IMPACT OF FINANCIAL LIBERALIZATION ON MONETARY POLICY IN NIGERIA.
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IMPACT OF FINANCIAL LIBERALIZATION ON MONETARY POLICY IN NIGERIA.
Chapter one
1.1 Background of the Study
In the current Nigerian environment, monetary policy covers acts taken by the Central Bank that affect the cost and availability of commercial and merchant bank reserve balances, and hence the overall monetary and credit conditions.
In the economy (Akatu, 1993), the major purpose of such efforts is to ensure that over time, the expansion of money and credit will be adequate for the long-run needs of the rising economy at stable prices.”
The short-term goals of monetary policy, however, include combating inflationary pressures, restoring a sustainable balance of payments, achieving full employment of productive resources, equitable income distribution, and maintaining a stable exchange rate at an internationally competitive level.
Monetary policy reforms are sometimes implemented as part of a coordinated effort to remove barriers to savings growth and effective investment allocation.
As is frequently the case, the pursuit of these short-term aims tends to clash with the fundamental goal of sustained, long-term growth. For example, a strong anti-inflationary attitude would normally need sacrificing output growth in the short run.
Similarly, restoring a healthy balance of payments might be prioritised. Similarly, a goal of maintaining a stable exchange rate may necessitate tighter control over aggregated demand, reducing output.
Furthermore, achieving the goal of exchange rate stability at an internationally competitive level may necessitate a large depreciation of the local currency, with resulting cost pressures on the price level.
To summarise, complex trade-offs are inherent in the implementation of monetary policy, making the central bank a regular target of criticism and other types of pressure.
Monetary policy’s aims have been consistent over time: achieve internal and external balance. However, the emphasis on techniques/instruments to attain those aims has shifted over time.
There have been two key eras in the pursuit of monetary policy: before 1986 and after 1986. The first phase emphasised direct monetary regulations, whereas the second relied on market mechanisms.
Prior to 1986, the economic environment that influenced monetary policy was characterised by the oil sector’s dominance, the growing importance of the public sector in the economy, and an over-reliance on the external sector.
To maintain price stability and a strong balance of payments position, monetary policy relied on direct monetary instruments such as credit ceilings, selective credit controls, administered interest and exchange rates, and the imposition of cash reserve requirements and special deposits.
The employment of market-based instruments was not viable at the time due to the underdeveloped condition of the financial markets and the purposeful restriction on interest rates.
However, as a result of the 1980s international oil market crash and the resulting deterioration in economic conditions, the Structural Adjustment Programme (SAP) was implemented.
In this approach, the most popular monetary policy instrument was the issuance of credit rationing guidelines, which primarily set the rates of change for the components and aggregate commercial bank loans and advances to private sector.
The sectoral allotment of bank credit in CBN guidelines was intended to support the productive sectors and so reduce inflationary pressures. Interest rates were kept reasonably low to encourage investment and growth.
Occasionally, specific deposits were enforced to reduce banks’ free reserves and credit-creating potential. In the mid-1970s, banks were required to maintain minimum cash ratios based on their overall deposit obligations.
The Structural Adjustment Programme was implemented in 1986 in response to the international oil market downturn of the 1980s, as well as the inadequacy of direct monetary policy to generate financial resources for investment.
In line with SAP’s overall economic management philosophy, monetary policy was designed to encourage the establishment of a market-oriented financial system for successful mobilisation of financial savings and efficient resource allocation.
The primary tool of the market-based framework is open market operations (OMO). This is supported by reserve requirements and discount window procedures.
This paper explores the influence of the SAP-led financial liberalisation plan on Nigerian monetary policy, as well as the shift from direct to indirect monetary management.
Specifically, the main topic to be addressed in this study is how effective monetary policy is in promoting financial sector liberalisation in Nigeria. To what extent can monetary policy be relied on to achieve macroeconomic goals in Nigeria?
These are critical problems since deregulation and changes in financial markets in recent years have had far-reaching consequences for the conduct of monetary policy in many nations.
Simple and well-behaved linkages between money and nominal income that existed under the regulatory framework appear to have broken down in the changing financial environment. Indeed, Fama (1980) and Hall (1982) have suggested that the more or less constant and predictable demand for money connection reported in previous studies was a byproduct of the financial regulation structure in place during the period under consideration.
Although these opinions represent the findings of studies undertaken in wealthy countries around the world, particularly in the United States, the test of this viewpoint has been validated in several observed Less wealthy Countries (LDCs).
With the liberalisation of Nigeria’s financial system, the impact of this policy move on monetary policy becomes critical. This is because monetary policy is critical to achieving Nigeria’s macroeconomic goals.
1.3 Justification for the Study.
According to Bogunjoko (1997), monetary policy remains a key component of economic policy development and implementation. It applies regardless of the economic system in existence.
Monetary policy refers to discretionary measures taken by monetary authorities to regulate and impact the supply, cost, and direction of money and credit in the economy.
The policies are implemented in such a way that monetary expansion remains consistent with the level of economic activity and overall macroeconomic stability (Ojo, 1994).
Montiel (1991) emphasised the importance of monetary policy, stating that while both monetary and fiscal policies are frequently given prominence in the quest of macroeconomic stabilisation in developing nations.
It is assumed that the authorities in these countries have access to macroeconomic policy instruments and can use them to accomplish desirable macroeconomic goals.
Given the significance of monetary policy for emerging countries, including Nigeria, it is critical to investigate the impact of changes in the financial sector on monetary policy in Nigeria.
The primary goal of this research is to provide empirical data on the influence of financial liberalisation on monetary policy in Nigeria. This study is important because it will shed light on the efficiency of Nigeria’s monetary policy.
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