AN EVALUATION OF MONETARY POLICIES IN NIGERIA
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AN EVALUATION OF MONETARY
POLICIES IN NIGERIA
INTRODUCTION
Monetary
policy deals with the discretionary control of money supply by the monetary
authorities in order to achieve the desired economic goals. It cold be seen
that money policy comprises of those government actions which are designed in
attempt to change the influence the behaviour of the monetary sector of an
economy. However, there are two views on the efficiency or monetary policy,
monetarist and Keynesian view. The Keynesian view is that monetary policy
should be direct towards interest rates rather than money supply and that the
monetary policy should be subsidiary to fiscal policy. The monetarist
recommends that the control of money supply should be the main concern of the
money authorities. But it should be noted that money policy has a central role
in macro economic management primarily because of the close relationship
between the monetary aggregate and economic activity.
This is true
irrespective of whether one is considering the monetarist or Keynesian
framework. Although it may be desirable to introduce some monetary instruments
the environment for their effective application may not be suitable. This fact
should be borne in minds as we considered the application of various instrument
of controlling money supply in the Nigerian economy. The Nigeria monetary
system is part of the wider financial sector and its major operators are the
monetary authorities, the banks merchant and commercial banks) as we as
discount houses recently permitted to operate within the system.
The monetary
authorities design and implement monetary policy and consist of the presidency,
apex bank and federal ministry consist of these, the apex bank is the agency
which is primarily responsible for designing monetary policy proposal for
presidential approval and ensuring implementation of the monetary policy
measures accepted by the federal government.
These goals
of monetary policy remain the same irrespective of the package of instruments
in use. The monetary policy attempts at maintain a balance as possible between
the supply and demand for the monetary assets of the economy in order to
achieve adequate economic growth. This broad purpose may be transmitted or
rather translated into several specific objectives such as price stability,
high level of employment or an acceptance
growth rate of the real gross domestic product (GDP), as well as balance
of payment equilibrium.
Monetary
management could take the form of direct or indirect control instruments
comprising of interest rate registration, credit ceilings and sectorial allocation
of credit. An indirect control instrument is mostly adopted by market based
economy. It has the advantage of the
relationship between money supply and the monetary base and the ability of the
monetary authorities to induce appropriate change in the monetary base. Banks
reserves constitute an important component of the monetary base usually
targeted by the monetary authorities to control the money supply in the
Nigerian economic through the manipulation of the discount rate and reverse
ratio. In Nigeria, the application of credit ceilings was designed to ensure
that domestic credit expansion and the monetary implications of the balances of
payment targets the expected increase in total demand for liquidity in the
economy. But Nigerian have decided to move away from indirect and direct
monetary instruments under credit ceiling for instance, the apex bank found it
increasingly difficult to achieve the stated monetary targets. The techniques
of indirect monetary control basically involves the control of the money stock
through the manipulation of the sources of the monetary base by the application
Open Market Operation (OMO), reserve requirement and rate.
OMO is
conducted mainly in the secondary market for government securities through the
buying and selling of government securities, the apex bank directly changes the
level of the bank reserves and indirectly induces changes in the level of
interest rates, terms and availability of credit and ultimately the money
supply.
HISTORICAL
BACKGROUND OF THE STUDY
the adoption
of a market-base framework such as Open Market Operation in an economy that had
been under direct control for long required substantial improvement in the
macro-economic stability, effort were directed to the management of excess
liquidity. Thus a number of measures were introduced to reduced liquidity in
the system. These includes the reduction in the maximum ceiling on credit
growth allowed for banks; the recall to Central Bank of Nigerian (CBN) from
banks of the special deposits as requirements against outstanding external
payment arrears; abolition of the use of foreign guarantees or currency
deposits as collateral for naira loans and the withdrawal of public sector
deposits fro banks to the CBN. The use of stabilization securities for purpose
of reducing the bulging size of excess liquidity in banks was introduced in
August, 1990.
