The Impact Of Monetary Policy On Industrial Growth In Nigeria

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The Impact Of Monetary Policy On Industrial Growth In Nigeria


This study empirically examines the Impact of Monetary Policy on Industrial Growth in Nigerian Economy. In line with the objectives of this study, secondary data were obtained from Central Bank of Nigeria Statistical Bulletin covering the period of 1995 to 2014. In concluding the analysis, Multiple Regressions were employed to analyze data on such variables as Open Market Operation, Cash reserve, Exchange Rate and Monetary Policy Rate for Nigeria over the period 1995 to 2014 were all found to have significant effects on Industrial Growth with Adjusted R2 of 0.694 (69.4%). Following the outcome of this study, it is therefore concluded that Cash Reserve Rates and Exchange Rate have significant positive effect on the Nigerian Manufacturing Sector Gross Domestic Product, but Open Market Operation and Monetary Policy Rate have negative effect on the Nigerian Manufacturing Sector’s GDP. All the variables are statistically significant. In order to improve economic growth, it is recommended that government should develop the Manufacturing Sectors of the economy through its capital expenditure. With this, capital expenditure on productive activities and social overhead capital will contribute positively to industrial growth which will invariably enhance economic growth.

Chapter One


1.1 Background of the Study

Financial instability is the new challenge for monetary policy. Most studies indicate that thetypical patterns of financial crisis include prolonged unwinding of industrial growth. These phenomena challenge modern monetary policy.

Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (ii)cost of moneyof rate of interest, in order to attain a set of objectives oriented towards the .growth and stability of the economy. Monetary theory provides insight into how to craft optimal monetary policy. ‘

Monetary policy is referred to as either being an expansionary policy or a contractionary policy. Where an expansionary policy increases the total money supply in the economy, the contractionary policy decreases the total money supply in the, economy. ,Expansionary policy is traditionally used to combat unemployment in a recession by lowering the interest rates while contractionary policy involves raising interest rate in order to’ combat inflation. Monetary policy is, contrasted with fiscal policy, which refers to government borrowing, spending and. taxation.
Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can’ be borrowed and the total supply of money. Monetary policy uses a variety of tools to control one or bothof these, to influence outcomes like economic growth (industrial growth), industrial growth with other currencies and employment. Where currencyis under a monopoly, of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the systemauthority has the ability to alter the money supply and thus influence the interest rate (in order to achieve’ Policy goals). The beginning of monetary policy as such comes from the late 19th,century, where it was used to maintain the gold standard.

A policy is referred to as contractionary if it reduces the size of the money supply, or-raises the interest rate, An expansionary policy increases the size of the money: supply, or decreases’ the interest rate. Furthermore, monetary policies are described, as follows:accommodating, if the interest rate set by the monetary authority is ‘intended to createeconomic growth: neutral if it is intended neither to create economic growth nor combat inflation: or tight, if intended to reduce inflation.

There are several monetary policy tools available to achieve these ends: increasing interest rate, by flat: reducing the monetary base and increasing reserve requirements. All have the effect of contracting the money supply; and if reserved, expand the money supply. Since the 1970s, the BRETTON WOODS system still ensured that most nations would form the two policies separately,Within almost all modem nations, special institutions (such as ,the Bank of England, the European Central Bank the Federal Reserve in the United States, The reserve Bank, of India, the Bank of Japan or the Bank of Canada) ,exist which have the task of executing the monetary policy and often independently of the ,executive. In general, these institutions are called central banks and often have oilier responsibilities such as supervising .the full operation of the financial system.

The primary tool of monetary policy is open market operations. This entails managing quantity of money in circulation through the buying and selling of various credit instruments, foreign currencies or commodities. All of-these purchases or sales results in more or less base currency entering or leaving market circulation.

Usually the short term goal of open market operation is to achieve a specific short term interest rate target in other instances, monetary policy might instead entail the targeting of a specific industrial growth relative to some foreign currency or else relative to gold. For example, in the case of USA, the Federal Reserve targets the federal fund rate, the rate which member banks lend to one another overnight, However the monetary policy of China is to target the industrial growth between the Chinese Renminbi and a basket of foreign currencies.

