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AN APPRAISAL OF MONETARY
POLICY MEASURES IN CONTROLLING
INFLATION IN NIGERIA
ABSTRACT
The research
study appraised the monetary policy measures adopted by Apex bank of the
country in controlling inflation, against the background of the adoption of the
structural adjustment programme in 1986 and the emergency of persistent
inflationary pressure in the Nigerian economy. That since the adoption of SFEM
in September, 1986, the rate of domestic price inflation has worsened, in
sympathy with the continuous depreciation of the Naira at FEM. In spite of the
anti-inflationary policy measures put in place by the CBN. The study therefore
identified the Naira exchange rate as the major factor in the propagation of
the soaring inflation rate in the economy, in addition, to the traditional
factors of low domestic output due to structural bottlenecks and supply
inelasticities; government deficits financing and excessive credit expansion by
banks. In view of this study, the CBN should be expected to achieve the
macroeconomic objective of price stability as long as the Naira exchange rate
continued to be determined at FEM as a trust step and the determination of the
exchange rate by the purchasing power parity concept. In addition, the study
recommended other measures as a follow up to this. A limitation due to the
problem of small degrees of freedom considering the time period covered by the
study and the non-availability pf the quarterly data on some economic variable
germane to the study.
TABLE
OF CONTENTS
Title Page i
Certification ii
Approval iii
Dedication iv
Acknowledgment v
Abstract vi
Table of Contents vii
CHAPTER
ONE
1.0 Introduction 1
1.1 Problem
of definition 4
1.2 Objectives
of the study 5
1.3 Scope of
the study 5
1.4 Need for
the study 6
1.5 Limitation 7
1.7 Organization
of the study 7
CHAPTER
TWO: LITERATURE REVIEW
2.0 The nature
and theories of inflation 8
2.1 Theories
of inflation 9
2.2 Structural
inflation 13
2.3 Monetary
policy in Nigeria 16
2.4 Monetary
policy since 1986
CHAPTER
THREE: REVIEW OF THE NIGERIA ECONOMY
3.1 Introduction 21
3.2 Background
of adjustment policy 21
3.3 The structural
adjustment programme 26
3.4 Anti-inflationary
monetary policy measures 29
CHAPTER
FOUR
4.1 Appraisal
of anti-inflationary policy measures 40
CHAPTER
FIVE: SUMMARY, RECOMMENDATIONS AND CONCLUSION
5.0 Summary
of findings 57
5.1 Recommendations 60
5.2 Conclusion 62
References
CHAPTER
ONE
1.0 INTRODUCTION
BACKGROUND
OF THE STUDY
One
of the greatest problems staring the global economy in the face today is
inflation. It is an age-long problem and centuries of theorizing have not
yielded the much needed answer to it. The difficulties of dealing with
inflation rest in the recognition of its existence, the search for its causes,
and the existence of appropriate tools to control it. Its phenomenon which is
easier described than defined.
Inflation
is no respecter of any economy. Just as it afflicts the economics of the more
developed countries of the Northern hemisphere, it also plagues the less
developed economics of the south. If anything, the problem has become more
critical in the latter, particularly since the 1980s. as a result of the
co-existence of the twin macroeconomic evils of inflations and unemployment (a
phenomenon known as stagflation and a negation of the Philips Curve Paradign)
in these developing economics, coupled with their attempt to tackle their
excruciating debt problem through the adoption of IMF-World Bank-supported
structural adjustment programmes, policies aimed at stimulating economic growth
result in the exacerbation of the already severe inflationary pressure existing
within these economics, and vice-versa. Yet, the amenonation of these two
problems is critical to the success of their growth-oriented adjustment
programmes. Thus, the problem of inflation, particularly in the debt distressed
developing countries, have assumed a new and under dimension.
