Format: MS-WORD Chapters: 1-5
Pages: 80 Attributes: STANDARD RESEARCH
The Impact Of Monetary Policy On The Nigeria Economy, The Effects, The Appraisal, And Possibly The Solution To The Problems Facing The Implementation And Working Of Monetary Policies In Nigeria. It is aimed at determining how monetary instrument affect economic growth, if there is an inverse and significant relationship between inflationary rate and monetary policy, investigating if the Nigeria monetary policy is efficient. To this end, the Researcher adopted surveys research methods. The data used in making analysis was collected mainly through questionnaire, and review of related literatures. Respondents were also selected by means of simple random sampling which gives every member of the universe equal chances of being selected. Analysis was carried out using tables and simple percentages. A total number of twenty (20) respondents formed the population out of which seventy (17) respondents were randomly selected as the sample size. Based on the analysis made, the Researcher discovered among other things monetary policy instrument affects economic growth. Hence, the organization should pay a special attention to this aspect of management as it would help to enhance efficient economic growth and development. On the basis of these findings, the Researcher therefore recommended among others that, Monetary policies should be used to create favourable investment climate by facilitating the emergence of market based on interest rate and exchange rate regimes that attract both domestic and foreign investments, create jobs, promote non oil export and revive industries that are currently operating far below installed capacity.
1.1 BACKGROUND TO THE STUDY
The monetary policy of a country deals with control of money stock (liquidity) and therefore interest rate.
The economic environment that guided monetary policy is characterize by the dominant oil sector, the expanding role of the public sectors 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 depend on the use of direct monetary instrument such as credit ceiling, selective credit controls, administered interest and exchange rate, as well as the perception of cash reserve requirement and special deposits.
The most popular instrument of monetary policy was the insurance of credit rationing guideline, which primary set rate on the change for the component of commercial bank loan and advances to the private sector.
Globally the problem of inflation is not peculiar to Nigeria, but it is a general problem confronting the majority, if not all countries of the world. The attempt by Nigerian Government to attain a higher level of economic development at this period, generally lead to inflationary spiral in the country.
The objective of monetary policy remained the same as in the earlier period namely; the stimulation of output and employment and the promotion of domestic and external stability. Monetary policy can be developed for encouraging investment and controlling inflation, while fiscal policy can be effective to reduce consumption of luxury and ostentation goods. But our major concern will be to explore the efficiency of monetary policy in an economic in controlling inflationary pressure in an economy like Nigeria.
It is generally believed by some economist that have inflationary effects are quite harmful to some business establishment. This could be so because often loses in the sense that the value of the money falls short of its original purchasing power. The extent of the effect of inflation in Nigeria could be appreciated from the following examples: in 2000, it stood at 6.94 percent, indicating an annual percentage increase compared to 13.3 percent in 2010 (Source: CBN statistical data).
Monetary policy consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as modifying the interest rate, buying or selling government bonds, and changing the amount of money banks are required to keep in the vault (bank reserves). It can also be seen as policy lay down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity. Monetary policy and fiscal policy refer to the two most widely recognized "tools" used to influence a nation's economic activity. Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks such as the Federal Reserve. Fiscal policy is the collective term for the taxing and spending actions of governments. In the United States, national fiscal policy is determined by the Executive and Legislative Branches.
Thus has force Nigeria to adopt several monetary measures within and the problem of inflation as could be seen from the associated increases in the cost of production during the periods under consideration.
It is therefore under the above that we will like to adopt some of the mix of policy instrument used and hence their efficiency as regard inflation control.
1.2 STATEMENT OF THE PROBLEM
On a yearly basis, the monetary authority formulates guidelines geared towards the enhancement and development of policy variables designed to ensure optimal performance of the banking industry and ultimately to advise the government on the macroeconomic goals or objectives to pursue but in the implementation of such policy variables, certain conflicting issues are to be addressed ranging from the ability to comply with various monetary policy instruments (such as the open market operation (OMO), required reserve ratio (RRR), bank rate, liquidity ratio, selective credit control and moral suasion) as well as satisfying depositors and shareholders. These are the instruments of Central Bank in controlling the activities and operations of commercial banks in order to achieve the macroeconomic objective such as growth, price stability, balance of payment equilibrium and full employment. The Central Bank of Nigeria (CBN) guidelines helped in setting the interest rates charged by the commercial banks, sales or purchase of securities to control the money supply, and changes in the required reserve ratios of banks and other financial institutions.
Monetary policy in an undeveloped country plays an important role in increasing the growth rate of the economy by influencing the cost and availability of credit by controlling inflation and maintaining equilibrium in the balance of payments. So the principal objectives of monetary policy in Nigeria is to control credit in order to control inflation and to stabilize the price level, to stabilize the exchange rates, to achieve equilibrium in the balance of payments and to promote economic development.
Furthermore, inflation discourages private savings and encourages speculation among the various economic units. Another consequence is that it result to balance of payment difficulties and reduces the external value of reserve. Nigeria being a market economy and therefore having its national economic management strategies largely informed by Neo – classical and Keynesian persuasions\ have sought over the decide for the solution to this problem through the adoption of the analysis and recommendation of these school of thoughts.
The CBN guideline on monetary policy works through the effect of the cost and availability of loans to real activity, and through this on inflation, and on international capital movement and thus on exchange rate.
All the measures so far adopted was inadequate in solving the problem of inflation in the country. The suffering of masses are unending as daily price surges occur. Indeed a more far reaching solution to the problem is needed hence, this study seek to find what economic impact the Central Bank’s monetary policy have on Nigeria rate of inflation.