The other primary means of conducting monetary policy include:

  1. Discount window lending (lender of last resort)
  2. Fractional deposit lending (changes in the reserve requirement)
  3. Moral suasion (cajoling certain market players to achieve specified. outcomes)
  4. “Open mouth operation” (talking monetary policy with the market),

1.2 Statement of the Problem

Industrialization has always constituted a major objective of development strategy and government policy. Through industrialization, developing nations aspire to achieve higher economic growth, and to eventually attain developed nation status. Yet, it remains doubtful whether the approach of industrial policy-making in Nigeria has indeed been successful in transforming the economy. Over the past three decades, the outlook of industrial growth and development in Nigeria has been gloomy and uncertain. Industrial output, measured in terms of aggregate index and its contribution to GDP has fluctuated very widely.

The industrial contribution to GDP which went up from 17.2 percent in 1996 to 18.1 percent in 1998, declined to 16.1 percent in 2002. Existing evidence highlights the main contribution to industrial development in Nigeria to include such diverse problems as poor infrastructure, scarce human capital, and limited access to inputs, high macro-volatility, poor legal and judicial system, small product market and thin financial market (Obitayo, 1991, Asogwa ,2003, Nnanna, 2003).

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 industrial 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 industrial 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.

1.3 Objectives of the Study

The general objective of this study is to examine monetary policy in Nigeria in relation to its impact on industrial growth. To achieve that, this topic will pursue the specific under listed objectives.

  1. To ascertain if monetary policy instruments have impact on industrial growth in Nigeria, if it does to ascertain the relationship.
  2. To examine if long run relationship exists between monetary policy instruments and industrial growth in Nigeria .
  3. To examine if causality exists between monetary policy instruments and industrial growth in Nigeria.

1.4 Hypotheses of the Study

The following hypothesis will guide this study:

  1. H0: Interest rate, industrial growth and inflation do not respond to shocks in monetary policy rate (MPR).
    H1: Interest rate, industrial growth and inflation responds to shocks in monetary policy rate (MPR).
  2. Hi: Monetary policy instruments have significant impact on industrial growth in Nigeria.
    Ho: long run relationship does not exist between monetary policy instruments and industrial growth in Nigeria

1.5 Significance of the Study


Both the foreign and local investors will benefit from this work since the research exposes the impact of several monetary policy regimes on industrial growth. This will enable the investors to know when to and when not to invest.

Policy Makers:

This research will also be beneficial to the policy makers seeing that the work .will reveal the impact of monetary policy instruments on• industrial growth in. Nigeria. This will help the policy makers know the efficient monetary policy to make regarding certain industrial growths: foreign or local.

1.6 Research Methodology

The method to be used in approaching this subject matter shall be descriptive. It will involve the employment of tabular analysis of data and graph or both. The source of data for the purpose of this essay shall be through primary and secondary sources. This will however be through regression analysis. The secondary data shall include information from journals of commercial banks, specialized banks and the Central Bank of Nigeria (CBN). Also, collections of information from the financial statement of some specialized credit bodies.

1.6 Scope of the Study

This study covers the Nigerian economy from 1970 to 2096. That is, a period of thirty seven (37) years. The choice of this period is based on the availability of data and the fact that it is a time series analysis.

1.7 Plan of the Study

The project work is divided into five chapter which are as follows;

  1. Chapter one consists of the introduction, statements of the problem, aims and objectives of the study, research questions, research hypotheses, research methodology, scope of the study, significance of the study.
  2. Chapter two consists of the literature review of the study.
  3. Chapter three consists of the research methodology.
  4. Chapter four consists of the data analysis, presentation and interpretation of the result finding while
  5. Chapter five consists of the summary of finding, conclusion and recommendation, then the bibliography.

Chapter Five

Summary, Conclusion and Recommendations

5.1 Summary

The study theoretically and empirically investigated how inflation, interest and industrial growth respond to shocks in monetary policy (captured by MPR). The research work used monthly data, beginning from December, 2006 (when the MPR was introduced) through February, 2020. The Structural VAR was employed to estimate the model, where the impulse response revealed how the inflation, interest and industrial growths responded to shocks in MPR and the variance decomposition brought to the limelight the impact of MPR on these Macroeconomic variables. The Granger Causality was equally used to disclose the causal direction among the variables, while Augmented Dickey Fuller (ADF) was conducted on all the variables before the estimations to establish the absence of stochastic process.