Nigeria
is also enmeshed in this complex problem from which dislodgement has proved to
be very difficult. The history of noticeable trends of upward price pressures
in post-independence Nigeria dates back to 1964 when the Central Bank of
Nigeria (CBN) first adopted anti-inflationary monetary measures, as
inflationary pressures threatened the country’s balance of payments position in
the early 1960’s. In the 1970’s which was the oil boom ear, inflation assumed a
worldwide character largely as a result of the energy crisis of the decade. In
Nigeria, in 1974, the severity of the problem compelled the government of the
day to declare it public enemy number one in the budget speech of that year,
while in 1976, anti-inflation task force was set up and saddled with the
responsibility of looking into all the ramifications of inflation in the
country and up with appropriate policy responses. In the 1980’s inflationary
pressure assumed a very disturbing dimension especially from the second half of
the decade. For instance the rate of domestic price inflation as measured by
the composition consumer price index rose from a one-digital rate of 5.5
percent in 1985 to a two-digital rate of 200.00 percent in 1994. This development
threatened to undermine the positive effects derived from implementation of the
structural adjustment programme (SAP). In response, the apex regulating body of
the nation’s financial system has been unrelenting in its efforts to control
the problem.
In
spite of all these, inflationary pressures have continued unabated and so also
are the discussion and the search for a lasting solution. Thus, inflation in
Nigeria has become a major problem for policy makers since 1985. This concern
is clearly reflected in the animal federal budgets and the
1. Federal
office of statistic, as slated in central bank of Nigeria annual report and
statement of accounts, 1986, Lagos, P.12
2. Federal
office of statistics, 1 bed, 1993, 16
The
CBN’s credit policy guidelines issued annually. The dampening of inflation
pressure has persistently been the major objective of monetary policy and in
order to achieve this objective, there has been a continuous resort to a
restrictive monetary policy orientation, expect when the need to relate the
economy was accorded the highest priority.
Obviously,
the view is that in a developing economy like Nigeria economic growth and
development cannot proceed without some measures of inflation. The validity of
this assertion is actually in doubt. Though it could be reasoned that inflation
can only be depressed to tolerable limits.
One
of the objectives of monetary policy is any economy, irrespective of its
ideological inclination, is the reduction of fluctuations in the average price
level. In most economics of the world, the initial formation as well as the
execution of such monetary policy measures is the exclusive preserve of a
central bank acting as an agent of the government. The CBN is not an exception.
Following
5.4 of the CBN ordinance passed by the legislature in 1958 establishing the CBN
(therinafter referred to as the bank) is to promote monetary stability. Since
it began operations on July 1, the bank has always accepted the attainment of
these objectives as its responsibility, and in its operations as well as public
pronouncements, the bank has continued to underscore the need. In doing this,
the bank has over the years, employed the quantitative tools. Such is discount
ratio, reserve requirements, stabilization securities, special deposits; cash
reserve ratio and variable liquidity ratio, all of which regulate the volume or
availability of credit and the quantitative or selective techniques such as
interest rate changes, more suasion and credit guidelines which indicate the
direction of credit which it has been empowered to exercise by the 1958
ordinance and subsequent legislations which arose in the light of changing
condition and the operational loopholes in existing powers. But the outcome of
such exercise leaves much to be desired.
It
is against this background coupled with the persistence of serve inflationary
pressures in the Nigeria economy that may have called to question the mode of
operation of the bank for controlling inflation. It is from this stand point
that the central flame of this study derives. The study is therefore a
contribution to the continuing debate on inflation in Nigeria.
1.1 PROBLEM OF DEFINITION
The
C.B.N has over the years since 1959 confronted excessive inflationary pressure
in the Nigeria economy with a new to forestall or at least reduce the negative
impact of such pressures on various facets of the economy. Indeed, this is one
of the major objectives that the bank is expected to accomplished. In
performing this role, the bank has been armed with powers to exercise various
monetary policy tools which are oriented towards demand and supply management.
However, the question’s that readily mention here is; flow has the bank fared
in performing this role of controlling inflation? Has the bank succeeded in
this regard and therefore party justify its existence? Or has it performed
otherwise and hence outline its usefulness in this regard? If or why? If not,
why not? Are the weapons at its disposal sufficient to carry out this role, or
do they now appearing to be impotent in combating the current wave of inflation
playing the economy today? Is there any need to equip the apex regulating body
of the Nation’s financial system with more weapons so as to enable it address
itself to this monstrous economic problem?
