THE IMPACT OF MONETARY POLICY MEASURE ON THE NIGERIA ECONOMIC GROWTH OF NIGERIA

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THE IMPACT OF MONETARY POLICY MEASURE ON THE NIGERIA ECONOMIC GROWTH OF NIGERIA

ABSTRACT

This paper examines the impact of monetary policy on the Nigerian economy. In doing this, the Ordinary Least Squares Method (OLS) is used to analyse data between 1981 and 2011. The result of the analysis shows that monetary policy presented by money supply exerts a positive impact on GDP growth and Balance of Payment but negative impact on rate of inflation. The recommendations are that monetary policy should facilitate a favourable investment climate through appropriate interest rates, exchange rate and liquidity management mechanism and the money market should provide more financial instruments that satisfy the requirement of the ever-growing sophistication of operators.

This study examined the effect of monetary policy outcomes on macroeconomic stability in Nigeria. Data was gathered for a time frame of 1985 to 2010 from the CBN statistical bulletin. A simplified ordinary least squared technique stated in multiple forms was applied to the data after ensuring data stationarity. At 5% significant level, none of the variables are statistically significant. The insignificant statistics between monetary policy, gross domestic product, credit to the private sector, net credit to the government and inflation in Nigeria, suggest that monetary policy as a policy option may have been inactive in influencing price stability. These considerations suggest that sound fiscal policies will be an important component of the policy mix if the move to price stability is to be sustained and credible.

This paper examines the impact of monetary policy on the Nigerian economy. In doing this, the Ordinary Least Squares Method (OLS) is used to analyse data between 1981 and 2008. The result of the analysis shows that monetary policy presented by money supply exerts a positive impact on GDP growth and Balance of Payment but negative impact on rate of inflation. The recommendations are that monetary policy should facilitate a favourable investment climate through appropriate interest rates, exchange rate and liquidity management mechanism and the money market should provide more financial instruments that satisfy the requirement of the ever-growing sophistication of operators.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Monetary policy as a technique of economic management to bring about Sustainable economic growth and development has been the pursuit of nations and formal articulation of how money affects economic aggregates dates back the time of Adams Smith and later championed by the monetary economists. Since the expositions of the role of monetary policy in influencing macroeconomic objectives like economic growth, price stability,

equilibrium in balance of payments and host of other objectives, monetary authorities are saddled the responsibility of using monetary policy to grow their economies. In Nigeria, monetary policy has been used since the Central bank of Nigeria was saddled the responsibility of formulating and implementing monetary policy by Central bank Act of 1958. This role has facilitated the emergence of active money market where treasury bills, a financial instrument used for open market operations and raising debt for government has grown in volume and value becoming a prominent earning asset for investors and source of balancing liquidity in the market. There have been various regimes of monetary policy in Nigeria some times, monetary policy is tight and

at other times it is loose mostly used to stabilize prices. The economy has also witnessed times of expansion and contraction but evidently, the reported growth has not been a sustainable one as there is evidence of growing poverty among the populace. The question is, could the period of growth be attributed to appropriate monetary

policy? And could the periods of economic down turn be blamed on factors other than monetary policy ineffectiveness? What measures are to be considered if monetary policy would be effective in bringing about sustainable economic growth and development?. These are the Questions this study would attempt to answer.

1.2 STATEMENT OF THE PROBLEM

Of recent, the economic sector in Nigeria has not been able to fulfill its traditional role of feeding the population, meeting the raw materials needs of industries, as well as providing substantial export earnings for the economy. Indeed, the contribution of the sector to gross domestic product (GDP) has been falling, not necessarily because a strong industrial sector is displacing agriculture but as a result of low productivity. The largely subsistence economic sector has failed to keep up with rapid population growth.

Nigeria is Africa’s most populous country and the country, once a large net exporter of food, now imports food. Emerging problems which constrained the full realization of the potentials in the economic sector include: inadequacies in the supply and delivery of farm inputs, shortage of working capital, low level of technology, diseases and pest infestation, poor post-harvest processing and shortage, technology, environment hazards, labour and land use constraints. Most of these problems could be solve with the appropriate monetary policy.

