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THE ROLE OF CENTRAL BANK IN ECONOMIC
GROWTH IN NIGERIA
(1986 - 2011)
ABSTRACT
This research work examined the role of
Central bank in development of Nigeria Economy (1986-2010). Secondary data were
used in this research work. The hypothesis was tested to examine the
significance of relationship that exist between monetary policy tools, exchange
rate and interest rate on economic growth in Nigeria. The analytical techniques
used were the simple regression analysis while the student t-ratio was used for
the test. From the test, it was observed that a positive relationship existed
with negative relationship exist between the variables. Hence the researcher
concluded that monetary policy is an efficient tool for economic growth in
Nigeria. And therefore recommended that effort should be made to improve on the
quality and the timeless of data generated within and outside the financial
sector, so that actions could be taken without much delay in controlling
adverse situations.
TABLE OF CONTENTS
Title Page
Abstract
Table of Contents
Chapter One:
Introduction
1.1 Background of the study
1.2 Statement of
problem
1.3 Objectives of the
study
1.4 Hypothesis of the Study
1.5 Scope and limitation of the
study
1.7 Definition of Terms
Chapter Two:
Literature Review
2.0
Literature Review
2.1
Theoretical Framework
2.2
Empirical Literature
2.3
Limitations of the Previous Studies
Chapter Three:
Research Design and Methodology
3.1 Research Methodology
3.2 Model Specification
3.3 Method of
Evaluation
3.4 Decision
Rule
3.5 Data Required and Sources
3.6 Econometrics
Software
Chapter Four:
Presentation and Analysis of Result
4.1 The Empirical Results
4.2 Examination of the Empirical
Results
4.3 Statistical Test of
Significance
4.4 Second Order Test
4.5 Evaluation of the Working
Hypothesis
4.5 Policy Implementation of the
Result
Chapter Five: Summary
of Findings, Conclusion
and Recommendation
5.1 Summary of the Finding
5.2
Conclusion
5.3 Recommendations
Bibliography
Appendix
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The role of the central bank in
promoting national economic policy and development has in recent years become a
topical international economic policy issue. Although the empirical evidence on
the relationship between central bank operations and macroeconomic stability
proxied by price stability is not conclusive (Folawewo and Osinubi, 2006), the
prevailing wisdom supports the need to accord a central bank a reasonable
degree of autonomy that will give it substantial discretion to conduct its
monetary policy in a manner that will help achieve its assumed central mandate
of maintaining domestic price stability, defined as a regime of relatively low
inflation rate and an environment free of inflation expectations.
While monetary policy’s aim at long-run price stability is critical to fostering sustainable economic growth, central banks’ role in promoting growth and, more generally, a healthy economy goes beyond the conduct of monetary policy (Sanusi 2002). Through involvement in financial regulation and supervision, as well as in the oversight of payments system operations, central banks play a key role in preserving and enhancing the safety and soundness of the banking and financial system (Alicia and Rio 2003).
While monetary policy’s aim at long-run price stability is critical to fostering sustainable economic growth, central banks’ role in promoting growth and, more generally, a healthy economy goes beyond the conduct of monetary policy (Sanusi 2002). Through involvement in financial regulation and supervision, as well as in the oversight of payments system operations, central banks play a key role in preserving and enhancing the safety and soundness of the banking and financial system (Alicia and Rio 2003).
The Central Bank of
Nigeria (CBN), like most central banks in the developing economies, undertakes
some non-traditional central bank functions such as promotion of economic
development, especially during the formative years in the 1960s and 1970s. The
contribution of the CBN in this regard, was focused on the creation of the
financial environment and institutional framework conducive to the mobilization
and channeling of financial resources into productive investment. Thus, during
the first decade of its establishment, the Bank concentrated on the task of promoting
and transformation of the rudimentary financial structure of the economy. These
included the issuance of money and capital market securities such as the
Nigerian Treasury Bills and Federal Government Development Stocks. Moreover, it
provided technical assistance to other relevant institutions, and start-up
capital for the development of money and capital market institutions. The CBN
initiative to encourage long-term bank lending to the economy included the
establishment of various refinance and guarantee schemes, focused on the
priority sectors of the economy. Two of such schemes are the Agricultural
Credit Guarantee Scheme Fund (ACGSF), and Export Refinance Scheme.
