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THE EFFICACY
OF MONETARY POLICY AS AN INSTRUMENT FOR CONTROLLING INFLATION ON NIGERIA
ECONOMY
ABSTRACT
The Nigerian
economy is aiming to have the sustainable growth path. Through the
International Monetary Fund (IMF) the government can adopt the comprehensive
Structural Adjustment Program (SAP). Nigeria has a structural and sectoral
macroeconomic policy reform and the main strategies were (a) the liberalization
of the external trade and payment systems, (b) the adoption of a market-based
exchange rate for the domestic currency ─ Naira, (c) the elimination of price
and interest rate controls, and (d) the reliance on market forces as the major
determinants of economic activity (Owoye & Onafowora, 2007).The market
reform in the financial sector such as the banking system can use the monetary
control and instruments for implementing monetary policy in Nigeria. In any
countries across the globe, the fiscal and monetary policies seek at achieving
relative macroeconomic stability. The monetary policy framework in Nigeria is
more than the objective of monetary policy is price and exchange rate
stability. The monetary strategy in the inflation management is based on the
view that inflation is essentially a monetary phenomenon. The Nigerian economy
targets the money supply and its growth can be the main objective of the price
stability. In order to promote the appropriate methods in monetary policy, the
supply growth is firstly considered in targeting the inflation. The study
examined the efficancy of monetary policy in controlling inflation in Nigeria.
In the model specified, inflation is the regress and while cash reserved
requirement, liquidity ratio, money supply, minimum rediscount rate and
interest rate are the regressor. Data was collected from CBN statistical
Bulletin for the period 1970 – 2009. The statistical techniques used for the
analysis is the ordinary least square technical with the aid of E-view 5.0
software package. The research indicates that monetary policy adopted in
Nigeria within the period under review failed to influence the inflation rate.
It has been identified that the major problem militating against the poor
performance of monetary policy instrument in controlling inflation in Nigeria
is time lags involved which makes any policy employed to take many months to
achieve its full effect.
CHAPTER ONE
CHAPTER ONE
INTRODUCTION
The monetary
policy of a country deals with control of money stock (liquidity) and therefore
interest rate; in order to influence such macro economics variables as
inflation, employment, balance of payment, aggregate output in the desired
direction. There is no standard and ideal structure of monetary policy target
and instrument, the instrument varies from country to country, depending on the
size and stage of development of the financial market.
Over the
years, the objective of monetary policy have remained the attainment of
external balance. However emphasis on techniques/instrument to achieve this
objective have change over the years. There have been two major phases in the
pursuit of monetary policy namely, before and after 1986. the first phase
placed emphasis on the direct monetary control, while the second relies on
market mechanisms.
The monetary
policy before 1986: the economic environment that guided monetary policy before
1986 was characterize by the dominate of the 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 use of market
– based instrument was not feasible at that point because of the underdeveloped
nature of the financial market and the
deliberate restraint of interest rate.
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 the
inflationary 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.
But whether
inflation in Nigeria is due to monetary mismanagement on the part of the
authorizes concerned or caused by interest structural deficiencies, still
remain uncertain. Many factors have been identified to be responsible for
inflationary pressure in the country. In a symposium of inflation in Nigeria
held at university of Ibadan in 1983, November, most of the participant
stressed on money supply, nature of government expenditure limitations in real
output and the inflation (imported) as the major causes of inflation in
Nigeria. In the case of formulating monetary policy, it is of paramount
importance to specify objectives and also impossible to evaluate performances.
Analysis of
the institutional growth and structure shows that the financial growth rapidly
in the mid 1980s and 1990s. the number of commercial banks rose from 34 – 64 in
1995 and decline to 51 in 1998 while the number of merchant banks increased
only to 12 in 1986, to 54 in 1991 and subsequently decline to 38. in the
network, the combined commercial and merchant bank branches rose from 12,549 in
1996. There was also substantial growth in the number of non – financial institutions
especially insurance companies.
