Impact Of Monetary Policy In Nigeria
The main objective of this study is to examine the impact of monetary policy on economic growth, poverty and unemployment in Nigeria. The study employed a Multiple Equation Approach based on both the traditional and modern views of economic development. The first model in this study takes growth rate in real per capita GDP as a proxy for economic development and seeks to establish the relationship between it and exports. The second model sought to ascertain the contribution exports have made to reduction in poverty. The model was estimated using Ordinary Least Square (OLS) estimation technique using E-views version 10 Computer Software. The estimated models were there after evaluated to determine whether the results obtained satisfy theoretical, statistical as well as econometrics requirements. The findings of the study provide evidence that monetary policies have had a positive impact on economy growth and poverty and a negative impact on unemployment. This study will be of great benefit to banker, investment analysis, government agencies, academics, private and public sectors and useful to policy makers to ensure price stability in the country. It will also give insight on how to adjust between demand and supply of money, credit control, creation and expansion of financial institutions, form a suitable interest rate structure and debt management in the Nigeria.
1.1 Background to the Study
Monetary policy is a deliberate action of the monetary authorities to influence the quantity, cost and availability of money credit in order to achieve desired macroeconomic objectives of internal and external balances (CBN, 2011). The action is carried out through changing money supply and/or interest rates with the aim of managing the quantity of money in the economy. Thus, 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 (Chimobi,& Uche, 2012).
Economic development could be defined as the increase in the amount of goods and services in a given country at a particular time. This of course indicates that when the real per capita income of a country increases over time, economic development is taking place. A growing economy produces goods and services in each successive time period, showing that the economy’s productive capacity is at increase. Broadly, economic development implies raising the standard of living of the people and reducing inequalities of income distribution (Jhingan, 2014).
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, have grown in volume and value becoming a prominent earning asset for investors and source of balancing liquidity in the market (Adegbite, & Alabi, 2013)
Two major periods have characterized monetary policy in Nigeria: the post and pre 1986 periods. Before 1986, direct monetary control was used in achieving price stability in Nigeria, while the emphasis shifted to market mechanisms after the 1986 market liberalization (Uchendu, 2019). Prior to 1986, direct monetary instruments such as selective credit controls, administered interest and exchange rates, credit ceilings, cash reserve requirements and special deposits to combat inflation and maintain price stability were employed. The fixing of interest rates at relatively low levels was done mainly to promote investment and growth. Occasionally, special deposits were imposed to reduce the amount of excess reserves and credit creating capacity of the banks (Okafor, 2019).
In the above period, the monetary control framework seems to have failed to achieve the set monetary targets as their implementation became less effective with time. The rigidly controlled interest rate regime and the non-harmonization of fiscal and monetary policies may have contributed immensely to the adverse effect of constraining growth of the money and capital markets. In the Structural Adjustment Programme (SAP) era instead of relying on direct control mechanism for monetary policy, a shift to market-oriented reform was introduced for effective mobilization of savings and efficient resource allocation. Open market operation was the main instrument of the market-based framework. In Nigeria, monetary policy has been based on a medium-term perspective framework in recent times. The shift was to free monetary policy implementation from the problem of time inconsistency and minimize over-reaction due to temporary shocks. Policies have ranged from targeting monetary aggregates to monitoring and manipulating policy rates to steer the interbank rates and by extension other market rates in the desired direction (Russell, 2010). The extent these strategies have helped to stabilize the economic and engender growth is of immense concern to policy makers and academics.
One of the major objectives of monetary policy in Nigeria is stabilization of economic growth. Nigerian government has adopted various monetary policies through Central Bank of Nigeria over years to achieve economic growth. Despite the increasing emphasis on manipulation of monetary policy in Nigeria, the problem surrounding its economic growth still persists. Such problems include high unemployment rate, low investment, high rate of inflation and unstable foreign exchange rate. These perceived problems are being claimed to have caused a fast decline in the economic growth of Nigeria. It, therefore, becomes necessary to examine the extent to which it has actually contributed to the development in the economy.