1.2 Statement
of the Problem
Given
the number of years since the Central Bank of Nigeria was established and the
substantial One of the major objectives of monetary policy in 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’s economic growth. Nigeria has experienced high
volatility in inflation rates. Since the early 1970’s, there have been four
major episodes of high inflation, in excess of 30 percent. The growth of money
supply is correlated with the high inflation episodes because money growth was
often in excess of real economic growth. However, preceding the growth in money
supply, some factors reflecting the structural characteristics of the economy
are observable. Some of these are supply shocks, arising from factors such as
famine, currency devaluation and changes in terms of trade. The first period of
inflation in the 30 percent range (12 months moving average) was in 1976 (CBN,
2009). One of the factors often adduced for this inflation is the drought in
Northern Nigeria, which destroyed agricultural production and pushed up the
cost of agricultural food items, significant increase in the proportion of the
average consumer’s budget. In addition, during this period, there was excessive
monetization of oil export revenue, which might have given the inflation a
monetary character. In addition, in the late 1980’s, following the Structural
Adjustment Program, the effects of wage increases created a cost-push effect on
inflation. In the long run, it was the structural characteristics of the
economy, coupled with the growth in money supply that translated these into
permanent price increases. In1984, inflation peaked at 39.6 per cent at a time
of relatively little growth in the economy. At that time, the government was
under pressure from debtor groups to reach an agreement with the International
Monetary Fund, one of the conditions of which was devaluation of the domestic
currency. The expectation that devaluation was imminent fuelled inflation as prices
adjusted to the parallel rate of exchange. Over the same period, excess money
growth was about 43 percent and credit to the government had increased by over
70 percent (CBN, 2010). In other respects the cause of the inflation may also
be adduced to the worsening terms of external trade experienced by the country
at that time. It is possible therefore that Nigeria’s inflationary episodes
were preceded by structural or real factors followed by monetary expansion. The
third high inflation episode started in the last quarter of 1987and accelerated
through 1988 to 1989. This episode is related to the fiscal expansion that
accompanied the1988 budget. Though initially the expansion was financed by
credit from the CBN, it was later sustained by increasing oil revenue
(occasioned by oil price increase following the Persian Gulf War) that was not
sterilized. In addition, with the debt conversion exercise, through which “debt
for equity” swaps took place, external debt was repurchased with new local
currency obligations. However, with the drastic monetary contraction initiated
by the authorities in the middle of 1989, inflation fell, reaching one of its
lowest points in1991i.e13 %(CBN, 2010). The fourth inflationary episode
occurred in 1993, and persisted through the end of 1995.Though inflation
gathered momentum towards the tail end of 1992, it reached 57 percent by the
end of 1994, the highest rates since the eighties, and by the end of1995, it
was 72.8 per cent (CBN, 2009). As with the third inflation, it coincided with a
period of expansionary fiscal deficit and money supply growth. The authorities
found it too difficult to contain the growth of private sector domestic credit
and bank liquidity.
Continuous
fall of the inflation rate has been experienced since 1996 as a result of
stringent monetary policies of the Central bank. It however, increased in 2001,
2003, 2005, and 2008 to 16.5%, 23.8%, 11.6%, and15.1% respectively (CBN, 2010;
CBN, 2011). 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. The failure of the monetary policy
in curbing price instability has caused growth instability as Nigeria’s record
of development has been very poor. In marked contrast to most developing
countries, its GDP was not significantly higher in the year 2000. It was 35
years before. As many economic indicators show, Nigeria’s economy has
experienced different growth stages. The GDP growth rate recorded negative
growth in the early 1980s (-2.7 in 1982, 7.1 in1983 and -1.1 in 1984). The
growth rate increased steadily between 1985 and 1990 but fell sharply in
1986and 1987 to 2.5% and -0.2%. Except in 1991 when a negative growth rate of
-0.8% was recorded, 1990s witnessed an unstable growth. However, the growth
rate has been relatively high since 2001. An examination of the long-term
pattern reveals the following secular swings: 1965-1968 Rapid Decline (civil
war years),1969-1971 Revival, 1972-1980 Boom, 1981-1984 Crash,1985-1991 Renewed
Growth, 1992-2011Wobbling. The main thrust of this study 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 process of Nigeria using the major objectives of monetary policy as
yardstick.
1.3 Objectives
of the Study
The main objectives of the study are as follows:
The main objectives of the study are as follows:
i.
To examine the nature of the relationship that exist between monetary
policy tools (bank rate, exchange rate and interest rate) in economic growth in
Nigeria.
ii.
To offer some recommendations based on the findings of the study.
1.4
Research Hypothesis
H0:
The
role of central Bank of Nigeria has no significance impact on gross domestic production.
H1:
The
role of central Bank of Nigeria has significance impact on gross domestic
production.
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