The Roles And Impact Of Central Bank Of Nigeria In Nigeria Economic Development

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The Roles And Impact Of Central Bank Of Nigeria In Nigeria Economic Development


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.


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).


1.2 Statement of the Problem

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:

  1. 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.
  2. 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.


1.5 Scope of the Study

The study is limited in scope to the monetary policies of CBN between 1999 to 2004 and their impact on the development of the Nigerian economy.


1.6 Limitation of the Study

The researcher encountered some constraints in the course of gathering data and conducting the research work. Among the major constraints are;

  1. Difficulty in accessing Central Bank Officials to cooperate in releasing data.
  2. Time for the study was too short and financial problems were also experienced by the researcher.

But with greater enthusiasm, all these constraints were overcome, and enough data colleted which assisted in conducting the research.


1.7 Justification of the Study

This is an area of interest not only to policy makers but students, academicians as well as the public sector. The study is intended to guide us understand and appreciate monetary policy, the tools used towards the achievement of the policy, and to evaluate its impact in the development of the Nigerian economy, and to proffer solutions to problems of implementing monetary policy.

The study is important to policy makers, students of finances, economics, academicians, and also a guide to the public sector generally in understanding monetary policies, their implementation and their impact on economic growth and development in Nigeria.


1.8 Definition of Terms

Liquidity:

The ability of a bank to meet its current obligations when they are due, and is normally a short term debt measures.

Reserve Requirement:

This refers to the proportion of total deposit liabilities which the commercial and merchant banks are expected to keep as cash in vaults and deposits with the Central Bank of Nigeria.

Quantitative Directives:

These are directives from the Central Bank of Nigeria to the banks and other financial institutions under its control as to the total amount of money which they may lend.

Narrow Money (Ml):

An “immediately spendable money”. All changeable deposits, currency and travelers cheques in the hands of the public.

Broad Money (M2):

Ml plus non – chequeable savings deposits and money market mutual funds shares.

Financial System:

The channel or conduct through which the sayings of surplus sectors (the household) flow to the deficit sectors (business organizations).

Monetary System:

A system whose main function is the provision of adequate stock of money or currencies i.e. notes and coins for the economy.

Capital Adequacy:

The regulations imposed on the banks both national and internationally that they should have sufficient capital to support the business and services that they offer in whatsoever currency such operations takes place.

Macroeconomic:

The branch of economics that considers the relationships between the large-scale movements of unemployment gross national products, savings and investments, etc


Chapter Five


Summary, Conclusion and Recommendations / Suggestion

This chapter attempt to summarize, recommend and make suggestion on the central bank monetary policies from 1999-2003. This chapter is the last chapter of the research thesis.


5.1 Summary

In chapter one of these research thesis, the researcher was able to introduced the subject matter” An evaluation of the impact of central bank monetary policy on the development of the Nigerian economy. The background of the study, statement of the problem, objective of the study, scope of the study, methodology of the study, limitation of the study, justification of the study and lastly the definition of terms were all lightened in order to give focus of what the research thesis is all about.

In chapter two, which contained the literature review from different authorities, where the brief history of the central bank was highlighted, overview of Nigerian Economic Development, the role of Central Bank of Nigeria (CBN) in the Nigerian economy, policy/monetary policies, monetary problems in the Nigerian economy and the summary of what was gathered in the literature of project.

In chapter three of the thesis, the organizational structure of CBN, operational activities of CBN, monetary problems of CBN in the Nigerian economy were highlighted.

Chapter four of the thesis discussed on the research methodology, method of data collection, data collection process, method of data analysis and summary of what transpired in the chapter.

In chapter five of the project, the research highlighted on different monetary policies of central bank of Nigeria ftom 1999-2004, the Nigerian economic policy 1999-2004 and the impact of the monetary policies on the Nigerian economy from 1999-2003.

Lastly, chapter six contained the summary, conclusion, recommendations/suggest of the research thesis.


5.2 Conclusion

It is evident in the light of this research that the monetary policies adopted by central Bank of Nigeria CBN’ have to create a conducive environment for Open Market Operation (OMO). Monetary policy instruments used impacted positively on the development of the economy, and in the promotion of economic stability. Although it impacted positively, there is need for the introduction of medium and long-term security to eliminate the persistent problem of excess liquidity in the economy. The outcomes of financial, monetary and other targets were favourable and thus, suggest a sound monetary management by the CBN.

The CBN should have to be proactive and programme in its interest rate management for a more responsive interest rate policy. The CBN have to pursue the goals of making the financial sector sound and stable for effective transmission of the monetary and fiscal policies.

CBN financing of government fiscal deficit should be curtailed, which will make the use of direct monetary control instruments unnecessary. The elimination of distress in the financial sector are further steps of promoting of financial sector (economic) stability.

Other economic policies should complement the monetary and fiscal (financial) programme, especially in the areas of maintaining macroeconomic stability, growth, external sector competitiveness and poverty alleviation.


5.3 Recommendation / Suggestions

Based on the above findings, the following recommendations and suggestion are proposed.

  1. For OMO to be effective, the money market must be further developed through the increase in the number of instruments and operators in the market.
  2. Timely data are required under a regime of indirect monetary control so that CBN can intervene to stabilize the financial market as desirable.
  3. Interest rate policy should be fine-tuned to encourage financial savings without discouraging investment.
  4. There is the need to introduce interest free banking in Nigeria, with the financial sector fine tuned to accommodate its functioning.
  5. Foreign exchange market should not be left entirely to market forces only both with due guidance and supervision by the monetary authorities, that is CBN.
  6. The government should increase funding of the IFEM.
  7. There is the need for greater harmonization of fiscal and monetary policies.

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