1.2 Statement of Problem
Monetary policy influences the volume and direction of purchasing power in an economy and is an instrument of market intervention to achieve rationality stipulated objectives which otherwise be impossible of attainment at least in terms of volume, speed and direction (Sanusi,2020). Economic development is essential in an economy as it is expected to lead to reduction in the level of poverty, help narrow the inequality gap in the society, create employment as well as improving livelihoods. The need to investigate how well the government through the monetary authority has used appropriate monetary policy to speed-up the economic development process cannot be overemphasized. Agbaje, (2018) found that in Nigeria monetary policy appears to have some set-backs; because, of inconsistent government policy, inability to implement the formulated policies, political and economic instability, absence of workable long-term development plans, and corruption at all levels of government etc. Oguda, & Chinda, (2018) found inconsistent impact of monetary policy on public and private sector growth in Nigeria. Therefore, there is no consensus on the impact of monetary policy on economic growth in Nigeria. It is against this background that the study attempts to investigate the impact of monetary policy on economic development in Nigeria.
1.3 Research Questions
- What is the impact of money policy on economic growth?
- It’s there an impact of monetary policy on poverty in Nigeria?
- It’s there an impact of monetary policy on unemployment in Nigeria
1.4 Objective of the Study
The main objective of this study is to examine the impact of monetary policy on economic development in Nigeria. Specific objectives are;
- To assess the impact of money policy on economic growth
- To investigate the impact of monetary policy on poverty
- To examine the impact of monetary policy on unemployment in Nigeria
1.6 Scope and Limitation of the Study
The study is aimed at examining the performance of monetary as well as the appropriate and possible solution to the problem facing the implementation and enhancement of monetary policy in Nigeria. To effectively and efficiently undertake a research work of this magnitude, it has some difficulties associated with it. Time is the vital factor for the success of any research work, for thoroughness and accuracy. I was faced with time constraint. This was due to academic pressure that characterized the final steps in the educational system. Similarly, effort was being frustrated by inadequacy of information given by the Bank officers as some information are classed as “top secret” which will never be revealed.
1.7 Significance of the Study
This study will be of great benefit to banker, investment analysis, government agencies, academics, private and public sectors as well as useful to policy makers to ensure price stability in the country. It will also help marketers to be more efficient in terms of time, money and other resources. Furthermore, it will give insight on how to adjust between demand and supply of money, credit control, creation and expansion of financial institutions, form a suitable interest rate structure and debt management in Nigeria.
1.8 Definition of Terms
It is a set tools used by a nation’s central bank to control the overall money supply and promote economic growth and employ strategies such as revising interest rates and changing bank reserve requirements.
This is the process by which the economic wellbeing and quality of life of a nation, region, local community, or an individual are improving according to targeted goals and objectives.
Central bank of Nigeria; its issue legal tender currency in Nigeria; maintain external reserves to safeguard the international value of the legal tender currency; promote a sound financial system in Nigeria; and. act as Banker and provide economic and financial advice to the Federal Government.
Conclusion and Recommendation
Monetary policy remains a potent tool in the hands of the government through the monetary authority that can be used to bring about economic growth, poverty reduction and employment generation in Nigeria. The timely use of appropriate monetary policy will help Nigeria overcome her macroeconomic challenges. The findings of this study provide evidence that monetary policy has had positive impact on economic growth and poverty and a negative impact on unemployment in Nigeria.
On the strength of the findings of this study, the following recommendations are made:
- The monetary authority should continue to use appropriate monetary policy to speed up the economic growth process in Nigeria;
- The federal government should put appropriate income policy in place to distribute the gains of economic growth equitably among the people;
- The monetary authority should deliberately target reduction in unemployment in its monetary policy making process;
- The federal government should proper harmonization of both fiscal and monetary policies to ensure more effectiveness.
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