The need to correct the existing structural distortions in Nigerian economic sector and put the economy on the path of sustainable growth is therefore compelling. This raises the question of what monetary policy to adopt to develop the economic sector in order to realize the potentials of the sector. This is the main thrust of this study.

1.3 OBJECTIVE OF THIS STUDY

1. To assess the impact of monetary policy in Nigeria, specifically, if it has

facilitate growth or not and examine the effect of other co-operant factors in bringing about the desired sustainable economic development in Nigeria.

2. To achieve balanced and steady economic growth and development.

3. To instil some sanity into a Nigeria’s financial system, the need for monetary policy becomes inevitable.

4. To examine the trend and structure of monetary policy in Nigeria;

5. To evaluate the performance of the economic sector in Nigeria over the years.

6. To empirically investigate the impact of the monetary policy on agricultural development in Nigeria;

7. To make recommendations on how to boost the performance of the economic sector through appropriate monetary policies.

1.4 RESEARCH QUESTION

1. The question is, could the period of economic growth be attributed to appropriate monetary policy?

2. Could the periods of economic down turn be blamed on factors other than monetary policy ineffectiveness?

3. What measures are to be considered if monetary policy would be effective in bringing about sustainable economic growth and development?.

4. What has been the trend and structure of monetary policy in Nigeria over the years?

5. What has been the performance of Nigerian economic sector over the years?

6. How do the monetary policy instruments affect economic sector in Nigeria?

1.5 RESEARCH HYPOTHESES

The hypotheses to be tested in the course of this research work are stated below:

HYPOTHESIS I

H0 – That monetary policy instruments do not affect agricultural output in Nigeria.

H1 – That monetary policy instruments affect agricultural output in Nigeria.

HYPOTHESIS II

H0 – That monetary policy instruments do not affect index of agricultural production in Nigeria.

H1 – That monetary policy instruments affect index of agricultural production in Nigeria.

H0: No measure that can be considered to ascertain if monetary policy would be effective in bringing about sustainable economic growth and development.

H1: Measures can be considered to ascertain if monetary policy would be effective in bringing about sustainable economic growth and development.

H0: The are no trend and structure of monetary policy in Nigeria over the years.

H1: The are trend and structure of monetary policy in Nigeria over the years.

H0: Monetary policy instruments does not affect economic sector in Nigeria.

H1: Monetary policy instruments affect economic sector in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

This study is significance in the following ways:

1. It would provide an objective view of the effectiveness of Nigerian monetary policy in terms of its promotion of economic development;

2. The study would also provide an econometric basis upon which to examine the effect of monetary policy on economic development in Nigeria;

3. Lastly, it would provide policy recommendations to policy-makers on ways to make the Nigerian economic sector vibrant through the monetary policy.

1.7 SCOPE AND DELIMITATION OF THE STUDY

The economy is a large component with lot of diverse and sometimes complex parts. However, this study will only focus on some macroeconomic variables such as the monetary policy and economic development. This study will cover all the 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 agricultural development in Nigeria shall be restricted to the period between 1970 and 2010.

This study shall contain five chapters. The first chapter shall contain the background of the study, the statement of the research problem, the objectives of the study, the research questions etc that would guide the study. Chapter two summarises the opinions of different authors on the subject matter. Chapter three states the methodology adopted in the study. Chapter four focuses on the presentation and interpretation of the regression results. The last chapter, which is chapter five, presents the summary of the findings, conclusion and appropriate recommendations.

1.8 DEFINITION OF TERMS

(i) Open Market Operation (OMO):

This is the buying and selling of government securities by a central bank, such as the Central Bank of Nigeria, in order to control the money supply.

(ii) Expansionary Monetary policy:

Expansionary monetary policy is when the Central bank is using its tools to stimulate the economy. This usually means lowering the cash ratio to increase the money supply. The opposite is contractionary monetary policy

(iii) Moral Suasion:

This is an application of pressure, but not force, by an authority (such as the Central Bank) to get financial institutions to adhere to a policy.

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