the achievement of full employment
equilibrium, rapid economic growth, price stability and external balance.
Over the years, the major goals of
monetary policy have often been the two later objectives thus, inflation
targeting and exchange rate policy have dominated CBN monetary policy focus
based on assumption that there are essential tools of achieving macroeconomic
stability.
The economic environment that guided
monetary policy before 1986 was characterized by the dominance of the oil sector, the expanding role of the
public sector in the economy and over dependence on the external sector in
order to maintain price stability and a healthy balance of payment position,
monetary management depended on the rise of direct monetary instruments such as
credit ceilings, selective credit controls, administered interest and exchange
rates, as well as the prescription of cash reserve requirements and special
deposits. The use of market based instrument was not feasible at the point
because of the underdeveloped nature of the financial markets and the
deliberate restraint on interest rates.
The most popular instrument of
monetary policy was the issuance of credit rationing guidelines, which
primarily set the rate of change for the components and aggregate commercial
bank loans and advances to he private sector.
In general terms, monetary policy
refers to a combination of measures designed to regulate the value, supply and
cost of money in an economy in consonance with the expected level of economic
activity.
However, an unstable or crisis
ridden financial sector will render the transmission mechanism of monetary
policy less effective, making the achievement and maintenance of strong
macroeconomic fundamentals difficult. This is because it is only in a period of
price stability that investors and consumers can interpret market signals
correctly: typically in periods of high inflation, the horizon of the investors
is very short, and resources of the investors is very short, and resources are
diverted from long-term investments those with immediate returns and inflation
hedges, including real estate and currency speculation. It is on this background
that this study would investigate the effectiveness of the monetary policy in
Nigeria with special focus on major growth components.
1.2 Statement
of the Problem
Ensuring rapid economic growth is
the major macroeconomic goal of every economy. Economic growth is simply
defined as a quantitative increase in a country output of goods and services
(Onwukwe, 2003).
Monetary policy is of importance to
every developing nation. But despite the various monetary regimes that have
been adopted by the central Bank of Nigeria has experienced high volatility in
inflation rates. Since the early 1970’s there have been four major episodes of
high inflation in excess of 30 percent. The growth was often in excess of real
economic growth. However, preceding the growth in money supply, some factors
reflecting the structural characteristics of the economy are observable some of
these are supply shocks; arising from factors such as famine, currency
devaluation and changes in terms of trade.
The first period of inflation in the
30 percent range was in 1976. One of the factors often adduced for this
inflation is the drought in Northern Nigeria, which destroyed agricultural
production and pursed up the cost of agricultural food items, a significant
increase in the proportion of the average consumers budget. In addition, during
this period, there was excessive monetization of oil export revenue, which
might have given the inflation a monetary character.
In the late 1980’s, following the
structure adjustment programme, the effects of wage increase created a cost
push effect on inflation. In the long run, it was the structural
characteristics of the economy coupled with the growth in money supply that
translated these into permanent price increase. In 1984 inflation peaked at
39.6 percent at a time of relatively little growth in the economy, at that
time, the government was under pressure from debtor groups to reach an
agreement with the international monetary fund, one of which was devaluation of
the domestic currency. The expectation that devaluation was imminent fuelled
inflation as prices adjusted to the parallel rate of exchange. Over the same
period, excess money growth was about 45 percent and credit to the government
had increased by over 70 percent. In other respects the case of the inflation
may also be adduced to the worsening terms of external trade experienced by the
country at that time. It is possible therefore, that Nigeria’s inflationary
episodes were preceding by structural or real factors followed by monetary expansion.
The third high inflation episode
started in the last quarter of 1987 and accelerated through 1988 to 1989. This
episode is related to the fiscal expansion that accompanied the 1988 budget.
Though initially the expansion was financed by credit from the Central Bank of
Nigeria, it was later sustained by increasing oil revenue (occasioned by oil
price increase following the Persion Gulf War) that was not Sterilized. In
addition, with the debt was repurchased with new local currency Obligation. However, with the drastic monetary contraction
initiated by the authorities in the middle of 1989, inflation fell reaching one
of its lowest point in 1991, i.e 13 percent.
The forth inflationary episode
occurred in 1993, and persisted through the end of 1995. Though inflation
gathered momentum towards the fail end of 1992, it reached 57 percent by the
end of 1994, the highest rates since the eighties, and the end of 1995, it was
72.8 percent. As with the third inflation, it coincided with a period of expansionary
fiscal deficit and money supply growth. The authorities found it too difficult
to contain the growth of private sector, domestic credit and bank liquidity,
there has been a continuous fall in the inflation rate since 1996 as a result
of stringent monetary policies of the central bank. It however, increased in
2001, 2003, 2004, 2005 and 2008 to 18.9 percent, 14 percent, 17 percent and 11
percent respectively.
For this research to be worthwhile,
the researcher is interested in these problems such as:
Why has monetary polices introduced in Nigeria in the
previous years not been able to achieve any meaningful result?
Could it be that the policies are not effective in
achieving economic growth?
Do the policies need further revenue to make it more
effective?
Is our financial system reliable in helping in the
implementation of the policies?
What is the impact of monetary policy on Nigeria
economic growth?
It is on this perspective that the role
of monetary policy on Nigeria’s economic growth will be studied.
1.3 Objectives
of the Study
The main objective of this study is
to assess the effectiveness of the monetary policies in Nigeria. However, the
following specific objectives would also be achieved.
To evaluate the performance of monetary policy in Nigeria
over the years.
To empirically investigate the impact of the monetary
policy on economic growth and other major growth components in Nigeria.
To make recommendations based on the findings.
1.4 Significance
of the Study
The result of this research work
will be beneficial to both financial and non-financial institutions. It will
help to give necessary information on the policy options which the government
of Nigeria should adopt to make the economy friendly and attractive to foreign
investors. Furthermore, the study will be
significant to the private sector, foreign investors and as well as the
individuals, as it will inform them on the macroeconomic condition of the
country. Thus, this will help in their policy formulation. Finally, the study will be added to
the already existing body of knowledge in the field of economics.
1.5 Hypothesis
of the Study
The hypothesis to be tested are:-
H0: That monetary policy does not have
significant impact on the economic
growth of Nigeria.
H1: That
monetary policy has significant impact on the economic growth of Nigeria.
1.6 Scope/Limitations of the Study
The economy is a large component with lot of diverse
and sometimes complex parts. This study will cover all the facts that make up
the monetary policy, but shall empirically investigate the effect of the major
ones. This study shall be restricted to the period between (1980-2010).
Nevertheless, many constraints were encountered in the
course of this research. The first being, lack of relevant statistical data,
some of the data needed for this research were not in existence and moreover,
data storage system in Nigeria is very poor and outdated. Closely related to
this is the choice of appropriate econometric techniques to estimate the parameters
of the relationship under study. These two factors have forced me to limit the
number of the macroeconomic indicators in the model to few variables.
Time constraint has shown no mercy to me too. The
limited time has to be shared among many alternative uses which are; course
work and research pursuance.
Finally, as a student of a developing country, finance
poses a lot of problem towards achieving the desired result; research writing
is very expensive as it entails many costs which include: mobility cost, of
collecting data and other miscellaneous costs.
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