THE EFFICACY OF MONETARY POLICY AS AN INSTRUMENT FOR CONTROLLING INFLATION ON NIGERIA ECONOMY (1980- 2006)
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THE EFFICACY OF
MONETARY POLICY AS AN INSTRUMENT FOR CONTROLLING INFLATION ON NIGERIA ECONOMY
(1980- 2006)
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
1.0
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.
1.1.
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.
1.2 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.
1.3 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.
1.4
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.
1.5
SCOPE
OF THE STUDY
Since inflation
arises when aggregate demand exceed aggregate supply, we shall focus our
attention at examining the control monetary policy has on thus primary
variables.
In this a year period
is adopted 1984 to 1985. We hereby try to analyze the causes effect of Nigeria
inflation in terms of some qualifiable as; money supply, real output etc.
1.6 LIMITATION
OF STUDY
The limitation of our
study centers around time, availability of material and money. The time limit
with which this study has to be completed is little more than three months.
Theses limitation not
with standing the researcher has made every effort to ensure in realization of
the research objectives.
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