EFFECTIVENESS OF MONETARY POLICY IN NIGERIA.
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EFFECTIVENESS OF MONETARY POLICY IN NIGERIA.
Chapter one
1.0 Background of the Study
It is believed that the modern Central Bank’s primary task is monetary management, which ensures a stable internal and external value for the national currency.
We defined monetary policy as a policy aiming to govern the supply, cost, availability, and direction of money and credit to the economy in accordance with national macroeconomic objectives.
It is a policy meant to ensure that the money supply is adequate to support long-term economic growth and development while avoiding inflationary pressures. It also entails determining the proportion of the money supply that should be made available to different sectors of the economy.
As a result, for money to fulfil its essential roles as a medium of exchange, store
of value, standard for postponed payments, and units of account efficiently, it takes cautious and skillful administration that is heavily reliant on the economic and institutional context, as well as the central bank’s resourcefulness in wielding the power and resources at its disposal. However, tactics used by monetary authorities to
Influence the supply, allocation, and cost of credit in an economy must be properly applied.
The control is exercised by the Central Bank of Nigeria (CBN) in collaboration with the Federal Government, which has overarching authority over the system. The Central Bank of Nigeria (CBN) initiates guiding policy measures and only implements those agreed by the government.
In the United States, the monetary authority is known as the Federal Reserve Bank (FRB), while in England it is known as the Bank of England and in Germany as the Bundesbank.
The bank’s measures to control the monetary and banking systems go through several stages, including identifying policy objectives and targets, policy formulation, policy integration into the budget and approval, policy implementation and review, and additional bank controls.
1.1 Monetary policy formulation
It is important to understand how monetary policy is developed in Nigeria in order to fully comprehend this study. The CBN’s statutory authority to establish monetary and financial policy stems from the Central Bank of Nigeria (CBN) Act of 1959, as revised by decrees 24 and 25 of 1991. Since its founding, the CBN has broadly interpreted its monetary policy powers to include:
• Encourages fast and flexible economic growth and development.
· Maintaining a healthy balance of payments and stable currency rates.
• Establishing a stable financial system.
· Achieving relative pricing stability.
Monetary policy is developed concurrently with banking policy and is mostly based on financial programming, which seeks to establish some consistency across macroeconomic variables in the Nigerian economy.
Typically, the programme seeks to estimate the optimal amount of money consistent with the specified targets for GDP growth rate, inflation rate, and external reserves.
The estimate produced yields the optimal level of money, allowing the growth target to be determined for some of the intermediate policy variables of money supply and aggregate domestic credit.
The allowable aggregate domestic credit is then divided between the government and the private sector. The portion taken by the government is decided by the extent of the budget deficit that will be covered by the banking system, which includes the Central Bank, commercial banks, and merchant banks. The balance is left to the private sector.
This mechanism has enabled the Central Bank to influence credit growth either directly through the credit ceiling regime or indirectly through market-based tools, depending on the extent of the fiscal deficit financed by the banking system.
In the age of direct monetary control, the key policy instruments include credit ceilings imposed on banks, administratively regulated interest rates and exchange rates, sectoral credit distribution, and the imposition of cash reserve and special deposits.
As a result of the negative effects of prolonged use of direct instruments on the effectiveness of monetary policy and the financial sector, a shift was made to an indirect approach that relies on market-based instruments such as reserve requirements, the discount rate, and open market operations.
Monetary policy development and implementation presented exceedingly significant conceptual and practical challenges. It may be intended to address four broad aims, namely:
• Price stability
• High level of employment
· A desirable and sustainable economic growth rate.
· The balance of payments is in equilibrium.
In practice, it is common to find conflicting aims.
Thus, the art of monetary management requires a tough trade-off between conflicting
Objectives are set in order to maximise the overall advantages of society.
The overall scope of monetary policy in a country must be considered in light of the economy’s structure and stage of development. These criteria, along with the features of the wider financial system within which monetary operate, have a substantial influence on the efficacy of monetary.
policy.
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