MONETARY POLICY AS AN INSTRUMENT OF DEVELOPMENT IN NIGERIA
Need help with a related project topic or New topic? Send Us Your Topic
DOWNLOAD THE COMPLETE PROJECT MATERIAL
MONETARY POLICY AS AN INSTRUMENT OF DEVELOPMENT IN NIGERIA
Chapter one
INTRODUCTION
1.1 Historical Background of the Study
The goal of Nigerian monetary policy has always been to achieve internal and external balances. However, the focus on technique and instrumentation to attain those goals has shifted over time.
There have been two key eras in the pursuit of monetary policy: before 1986 and after 1986. The first phase focused on direct monetary restrictions, whereas the second focuses on market control mechanisms.
Prior to 1986, the economic environment that guided Nigerian monetary policy was characterised by the oil sector’s dominance, the growing importance of the public sector in the economy, and an overdependence on the external sector.
To maintain price stability and a healthy balance of payments, monetary management relies on the use of direct monetary instruments such as credit ceilings, selective credit controls, administered interest at the exchange rate, and the prescription of tile cash reserve requirements and special deposits.
The employment of market-based instruments was not viable at the time due to the immature condition of the financial system and the purposeful restriction on interest rates.
The most common instrument of monetary policy was the issuance of credit rationing guidelines, which largely established the interest rates for component and aggregate commercial bank loans and advances to the private sector.
The sectorial allocation of bank credit in the Central Bank of Nigeria (CBN) guidelines was intended to encourage productive sectors and, as a result, reduce inflationary pressures.
The fixing of interest rates at relatively low levels was done primarily to encourage investment and expansion. Special deposits were occasionally imposed in order to diminish banks’ free reserve and credit-creating potential.
Minimum cash ratios were imposed on banks in the mid-1970s based on their total deposit liabilities, but because these ratios were typically lower than those voluntarily maintained by the banks, they were less effective as a brake on their loan operations.
Beginning in the mid-1970s, it became increasingly difficult to meet the goals of monetary policies; in general, monetary aggregates, government budget deficit, GDP growth rate, inflation rate, and balance of payment position all moved in undesired directions. Banks’ compliance with credit criteria was less than satisfactory.
The nature of the monetary control framework, the interest rate regime, and the lack of coordination between fiscal and monetary policy were the primary causes of monetary management problems.
The monetary control structure, which depended mainly on the oil credit ceiling and selective credit controls, failed to meet the specified monetary targets as their implementation became less effective over time.
For example, the rigidity-controlled interest rate regime, particularly the low levels of the various rates, favoured monetary expansion over rapid development in the money and capital markets.
The low interest rates on government debt instruments failed to entice private sector depositors, and because the CBN was compelled by law to absorb the unsubscribed component of government debt instruments, significant amounts of high-powered money were typically pushed into the economy.
During the oil boom, the quick monetization of foreign exchange revenues resulted in a considerable surge in government spending, which contributed significantly to monetary instability.
In the early 1980s, oil receipts were insufficient to satisfy rising needs, and because spending was not rationalised, the government resorted to borrowing from central banks to pay massive deficits.
The Structural Adjustment Programmes (SAP), which began in July 1986, brought with them a renewed ideology of economic deregulation that would result in the elimination of price distortions and a comeback of rapid growth in the energy and oil sectors.
The fundamental tools of a realistic exchange rate strategy, together with the liberalisation of the external trade and payment system, increased reliance on market forces in price setting, and sensible isolation of governmental expenditure programmes.
Monetary policy, while maintaining the same basic goals as before, was intended to play a distinct role in restoring economic stability. In order to improve macroeconomic stability, efforts were focused on managing excess liquidity, and a number of measures were implemented to reduce liquidity in the system.
These included lowering the maximum credit growth ceiling allowed for batiks, recalling the special deposits requirement against outstanding external payments areas to CBN from banks, eliminating the use of foreign guarantees / currency deposits as collateral for Naira loans, and withdrawing public sector deposits from banks to CBN.
The sectoral credit standards were revised to offer banks more latitude in their loan operations, and all limitations on oil interest rates were eliminated in August 1987.
By mid-1992, the biggest impediment to the implementation of Open Market Operations (OMO) was the continuous enforcement of credit ceilings on banks.
Beginning September 1, 1992, the CBN lifted the credit ceiling for individuals banks that met CBN-specified criteria for oil selection, including statutory minimum paid up capital, capital adequacy ratio, cash reserve and liquidity ratio requirements, prudent guidelines, sectoral credit allocation, and sound management.
Meanwhile, the usage of stabilisation securities to absorb surplus reserves in banks increased, and three houses opened their doors for business in March 1993. The fourth bargain house commercial aired in 1995, followed by the fifth in 1996.
On June 30, 1993, the CBN began weekly OMOs in government securities with banks through discount houses. The ONTO has remained an important monetary policy tool in Nigeria, with its effectiveness in controlling system liquidity.
1.2 Introduction
According to Paul Flilbers (2004), monetary policy is the central bank’s control over the supply of credit in the economy in order to achieve broad economic policy objectives.
It is a measure taken by a country’s monetary authority to influence, directly or indirectly, the supply of money and credit to the economy, as well as the structure of interest rates, with the goal of achieving economic stability, which could take the form of “sustainable rate of economic growth and development, price stability, full employment, and balance of payment equilibrium.”
Achieving these stated goals goes a long way towards increasing a nation’s development. Controls can be exercised through the monetary system by working on aggregates such as the money supply, interest rate level and structure, and other credit-related circumstances in the economy.
The primary goal of central bankers is price stability, although others include fostering economic development and growth, exchange rate stability, ensuring the external payment balance, and maintaining financial stability.
Key monetary policy factors include interest rates, money and credit supply, and the exchange rate. Monetary policy is recognised as an essential tool of economic management; it plays an important role in promoting the welfare of its citizens.
However, economic development is a multifaceted process that includes both economic and social transformations inside the economy.
It entails developing the real income potentials of underdeveloped countries through investment to effect those changes and augment those production resources, which promises to raise real income per person. Some of the objectives of economic development include even income distribution, price stability, full employment, and so on.
Need help with a related project topic or New topic? Send Us Your Topic