1.1 BACKGROUND
OF THE STUDY
Monetary authorities in Nigeria
consist of the central bank of Nigeria (CBN) and the Federal Ministry of
Finance. The central bank promotes and maintains monetary stability and
supervises the activities of other banks, together with the Nigeria Deposit
Insurance Corporation (NDIC). Over the years, the central bank has relied on the
direct instruments of monetary control as a means of stabilizing the economy.
This implies the use of credit ceiling and sectoral credit allocation.
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
activities (Okwu et al, 2011; Adesoye et al, 2012). For most economies, the
objective of monetary policy includes; prize stabilities, maintenance of
balance of payments equilibrium, promotion of employment and output growth and
sustainable development (Folawewo and Osinubi, 2006). These objectives are
necessary for the attainment of internal and external balance of payment
equilibrium and the promotion of long – run economic growth and development.
The importance of prize stability
derives from the harmful effect of prize volatility which undermines the
ability of policy makers to achieve other laudable macroeconomic objectives.
Infact there is a general consensus that domestic prize fluctuation undermines
the role of money as a store of value and frustrates investments and growth
(Ajayi and Oyo, 1981; Fischer, 1994) on inflation, growth and productivity have
confirmed the long-term inverse relationship between inflation an economic
growth. With the achievement of price stability, the conditions in the
financial market and institutions would create a high degree of confidence,
such that the financial infrastructure of the economy is able to meet the
requirements of market participants.
The economic environment that guided
monetary policy in Nigeria before 1986 was characterized by the dominance of
the oil sector, the expanding role
of public sector in the economy and over-dependence on the external sector. The
introduction of Structural Adjustment Programme (SAP) in July 1986 as the most
viable option towards tackling the problem of the economy.
The establishment of CBN in 1st
July 1959 it 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 of
payment (Adesoye et al, 2012). (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’s monetary policy focus based on the
assumption that these are essential tools of achieving macroeconomic stability
(Aliyu and England 2009).
Indeed, an instable or Crisis–ridden
financial sector will render the transmission mechanism of monetary policy less
effective; making the achievement and maintenance of strong macroeconomic
stability/goal difficult or unrealistic. Especially, in this period of high
inflation, where the horizon of investors is very short and resources are
diverted from long–term investment to those with immediate returns. If, this is
prevalence in the economy stagnating in the nearest future as witnessed in the
period between 1991–1994 in Nigeria.
1.2 STATEMENT
OF THE PROBLEM
One of the major objectives of
monetary policy in Nigeria is price stability. However, despite the various
monetary policies/measures adopted by the central bank of Nigeria (CBN) over
the years, inflation still remains a major threat to Nigeria’s economic growth.
Nigeria has experienced high
volatility in inflation rate. Since the early 1970s, there have been four major
episodes of high inflation trend excess of 30 percent. The growth of money
supply is correlated with high inflation episodes because money growth was
often in excess of real economic growth.
However,
preceding the growth in money supply, some factors reflecting the structure
charactistics of the economic are observable. Some of these are supply stock,
arising from factors such as famine currency devaluation and changes in terms
of trade.
The first period of inflation in the
30% percent range (12 mouth moving average) was in 1976 (CBN, 2009) one of the
factors often adduced for this inflation is the drought in Northern Nigeria,
which destroyed Agricultural production and pushed up the lost of agricultural
products, a significant increase in the proportion of the average consumer’s
budget.
In
addition, during this period, there was excessive monetization of oil export
revenue, which night have given the inflation a monetary character.
In addition, in the late 1980s,
following the SAP, the effect of wage increase created a cost-push effect on
inflation. In 1984, inflation peaked at 39.6 percent at a time of relatively
little growth in the economy. Over the same period, excess money growth was
about 43 percent and credit to government had increased by over 70 percent
(CBN, 2010).
The main thrust of this study is to
evaluate the effectiveness of CBN’s monetary policy over the years. This would
go along way in assessing the extent to which the monetary policies have impacted
on the growth process of Nigeria using the major objective of monetary policy
as yardstick. In this regard, this study will attempt at investigating
instruments has gone on the achievement of price stability in Nigeria.
1.3 RESEARCH
QUESTIONS
The
researcher has formulated the following research question to guide the
study;
1. What is the trend of monetary policy in
Nigeria?
2. Have
these monetary policy instruments had any impact on price stability in Nigeria
and to what extent?
3. How
far has the central bank and monetary authorities in Nigeria gone in the
implementation of monetary policies in Nigeria?
1.4 OBJECTIVE
OF THE STUDY
The broad objective of this research
work is to investigate the significant impact of monetary policies on price
stability in Nigeria’s economy. However, the specific objectives of this
research work are as follow;
1. To
examine the trend of monetary policy and its instrument in Nigeria,
2. To
examine if these policy instruments have had any impact on prize stability in Nigeria
and to what extent,
3. Evaluate
the performance of the monetary policy instrument in Nigeria over the period
under review.
1.5 HYPOTHESIS OF THE STUDY
This study will he guided by the following hypothesis:
Ho: Monetary policy does not
have significant impact stability in Nigeria.
Hl: Monetary policy has a
significant impact on price stability in Nigeria.
1.6 SIGNIFICANCE
OF THE STUDY
This study is significance in the
following ways:
1. It
would also provide an objective view of the effectiveness of the monetary
policy in Nigeria;
2. The
study would also provide an econometric basis upon which to examine the effect
of monetary policy on the Nigerian economy.
3. Lastly,
it would provide policy recommendations to policy – makers on ways to make the Nigerian
economy vibrant through the monetary policy.
This study will also provide other
alternative policy measures. Although the monetary authority has suffered from
concatenation of political attenuation since its implementation, but its
importance and need for improvement cannot be over emphasized in the Nigeria
economy.
1.7 SCOPE
AND LIMITATION OF THE STUDY
The economy is a large component
with lot of diverse and sometimes complex parts. This study will only focus on
major growth component such as the gross domestic product, price level,
exchange rate and the balance of payment equilibrium. This study will cover all
the facets that make up the monetary policy (Direct and Indirect), but shall
empirically investigate the effect of the major ones. The empirical
investigation of the impact of the monetary policy on the price stability
variable in Nigeria shall be restricted to the period between 1981 and 2011.
The research work as limited by lack
of adequate physical direct information and statistic, lack of adequate finance
and time constraints; as the researcher is a student who combines this study
with his academic work.