Series of studies have examined the impact of Central Bank of Nigeria monetary policy on the economic growth in Nigeria. However, few of this studies have been able to narrow it down to impact of Central Bank of Nigeria monetary policy on the economic growth in Nigeria. This is the gap that this study will fill in the course of this Research Work.
1.3 RESEARCH QUESTIONS
This study revolved around the answering of the following research questions:
i. Does monetary policy instrument affect economic growth?
ii. Is there an inverse and significant relationship between inflationary rate and monetary policy?
iii. Is Nigeria monetary policy efficient in achievement of its objective of the economy?
1.4 OBJECTIVES OF THE STUDY
It is necessary to state the primary objective of this research having identified the ruling monetary policy instrument in Nigeria and some of these economic objective that they are expected to influence.
These objectives include:
1. To determine how monetary instrument affect economic growth.
2. To find out if there is an inverse and significant relationship between inflationary rate and monetary policy.
3. To investigate if the Nigeria monetary policy is efficient.
1.5 RESEARCH HYPOTHESIS
Based on the statement of the problem and the purpose of study, the following hypothesis was formulated.
1. H0: Monetary policy instruments do not affect economic growth
Hi: Monetary policy instruments affect economic growth.
2. Hi: There is inverse and significant relationship between inflationary rate and monetary policy.
H0: There is no inverse and significant relationship between inflationary rate and monetary policy.
3. Hi: Nigeria monetary policy is efficient in achieving its objectives of the economy.
H0: Nigeria monetary policy is not efficient in achieving its objectives of the economy.
1.6 SIGNIFICANCE OF THE STUDY
This study will be of great benefit to bankers because of the information it contains. The study will enable them to understand the role of the Central Bank of Nigeria (CBN) in ensuring safety of their funds and this will help in sustaining their confidence in the banking sector. There would be efficiency through payment process reduces cost of operation (cash handling) and increases banks penetration, government agencies in the sense that it would increase tax collections, greater financial inclusions, increased economic development, more so it will acquaint the government on the importance of monetary policy and how it should be managed. Both academic and other researches in this similar subject matter will find it a useful source of learning and also it will serve as a guide to student who are researching on this same topic. This study will help to restore the lost confidence of the public as regard monetary policy. More so, it will be useful to policy makers in the attempt to fashion out dynamic and reliable monetary policy measure for controlling commercial banks ability to create money and thereby influence the effective development of the economy. Full employment, equilibrium balance of payment, economic growth, and price stability are the four primary goals of any economy which Nigeria is not an exception and this study will contribute immensely in understanding these goals.
This study is of great significance to body of knowledge and will be used as basis for future studies. It is therefore becomes imperative to carry out this research work for the benefits listed above.
1.7 SCOPE OF THE STUDY
This work is aimed at examining the impact of monetary policy on the Nigeria economy, the effects, the appraisal, and possibly the solution to the problems facing the implementation and working of monetary policies in Nigeria. Since inflation arises when aggregate demand exceed aggregate supply, we shall focus our attention at examining the control monetary policy has no thus primary variables. The scope of this research covers the period from 2005 to 2015.
1.8 LIMITATION OF STUDY
This research work was greatly limited by fund. Though efforts were made to source for all financial requirements needed for this work, but there are few things that could be done due to inadequate finance i.e. some materials could not be gotten from local or regional offices, which will involve travelling to Lagos, Abuja e.t.c. where head office is located, and fund is inevitable to embark on such journals.
Access to needed data in that, the researcher would have conducted a more extensive research. Enough data were not obtained owing to the concept of secrecy in the organization and unavailability of information that are central to this topic in the journals made available to the researcher. Again, some customer’s respondent does not fully understand why the researcher was asking some questions. Also, time need to be share between researcher’s work and my academics, this greatly limited the progress of the research work as time had to be share between the two and other intervening factors.
1.9 OPERATIONAL DEFINITIONS OF TERMS
- Central Bank of Nigeria: This is the government bank in charge of monetary policy and the supervision of commercial banks in Nigeria.
- Monetary Policy: Monetary policy is defined by the Central Bank of Nigeria (CBN) as combination of measures designed to regulate value supply and cost of money in an economy, in consonance with the level of economic activities.
- Open Market Operation: The weapon must often, and the one capable of being adjusted with the utmost delicacy. This comprise the buying and selling of government securities.
- Interest Rate: Interest rate can be defined as the return or guild on equity or opportunity cost of differing current consumption in the future. It can also be identified as the cost of credit.
- Money: Broad term consisting of coins, paper notes, and demand deposits of commercial banks.
- Discount Rate: This is the interest rate charged by the Central Bank on loans made to member banks.
- Excess Reserves: This is the holding of reserves by the commercial banks over and above the level required by law.
- Reserve Requirement: this is the situation where banks will ordinarily, either from custom or produce, land to keep a certain percentage of demand deposits in their bank as reserve. The CBN stipulate the rate of this reserve to control inflation and deflation.
- Inflationary Spiral
A continuous rise in prices that is sustained by the tendency of wage increases and cost increases to react on each other. It can also be seen as a situation in which prices increase, then people are paid more in their jobs, which then causes the price of goods and services to increase again, and so on
- Market Economy
A capitalistic economic system in which there is free competition and prices are determined by the interaction of supply and demand. A market economy is an economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country's individual citizens and businesses.
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