Outlines of Major Findings
  1. Inflation responds to shocks in MPR only in a volatile manner (a pattern that is almost unpredictable); in the first four periods, positive shocks in MPR could not bring down inflation but thereafter, any further increase in MPR produced gradually declining but positive interestrate.
  2. Industrial growth responds to shocks in MPR in a relatively downward fashion and quickly assumes upward trend from the second period lasting throughoutthe periods.
  3. Interest rate responds quickly and positively to shocks in MPR from the first thorough the last period. Therefore, MPR has its greatest influence on interest rate (prime lendingrate).
  4. Of all the three macroeconomic variables, inflation is the most difficult to deal with and cannot always be successfully conquered with the manipulation of MPRalone.
  5. Low and stable interest and industrial growth can only be achieved when inflation is low and stable. Hence, inflation is the greatest enemy of our economy.
  6. Changes in the interest and industrial growth as well as MPC meetings can be used to predict MPR.

5.2 Conclusion

The study concludes that both interest (prime lending rate) and industrial growths respond quickly and almost in a predictable way to shocks in MPR. However, changes in MPR do not automatically and consistently produce changes in inflation and above all inflation responds to shocks in MPR only in a volatile manner (a pattern that is almost unpredictable). Hence of all the three variables, inflation is the most difficult to deal with (stability of which could leads to stability in the remaining two) and could not be totally addressed by mere manipulations of MPR. Hence low and stable inflation is a necessary condition for the achievement of low and stable interest and industrial growth. We also conclude that MPR is also responsive to Monetary Policy Committee (MPC)meetings.

5.3 Recommendations

  1. Other monetary policy instruments particularly Cash Reserve Requirements (CRR) and especially, OMO should be prudently used to compliment MPR in achieving Economic growth.
  2. The current monetary tightening stance of the CBN is a step in the right direction but should be used with caution. Considering the dual objective of CBN, themonetary policy should be tailored to promote real sector lending while trying to achieve low and stableinflation.
  3. There is the need for policy harmonization between the monetary and fiscal authorities. Budget deficit should be avoided and more fund be appropriated for capital as against the recurrentexpenditures.
  4. CBN should license more banks to operate non-interest banking so as to boost financial deepening and inclusion. The large informal sector in the country that cripples the transmission mechanism of monetary policy and constraints the ability of CBN to control money supply was to some extent caused by cultural and religious belief that interest is unlawful; this could be avoided by introducing more non-interest banks.
  5. The “cashless policy” of CBN should be maintained, made more efficient and user friendly. Researches have shown that a system that is cash based is inefficient and distorts transmission mechanism. More efficient point of sale (POS) terminals, multifunctional ATMs as well as mobile payment compatible system should be put in place.
  6. There is the need for proper enlightenment of the public about any new CBN policy initiatives (e.g. non-interest banking & cash-lite policy). The communication strategy should be clear andconcise.
  7. The physical and social infrastructures of the economy should be improved to reduce the cost of doing business and by extension the interest charged by thebanks.
  8. The three tiers of Government should exercise fiscal prudence and fiscal responsibility act be fully implemented. More so, Banks and OtherFinancial Institutions should improve their operational efficiency by cutting down overhead and any other unnecessary expenses.
  9. The CBN should reduce or strike out any unnecessary stringent documentation requirement for the purchase of forex in the official market. This would kill patronage and by extension the life of parallel market/streettrading.
  10. To ensure policy continuity and consistency, the rate of turnover of CBN Governors should be checked and the frequency of MPC meetings be reduced to at most quarterly unless in case ofemergencies.
  11. The Oil and Gas sector should be fully deregulated, corruption in the sector and other sectors of the economy be fought to the latter and above all the saved subsidy proceeds be used to boost physical infrastructure. This would reduce pressure on forex demand as well as cost of doing business and in addition boost external reserve in the country.
  12. Last but not the least, CBN should avoid policy summersault, a situation where CBN would initiate a policy that originally supposed to be applicable to all economic agents (e.g. cash-lite) and latter begin to exonerate some agents (e.g. government parastatals, foreign embassies, Primary Mortgage Banks, Microfinance Banks etc.) from compliance, would not augur well for the economy. If Monetary Policy must strive, the credibility of CBN should be held in high esteem especially under condition of uncertainty.

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