Commercial
banks cash reserve requirement were increased in 1989, 1990 and 1992; the
rising level of fiscal deficits was identified as a major source of macro
economic but also to synchronize fiscal and monetary policies. In the legal
aspect, the federal government promulgated the CBN decree (BOFID) No. 1969, the
CBN decree enhanced the banks powers and discretion in the design and conduct
of monetary policy, while the BOFID addressed the problem of policy leakages in
the monetary management by bringing the non-bank financial intermediaries,
which hitherto, were entirely outside the control of the CBN under the control
and supervision of the bank.
The decree streamline
and simplified procedures for licensing bank and established procedures for
licensing and controlling of other financial institutions including discount
houses and financial companies. Three discount houses have been fully licensed
to undertake secondary market dealership in treasury security. By way of
inducing efficiency and encouraging a good measure of flexibility in banks,
credit operations, the regulatory environment was also improved. Consequently,
the sectors specific credit distribution targets were compressed into four (4)
sectors in 1986 and to only two (2) in 1987. The commercial and merchant banks
were subjected to equal treatment since their operations were found to produce
similar effect on the monetary process. Hence, merchant banks, hitherto
excluded from cash reserve requirement, were subjected to the same cash ration
with commercial banks. Also liquidity ration of merchant banks was raised to
the level applicable to commercial banks. In August 1987, all controls n
interest rates were removed. However, in 1991, bank maximum lending rates were
pegged at 21% while a minimum of 13.5% was stipulated for saving deposits. From
1992 the markets was feed of interest rate controls. However, controls measures
were re-introduced in 1994 and later deregulated in 1997.
In
recognition of the fact that well capitalized banks would strengthen the
banking system for effective monetary management, the monetary authority
increase the minimum paid capital of commercial bank and merchant banks in
February 1990 from N40 million and N50 million and from N12 million to N20
million respectively. This was later increased to N500 million for both banks in 1997. Also in 1990, the
apex bank brought into force the risk weighted measure of capital adequacy
recommended by the BALSE committee of the bank for international settlements
for licensed banks, which were complementary to both the prudential guidelines
for licensed banks, which were complementary to both the capital adequacy
requirements and Statement of Accounting Standard (SAS). The prudential
guidelines among others, spelt out the criteria to be employed by banks for
classifying non-performance loans. The CBN and NDIC continue to monitor and
examine banks in order to promote stable banking system.
In an effort
to improve the operation of the money market an auction €“ based market for
treasury securities was introduced in 1989 and these treasury instruments were
made bearer bills so as to enhance transferability and promote secondary
trading. The importance of timely data for the success of indirect monetary
management, especially through OMO was realized by the CBN such that efforts
have been made to improve the quality and timeliness of financial data. To this
end, remarkable progress have been made in the computerization effort to the
CBN and banks thereby creating a more conducive atmosphere for quick processing
of relevant data. From 30th June 1993, the CBN commenced OMO in treasury
securities with banks through discount houses. The OMO is coordinated with
discount window and reserve requirement policies to ensure the attainment of
the monetary policy objectives and targets. In particular OMO has been
conducted every week monitoring the growth in the monetary base, which consists
of currency in the hands of the non-bank public total bank reserves.
OMO is based
on the discretionary of CBN to buy and sell eligible securities in the money
market from the private sector, depending on the objectives of the policy.
Thus, if there is need to reduce bank credit and hence money stock in an
inflationary economy, the appropriate response of CBN is to sell traded
securities, hoping that the private sector (bank and non bank public) would
purchase them. When purchases are made by bank on behalf of their customers, the
banking system, money stock is still constrained through reduction in the
system€™s reserve and hence ability to expand credit. However, if the purchase
security off the private is financed through currency outside the banking
system, the constraining effect on money supply is direct. When the stance of
the policy is monetary ease, the apex bank reserves it strategy of the banking
system is expanded. This enable the bank expand credit which influence money
stock, where funds sis realize from the sale of securities by non €“ bank
public are kept outside the banking system, OMO expand money supply directly.
Though, the effect of OMO is more flexible and better suited for ay to day
adjustment of the reserves in the desired direction.