An
evaluation of the mode of operation of the Bank for controlling inflation will
go a long way in providing answers to these questions.
1.2 OBJECTIVES OF THE STUDY
The
objectives of this study are two-fold. Firstly, it is aimed at examining the
various monetary policy measures adopted by the Bank in its effort to control
inflation. This is with a view a to identifying the effective ones and the
factors responsible for their effectiveness. Secondly, in the process, the
non-effective measure shall be identified. This will allow for the assessment
of the impact of these various measures on the soaring inflation rate and
therefore, for making useful policy recommendations.
1.3 SCOPE OF THE STUDY
This
study work is limited by its main objectives. Though there are both direct and
indirect measures to curb inflation the study will exclusively deal with the
indirect measures, that is the monetary policy cum operations of the CBN.
However, the time range of this study will be from 1985-1997. The concentration
on this rather short period was deliberate owing specifically to shortage of
materials.
Since
1986, the rate of domestic price inflation has persistently been on upward trend.
The year 1986, also marked a significant milestone in Nigeria’s economic policy
as Nigeria adopted SAP which introduced several structural changes into the
economy. In addition, the choice of 1985 as the point of departure for
this study was therefore informed by the
need to trace the genesis of the current wave of severe inflationary pressures
from that year the eve of the adopting of SAP when a fifteen month economic was
declared. Since the domestic price level went hay wire on the arrival of SAP,
it is instructive to ascertain whether the problem emanated from the structural
changes that SAP brought about. Analogously, 1989 will be remembered as one of
the years that the CBN played the most active part in regulating economic
activities. Thus this research study would be confirmed to the appraisal of the
CBN anti-inflationary monetary policy measures since 1985 when the current
economic crisis became active.
The
empirical analysis, which would both be descriptive and quantitative, would
involve the examination of the various policy measures and their ability to
accomplish pre-determined goals as a basis for determining their effectiveness.
1.4 NEED FOR THE STUDY
With
the emergence of persistence inflationary pressures in the Nigeria economy, it
has become imperative to evaluate the method of operation of the bank for
controlling inflation, a problem that now appears intractable. This study
therefore arose as a result of the deep dissatisfaction with the present growth
rate of inflation in the economy. Seemly, in the area of policy design, there
is the need for an effective policy measure to ensure that this problem is
nipped in the bud.
1.5 METHODOLOGY
The
research study will rely heavily on secondary data since it is basically a time
series survey. This includes published data by the Central Bank of Nigeria such
as annual report and statement of accounts, economic and financial review,
monthly reports, credit and monetary policy guidelines etc. In addition,
materials will be got from journals, text and news magazines etc.
Thus,
the study will adopt the traditional “before/after” approach. However, it must
be mentioned that the independent impact(s) of the bank’s monetary policy
measures is not amenable to mathematical computation because of the co-operant
fiscal policies adopted during the period in review.
1.6 LIMITATION
A
research of this nature would have been enriched tremendously by the
utilization of econometric techniques such techniques would have been used to
specify a model of inflation for Nigeria for a time period, so as to identify
the major determinants of the persistent inflationary pressures experienced
during the period and thus whether the bank’s anti-inflationary measures were
justified or appropriate.
However,
inspite of the advantage such techniques, its utilization was not possible
because of the problem of small degrees of freedom and the lack of quarterly
data on some variables, germane to this study such GDP, among others.
1.7 ORGANIZATION OF THE STUDY
For
the purpose of easy exposition, this study it is lined into five (5) chapters
immediately after this introductory chapter, chapter two will undertake a renew
of existing literature on the meaning of inflation, theories on inflation, as
the role of CBN in the control of inflation in chapter three. The fourth
chapter will contain an empirical analysis of anti-inflationary monetary policy
aimed at achieving the macroeconomic objective of price stability. The final
chapter will summarize these essentials make appropriate policy recommendations
and draw relevant conclusions.
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