REVIEW OF MONETARY AND FISCAL POLICIES IN THE NIGERIA ECONOMY
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REVIEW OF MONETARY AND FISCAL POLICIES IN THE NIGERIA ECONOMY
ABSTRACT OF A REVIEW OF MONETARY AND FISCAL POLICIES
Occasionally, the nation is faced with economic instability, this might be as a result of less or too much money in circulation, thus the researcher plans to write on laws these problem could be remedied by the use of monetary and fiscal policy tools.
Furthermore, the purpose of the research is to examine and discover various methods of increasing and managing the volume of money in circulation during periods of deflation and inflation, respectively.
Furthermore, the research plans to obtain her data from secondary sources, as advised; this includes an examination of relevant textbooks, journals, and other publications.
Because this research is limited to secondary sources of data, the researcher aims to collect her information from the following locations. IMT library, ESUT library, National library, and CBN library are all available.
Conclusively it is considered that at the end of this study work, the data/information contained in this work will contribute positively to measure of managing the Nigerian economy through the execution of the monetary and fiscal policy tools.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The Central bank of Nigeria (CBN) commenced with effect from 2002 fiscal year, adopt a medium term perspective monetary policy framework. Unlike earlier program which was planned for one year, the new programmes is for a two year period beginning January 2002 to December 2003.
the move is in acknowledgement of the fact that monetary policy measures affect the ultimate objectives of policy with a large lag. Thus, the current shift will liberate monetary policy implementation from the problem of time inconsistency and minimize over reactivity due to transient shock..
This circular covers the monetary, credit, foreign trade and exchange policy guideline applicable to bank and others financial institution in Nigeria in 2002/2003. in particular, monetary and credit policy will be implemented within the scope of the medium term programme.
The instructions will be fine-tuned in light of changes in monetary and financial market conditions, as well as economic performance, which may be communicated to the appropriate institutions through supplementary circulars as needed.
Following the in production, the circular has four primary sections and four appendices, which are section 1, section 2, evaluate the progress in the economic and policy environment in 201 and thus 2002/2003. Section 3 discusses the monetary and credit policy financial institutions in fiscal 2002,
while Section 4 discusses foreign trade and exchange policy actions. Prudential guidelines for licenced banks and reporting format are included in the appendices.
MEACRFO’S ECONOMIC AND POLICY ENVIRONMENT IN 2001 REVIEW
Macroeconomic developments major economic indicators indicated mixed macroeconomic performance in 2001 the environment for the continuation of expansionary fiscal operations of the three tiers of government, as a result of the magnetization of excess crude oil, receipt and proceeds from the GSM licence later in the year, as well as monetary financial fiscal deficit.
This resulted in significant injections of cash into the economy, which undirected rapid monetary growth and exacerbated inflationary pressures. Interest rates were influenced by the level of bank liquidity as well as policy initiatives targeted at alleviating liquidity issues.
The average naira currency rate in the fiscal market, on the other hand, remained essentially steady for the majority of the period, despite relative growth in agricultural and industrial production.
The outlook for the external sector remains positive through the third quarter of the year. However, the average price of crude petroleum fell in the fourth quarter, which had a negative impact on export earnings and government income.
Growth in real GDP was anticipated to be 3.8 percent in the first half of 2001, compared to the 5.0 percent forecast for 2001. The increase in output reflected increases in agricultural and industrial production. Aggregate manufacturing capacity utilisation increased marginally by 0.3 percentage point over the previous half year’s level in the first half of 2000.
The upward pressure on inflation that has been witnessed since July 2000 persisted in the fourth quarter of 2001, with the inflation rate in November standing at 18.9 percent, compared to 5.8 percent in the same period of 2002.The preliminary balance of payments for the first half of 2001 showed an overall surplus of #51.1 billion (US$458.9 million), compared to #78.3 billion (US$782.5 million) in the same period in 2000.
This development represented the current account surplus, which more than compensated the capital and finance account deficits. The current account situation was bolstered mostly by increased earnings from crude oil exports, with occasional support from high crude oil prices in the international petroleum market.
However, the value of non-oil exports declined drastically from $14.8 billion in 2000 to $9.3 billion in June 2001. The gross external reserve climbed from US $9.9 billion (#1.032.5) at the end of December 2000 to US$10.6 billion (#167.8 billion) in June 2001, then fell slightly to US$10.4 billion (#1,152.2 billion) in November.
For the most part of the year, the Naira exchange rate compared to the US dollar remained reasonably constant in the IFEM. Following the initial devaluation from #110.5 to #113.59 = US$1.00,
the average IFEM rate slowly increased from #113.07 = US$1.00 in May to #111.60 = US$1.00 in September and held at that level in October 2001. The rate did however decline significantly to #111.99 = US$1.00 in November.