The type of
securities used for OMO varies from country to county but generally they
consists of both government and non-governments with issues ranging from very
short to long term maturities. The essentials is that the securities trade
should be those which the CBN can use easily to influence the level of
reserves, credit and money and money stock thereby inducing favourably changes
in order relevant variables for economic growth. Depending on the
sophistication of the financial market the operation vary from outright sales
and purchases to temporary trading securities. Temporary trading could be
reports in which case securities are sold with an agreement to purchase in
future before maturity; or reverse response in which securities are purchased
with an agreement to resell later before maturity. Other techniques of OMO
include forward sales sand purchase as well as swaps.
Recruitment
of participations of OMO depends largely on the structure of the financial
system. Where there are discount houses, it is common for the apex bank to
channel transaction primary through discount houses, in their absence the CBN
relies on the selected from the foregoing that the main purpose of OMO is to
influences banks liquidity with a view of influencing monetary growth. However,
the expansion or contraction in money stock is not desired for its own sake but
rather to achieve monetary growth, that is consistent with short term to long
term objectives of the economy especially with regards to exchange rates,
interest rate, investment and low or non-inflationary growth in goods and
services.
extreme
1.2 STATEMENT OF GENERAL PROBLEM
The
fundamental problem of any government is it economic or otherwise its
implementation. a number of government monetary policy instrument have been
designed and applied in Nigeria in the hope of achieving the desired result of
stable price level, low level of unemployment, efficient banking system etc.
but the application of direct monetary instrument have not bring forth the
desired objectives stated above hence, left the government with no any other
alternative than to turn to the direct monetary instrument. Therefore, the
problem under study is the application of OMO as an instrument of monetary
policy in Nigeria.
1.3 OBJECTIVE OF THE STUDY
The main
purpose of this research work is to evaluate the monetary policy in Nigeria.
The research also is at reviewing the evolution and performance of monetary
police in Nigeria, so also present a clear picture of the effort of to
introduce the instruments.
1.4 HYPOTHESIS
The
objective of this study will be pursued vigorously by in directing analytical
tools towards putting into imperial test, the following are the major
hypothesis.
HA: Alternative Hypothesis
The CBN
monetary policies have been properly ruled out to activate our depressed
economy.
Ho: Null
Hypothesis:
The monetary
is not properly out to activate our depressed economy.
HA: -
Alternative hypothesis.
The CBN
monetary policies is a bit too stringent for the banks in the country and will
therefore hamper an effective operations of banks sin the economy.
Ho: Null
hypothesis:
The CBN
monetary policies are not too stringent for the bank in the country, it will
enhance productivity.
1.5 LIMITATION OF THE STUDY
Obviously,
every research work may be faced with some difficulties which limit the extend
of the research.Therefore, this research work is limited to financial, data
collection is not sufficient. it is most adequate and has been put to the
maximum utilization.
1.7 DEFINITION
OF TERMS
Monetary
Policy: The discretionary control of money supply by the monetary authorities
in order to achieve the desired economic goal.
Monetary
Base: The sum total of bank reserve and currency in the hands of non-banks
public €œvault cash and balance with apex bank€.
Money: As a
medium of exchange, a store and measure of value which economic agents
preserve, and units of account which form the basis of comparing prices and
evaluating relative values, generally, anything that is acceptable as an
instrument of settlement can be term as money for the settlement of legal
payments, it is conferred as status of €œlegal tender€.
Money
supply: Represent the measure of money and include currency in circulation
(with non-bank, public) and demand deposit at the commercial bank €“ MI. The
broad measured of money include MI and savings and time deposits, also called
quasi €“ money (QM) at the commercial and merchant banks and represents by M2.
Interest
Rate: the cost of or price charged for using someone€™s money which is normally
expressed as a percentage of the amount borrowed.
Discount
House: A financial institution devoted to trading in government secondary
market instrument treasury bills certificates and other eligible instrument.
Offer: Willingness to sell securities. i.e.
willingness on the part of government through apex banks to sell securities
(treasury bill) to the public.
Tenor: Maturity period that a security takes to
mature for the payment of principal amount interest attached.
Subscription:
Willingness to buy or purchase i.e. willingness on the part of the public
through banks commercial and merchants banks to buy or purchase securities
offered by the government.
Securities:
Money market instruments created by government for financing short term fiscal
operation. There are two(2) types of securities in Nigeria and are in use,
these are treasury bill and certificates.
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