THE IMPACT OF THE CBN’S MONETARY POLICIES IN NIGERIA FROM 1981 – 2012
1.1 BACKGROUND TO THE STUDY
Since the establishment in 1959, the central bank of Nigeria (CBN,1992) 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 the 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 assumption that these are essential tools of achieving macro-economic stability. The economic environment that guided the monetary policy before 1986 was characterized by the dominance of the oil sector, the expanding role of the public sector, in the economy and the over-dependence on the external sector.
In order to maintain price stability and a healthy balance of payments position, monetary management dependent on the use 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 instruments was not feasible at that time because of the under developed nature of the financial markets and the deliberate restraint on interest rates (CBN, 1992).
The most popular instrument of monetary policy was the issuance of credit rationing guidelines, which primarily sets the rates of change for the components and aggregates 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 a 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 cash ratios were stipulated for the banks in the mid-1970s on the basis of their total deposit liabilities, but since cash ratios were usually lower than those voluntarily maintained by the banks, they proved less effective as a restraint on the credit operations.
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, (CBN, 1992). For most economies, the objectives of monetary policy include price stability, maintenance of balance of payments equilibrium, promotion of employment and output growth, and sustainable development (Folawewo and Osinibi, 2006). These objectives are necessary for the attainment of internal and external balance, and the promotion of long run economic growth.
The importance of price stability derives from the harmful effects of price volatility, which undermines the ability of policy makers to achieve other laudable macro-economic objectives. There is indeed a general consensus that domestic price fluctuation undermines the role of money as a store of value, and frustrates investments and growth. Empirical studies by (Ajayi and Ojo, 1981, Fisher, 1994) on inflation, growth and productivity have confirmed the long term inverse relationship between inflation and 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. Indeed, an unstable or crisis ridden financial sector will render the transmission mechanism less effective, mailing the achievement and maintenance of strong macro-economic fundamentals difficult. This is because it is only in a period of price stability that investors and customers can interprete market signals correctly. Typically, in periods of high inflation, the horizon of the investors is very short and resources are diverted from the long-term investments to those with immediate returns and inflation hedges, including real estate and currency speculation. Odedokun (1996). It is on this background that this study would investigate the effectiveness of monetary policy in Nigeria with special focus on major growth components. Monetary Policies
1.2 STATEMENT OF THE PROBLEM
One of the major objectives of monetary policy of Nigeria is price stability, but despite the various monetary regimes that have been adopted by the central bank of Nigeria over the years, inflation still remains a major threat to Nigeria economic growth. Nigeria has experienced high volatility inflation rates. Since the early 1970s, there have been four major episodes of high inflation, in excess of 30 percent, the growth of money supply is correlated with high inflation episodes because money growth of real economic growth, Rasheed (2011). However, preceeding the growth in money supply, some factors reflecting the structural characteristics of the economy are observable. Some of these are supply shocks, arising from the factors such as famine, currency devaluation and changes in terms of trade. Structural factors have proven to be important in the inflation spiral. Reduction in oil revenue (a supply shock) led to a reduction in real income. With serious distributional implications. As workers pushed for higher nominal wages, while producers increased mark-ups on costs, an inflationary spiral followed. In addition to these factors, the government also had a transfer problem in order to meet debt obligations.Monetary Policies
The failure of the monetary policy in curbing, price instability has caused growth instability as Nigeria’s record of development has been very poor. Thus, the main thrust of this research is to evaluate the effectiveness of the CBN’s monetary policy over the years. This would go a long way in assessing the extent to which the monetary policies have impacted on the growth in Nigeria using the major objectives of monetary policy as a yard-stick.
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to assess the effectiveness of the CBN’s monetary policies in Nigeria. However, the following specific objectives would be achieved:
(i) To examine the trend and structure of monetary policy in Nigeria
(ii) To empirically investigate the impact of the monetary policy on economic growth in Nigeria.
(iii) To evaluate the performance of monetary policy in Nigeria over the years.
1.4 RESEARCH HYPOTHESES
The hypotheses to be tested in the course of this research work are;
(1) Ho: The monetary policy instruments do not have significant impact on the economic growth in Nigeria.
(2) Ho- The monetary policy instruments do not impact significantly on the general price level in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
The result of this research is crucial to evaluate the performance of the monetary policy in order to adopt appropriate measures that would ensure the achievement of both primary and secondary goals of monetary policy in Nigeria.
The significance of the study will also be best appreciated by considering the effectiveness and usefulness of monetary policy measures in regulating the economy; particularly, the finding will help in establishing the extent to which monetary policy has stabilized price in the Nigerian economy.
The study will make suggestions and recommendations that will enable the government, banks, depositors (individuals), non-financial institutions, and authorities solve the problems facing monetary policy measures in the Nigerian economy. Monetary Policies
1.6 SCOPE OF THE STUDY
The economy is a large component with a lot of diverse and sometimes complex parts. This study will only focus on major growth component such as the Gross Domestic Product (GDP), price level, exchange rate and balance of payment equilibrium. Monetary Policies
The study will cover most facets that make-up the monetary policy, but shall empirically investigate the effect of the major ones. The empirical investigation of the impact of the monetary policy on the economic growth in Nigeria shall be restricted to the period between 1981 and 2012. Monetary Policies