Similarly, the average parallel market and bureau discharge rates fell from $123.38 and 48 = US $100, respectively, in May before gradually increasing. The relative stability attained was ascribed to port destination import inspection.
Monetary aggregates grew significantly in the first eleven months of 2001, well above the specified target for the year. According to preliminary data, wide money (M2) increased by 26.8 percent in comparison to the year’s aim of 12.2 percent. M2 growth represented increases in both the narrow money (m1) and questioned components.
M11 increased by 19.9 percent, compared to the 4.3 percent rise expected for the entire year. During the time, monetary expansion was provided by a boost in bank lending to the domestic economy and foreign assets (net) of the banking system, as a result of the sustained magnetization of excess crude oil export profits.
Aggregate bank credit to the domestic economy increased by 77.8 percent in fiscal 2001, exceeding the 15.8 percent growth objective. The increase was due to an increase in loans to both the government and the private sector. Net claims made against the government and the private sector.
Net government claims increased by 132.8 percent in comparison to the year’s anticipated expansion rate of 2.6 percent. Similarly, credit to the private sector increased by 37.3 percent, exceeding the year-end objective of 22.8 percent. Credit to the private sector increased, as it did the previous year, mostly due to developments in the foreign exchange market.
During the year, reported bank lending rates were generally high, while deposit rates remained low. By November 2001, the disparity between the weighted average deposit and the maximum lending rate was 11.6 percentage points, while the spread between the average saving deposit and the maximum lending rate was 26.1 percentage points.
Throughout the year, the CBN tightened its monetary policy to stem the liquidity increase caused by governments’ expansionary fiscal policies. The banks gradually increased their minimum rediscount rate (MRR) from 14000 percent in January to 20.5 percent in September, while the cash reserve requirement (CRR) and statutory minimum liquidity ratio (LR) were revised upward from 10.0 and 35.0 percent,
respectively, during the same period. In February 2001, the CBN also launched its own intervention instrument, the CBN certificate, to supplement the traditional treasury bill in addressing the problem of liquidity overhang in the banking sector.
1.2 EXTREME MACROECONOMIC PROBLEMS AND POLICY CHALLENGES FOR FISCAL 2002/2003
The effect of fiscal federalism exacerbated the problem of excess liquidity, with negative implications for domestic prices, exchange rates, and interest rates; the persistence of structural bottlenecks in the economy also continued to constrain economic recovery in 2001, while some macroeconomic indicators improved marginally in 2001 compared to 2000.
1.3 OBJECTIVES OF THE STUDY
In 2002/2003, the major goal of monetary policy is to achieve price and exchange rate stability. Monetary policy will specifically seek to contain inflation to a single digit over a two-year period; consequently, the central focus will include effective control of anticipated liquidity injections that may result from excessive government spending during the pre-election year of 2002/2003 in order to minimise their negative effects on domestic prices and exchange rates.
Monetary policy will be non-accommodative, while a more competitive financial environment will be encouraged to facilitate increased access to credit for the real sector. Furthermore, efforts will be undertaken to improve the payment system in order to increase the effectiveness of monetary policy.
The wide measure of money supply (m2) will remain the intermediate monetary policy aim. An average growth rate in m2 of roughly 15.2 percent during the two-year period, corresponding to 15.3 percent in 2002 and 15.0 percent in 2003, is expected to be maintained.
1.4 THE SIGNIFICANCE OF THE STUDY
The terms of the bank’s legal stability have made the critical rate of the CBN in the management of the Nigerian economy clear. The core mandate of the CBN, as outlined in the CBN Act of 1958, includes insurance of legal tender currency,
acting as a banker and financial adviser to the federal government in order to safeguard the international valve of the currency, and promoting monetary stability and a sound efficient financial system.
Although the original act mandates the CBN to promote monetary stability, it was the 1999 amendment to the act that confirmed discretionary powers of governors, the board of governors, and the board of governors.
In accordance with the idea of transparency and accountability in monetary and financial policymaking. The CBN releases its two-year monetary policy objectives, targets, and measures.
The activity include reviewing economic trends during the previous year, identifying potential and issues for the coming years, and defining policy goals and performance targets. For the time being.
Every month, in the spirit of transparency, the MPC’s summary debate and conclusions are conveyed to the general public through newspaper publications.
Furthermore, the financial services regulation and coordinating committee (FSRCC) meets to coordinate the numerous regulatory institutions in the industry in order to improve the effectiveness and stability of the financial sector.
The committee works to reduce arbitrage opportunities caused by disparities in regulatory and supervisory standards among agencies, deliberates on problems encountered by each member in its relationship with any financial institution, and bridges any information in its relationship with any type of financial institution.
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