Project Materials

THE EFFICACY OF MONETARY POLICY AS AN INSTRUMENT FOR CONTROLLING INFLATION ON NIGERIA ECONOMY

ABSTRACT

The Nigerian economy aspires to have a sustainable growth path. The government can implement the comprehensive Structural Adjustment Program (SAP) with the assistance of the International Monetary Fund. Nigeria’s macroeconomic policy reform focusses on liberalising external trade and payment systems, adopting a market-based exchange rate for the Naira, eliminating price and interest rate controls, and relying on market forces to drive economic activity (Owoye & Onafowora, 2007). Market reform in the financial sector, such as the banking system, can make use of monetary control and instruments to implement Nigerian monetary policy. Fiscal and monetary policy in all countries aim to achieve relative macroeconomic stability. The Nigerian monetary policy framework encompasses more than just price and exchange rate stability. The monetary strategy for inflation management is based on the assumption that inflation is primarily a monetary phenomenon. The Nigerian economy focusses on the money supply, and its increase could be the primary goal of price stability. In order to encourage proper monetary policy methods, supply growth is initially examined when targeting inflation. The study looked at the effectiveness of monetary policy in reducing inflation in Nigeria. In the model described, inflation is the regressor, while the cash reserve requirement, liquidity ratio, money supply, minimum rediscount rate, and interest rate are the regressors. The data was gathered from the CBN Statistical Bulletin from 1970 through 2009. The analysis was conducted using the ordinary least squares statistical technique and the E-view 5.0 software tool. According to the findings, Nigeria’s monetary policy during the study period had no effect on inflation. It has been determined that the greatest impediment to the poor performance of monetary policy instruments in controlling inflation in Nigeria is the time lags involved, which cause any policy implemented to take many months to achieve its full effect.

Chapter one

INTRODUCTION

A country’s monetary policy is concerned with controlling the money stock (liquidity) and thus interest rates in order to influence macroeconomic variables such as inflation, employment, the balance of payments, and aggregate output in the desired direction.

There is no conventional or ideal structure for monetary policy targets and instruments; instead, the instrument varies each country, based on the size and stage of development of the financial sector. Over the years, the goal of monetary policy has remained to achieve external balance.

However, the emphasis on techniques/instruments to attain this goal has changed over time. There have been two significant eras in the pursuit of monetary policy: before and after 1986. The first phase focused on direct monetary regulation, whereas the second focusses on market mechanisms.

Monetary policy prior to 1986 was characterised by the dominance of the oil sector, the growing importance of the public sector in the economy, and an overreliance on the external sector.

To maintain price stability and a healthy balance of payment position, monetary management relies on direct monetary instruments such as credit ceilings, selective credit controls, administered interest and exchange rates, as well as the perception of cash reserve requirements and special deposits.

The deployment of market-based instruments was not viable at the time due to the immature condition of the financial system and the purposeful constraint on interest rates.

The most popular monetary policy instrument was the credit rationing guideline, which established a primary rate of change for the component of commercial bank loans and advances to the private sector.

Globally, the problem of inflation is not unique to Nigeria; it is a problem that affects the majority, if not all, countries in the world. The Nigerian government’s attempt to achieve a better degree of economic development during this period often resulted in an inflationary spiral in the country.

However, it is unclear whether Nigeria’s inflation is caused by monetary mismanagement on the part of the authorities or by interest structural problems. Several variables have been recognised as contributing to the country’s inflationary pressures.

In a symposium on inflation in Nigeria conducted at the University of Ibadan in November 1983, the majority of participants emphasised the importance of money supply, the type of government expenditure constraints on real output, and inflation (imported) as important causes of inflation in Nigeria. When developing monetary policy, it is critical to identify objectives; however, it is impossible to measure performance.