The
objective of monetary policy since 1986
remained the same as in the earlier period namely; the stimulation of output
and employment and the promotion of
domestic and external stability. In line with the general philosophy of
economic management under structural adjustment programme (SAP). Monetary
policy can be developed for encouraging investment and controlling inflation,
while fiscal policy can be effective to reducing consumption of luxury and
ostentation goods. But our major concern will be to explore the efficiency of
monetary policy in an economy in controlling inflationary pressure in an
economy like Nigeria.
It is
generally believed by some economist that inflationary effect are quite harmful
to some business establishment. Thus could be so because vender often lose in
the sense that the valve of the money falls short of it original purchasing
power. The extent of the effect of inflation in Nigeria could be appreciated
from the following examples: in 1985, it stood at 5.5 percent, indicating an
annual percentage increase of 20.1 percent compared to 40.9 percent in 1989.
It has been
accompanied with high level of unemployment rate at 4.3 percent in 1985 and
18.5 percent in 1989. 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.
STATEMENT OF
THE PROBLEM
Many
attempts being made by the Nigeria authorities to attain higher rate of
economic growth and development have generally being accompanied by certain
degree of price increase in recent years, the phenomenon developed into several
and prolonged inflation and stag inflation. Indeed, it is increasingly being
recognizes that a process of rapid economic growth is likely to provoke
inflationary pressures. However, whether the problem of inflation in this
country is due to mismanagement of monetary policy tools or structural
deficiencies still remain a controversial matter.
During the
last decade the problem of inflation and deflation to economic growth and
development have been extensively discussed. The problem is not peculiar to
Nigeria but has assumed a global phenomenon. It is generally agreed worldwide
that inflation is socially unjust. Inflation also affects general economic
behavior and the pattern of resource allocation. By distorting price relations
and undermining general confidence, prolonged inflation tends sector; and thus
slackens growth.
Furthermore,
inflation discourages private saving and encourages speculation among the
various economic units. Another consequence is that it result to balance of
payment difficulties and reduces the external valve. 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.
Economic
aggregate as; national income, savings, investment and consumption expenditure
have been experimental upon to varying degrees with respect to taxes public
expenditure, savings campaign, credit controls wages adjustments and all the
conceivable anti- inflation measures affecting the propensities to consume,
save and invest which all combined should determine in general level.
All the
measure so far adopted were inadequate
in solving the problem of inflation in the country. The suffering of masses
are unending as daily price surges
occur indeed a more for reaching solution to the problem is needed hence, this
study seek to find what control has monetary policy on inflation.
OBJECTIVE 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 the economic objective
that they are expected to influence.
These
objectives include:
1. to investigate the major causes of
inflation in Nigeria during 1980s
2. To investigate if the Nigeria monetary
policy is efficient or not in the achievement of certain objectives of the
economy and inflation control in particular.
3. To see if the non-realization of the
economic objective is due to chosen instrument or inappropriate application of
the instrument.
4. To recommend policy solution based on the
above finding.
The policy
recommendation based on the above findings will be used as a guide in the
further application of monetary policies.
STATEMENT OF
HYPOTHESIS
Based on the
statement of the problem and the purpose of study, the following hypothesis
were formulated.
1. H1:
there is a positive and significant relationship between the stock of
money supply and inflation rate in the economy.
HO: There is
no positive and significant relationship between stock of money supply and
inflation rate in the economy.
2. H1:
There is inverse and significant relationship between inflationary rate
and economic growth.
HO: There is
no inverse and significant relationship between inflationary rate and economic
growth.
SIGNIFICANCE
OF THE STUDY
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.
It is
therefore the aim of this study first and foremost to study the efficiency of
monetary policy in controlling inflation in Nigeria. The important of this
study to policy makers cannot be over- emphasized in the economy considering
the alarming rate of inflation increment over the years especially in the 90s.
This study
will therefore be of immense help to policy makers, government and it agent,
ministers of finance, investors – both foreign indigenous and the entire
Nigeria populace.
This study
will also study the type of inflation, causes and ways of controlling it and it
impact on economic development of Nigeria.
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