MONETARY POLICY AS A TOOL OF ACHIEVING PRICE STABILITY IN THE NIGERIA ECONOMY.
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MONETARY POLICY AS A TOOL OF ACHIEVING PRICE STABILITY IN THE NIGERIA ECONOMY.
Chapter one
INTRODUCTION
1.1 Background of the Study
Nigeria’s central bank (CBN) is responsible for formulating and implementing monetary policy in order to promote national stability. To do this, the governor of Nigeria’s central bank must submit a proposal to the federal republic of Nigeria through the finance minister, who has the authority to accept or change such plans.
The two enabling laws also authorise the Central Bank of Nigeria (CBN) to direct banks and other financial institutions to carry out specific obligations in the pursuit of approved monetary policy.
The monetary policy to be pursued is therefore specified in the form of recommendations for all banks and financial institutions. The recommendations are normally implemented throughout the course of a fiscal year; however, both elements may be altered during the year.
Noncompliance with certain requirements in the guidelines is frequently penalised.
In general, monetary policy refers to a set of policies intended to manage and control the volume, cost, availability, and direction of money and credit in an economy.
According to Anyanwu (1993), it is a deliberate effort by monetary authorities (CBN) to control the money supply and credit conditions in order to achieve specific broad economic objectives.
According to Akatan (1993), monetary policy in Nigeria refers to economic activities taken by the Central Bank of Nigeria (CBN) that affect the availability and cost of commercial and merchant banks’ reserve balances, as well as the overall monetary and credit conditions in the economy.
An increase in the supply of money would lead to a rise in demand for goods and services, resulting in higher prices or a deterioration in the balance of payments.
On the other side, an insufficient quantity of money may cause the economy to stagnate, so slowing growth and development.
However, the monetary authority must make an effort to keep the money supply rising at a steady rate in order to assure long-term economic growth and internal and external stability. The discretionary control of money, whether cheap or expensive, is determined by the current economic conditions and the thrust of policy.
In other words, the primary goals of monetary policy are to control inflation, maintain a stable balance of payments position to protect the external value of the national currency, promote adequate and sustainable levels of economic growth and development, break the vicious cycle of poverty, and ensure price stability.
1.2 Statement of Problem
The prevailing economic problem in Nigeria is that inflation, unemployment, capacity under-utilization, BOP disequilibrium, and inconsistent growth levels in the economy are ongoing, despite claims of regulating the economy by the relevant government authority, raising questions about the efficiency of various monetary policy measures and the competence of economic planners.
Given the foregoing, economists and the general public have lost faith in Nigeria’s monetary policy options over time.
Nigerians are wondering whether the prolonged state of disequilibrium in the Nigerian economy is being controlled or left to chance by the competent authorities.
1.3 Research Questions
This study will observe the following research questions:
· Is monetary policy effective in driving economic growth in Nigeria?
· How does monetary policy impact domestic investment in Nigeria?
· What are the issues with Nigeria’s monetary policy.
1.4 Objectives of the Study
The study’s overarching goal is to assess the impact of monetary policy on price stability in Nigerian markets. However, more specifically, the aims intend:
· Assess the effectiveness of monetary policy in driving economic growth in Nigeria.
· Evaluate the impact of monetary policy on domestic investment in Nigeria.
• Identify issues hindering the effectiveness of Nigeria’s monetary policy.
1.5 Significance of the Study
The conclusions of the study will be relevant to the following.
· Economic Planners: The study will provide empirical data on the Nigerian economy’s growth pattern centred on monetary policy, which is important for policy modelling purposes.
· Economic Watchers: The study’s findings will shed light on how monetary policy affects domestic investment in Nigeria.
· Researchers/Students: The study’s findings will inform future research in relevant domains.
In conclusion, the research study findings will be useful to anyone concerned about the effectiveness of monetary policy on price stability, its structures and administration, and why many monetary policies have failed in Nigeria.
1.6 Scope of the Study
This study investigated the impact of monetary policy on price stability in Nigeria. It covers the years 1991–2007. The study looked at the overall performance of the economy, which would help with an appropriate appraisal of monetary policy.
The emphasis was on data analysis, even though references to events outside the stimulated time range were limited to the aforementioned timeframe. The approach also focuses on effectively managing surplus liquidity or cash in the economy.
1.7 Limitations of the Study
The analysis is constrained by the discrepancy around the important data as recorded by the key government authorities (CBN, National Bureau of Statistics, etc). Furthermore, the study is constrained by time and money.
The rising expense of transportation, stationery, and clerical work, as well as the tight deadline for submitting this research work, all contributed significantly to the study’s limitations.
1.8 Definition of terms.
The following are the definitions and technical words utilised throughout this investigation.
· Policy Instrument: Variables that authorities can directly modify to meet aims. Examples of such variables include open market operations instruments, discount rates, bank rates, and so on.
· Intermediate target: These variables act as a channel for instruments to affect targets. Examples include interest, the money supply, and so on.
• Monetary Basel High-powered money: Includes certain liabilities of the Central Bank of Nigeria (CBN), such as total bank reserves and currency held by non-banks. The main sources of the monetary base are the CBN’s net foreign assets, net government claims on commercial and merchant banks, and other (net) CBN assets.
· Interest rates: Also referred to as interest rate structure. Interest rates vary from bank to bank because they have been fully deregulated. Each bank has interest rates for its standard fixed depositors and savers, as well as a prime lending rate offered to its first-class customers and a maximum lending rate charged to its other customers.
Furthermore, there is an inter-bank rate that applies to very short-term loan transactions between banks themselves.
The Rediscounts rate is the minimum rate at which the CBN has set aside to lend to merchant banks and commercial banks, either directly or through bill rediscounting.
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