Problems of monetary policy implementation by central bank of Nigeria (CBN)

Problems of monetary policy implementation by central bank of Nigeria (CBN)

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ABSTRACT

This project has traced the evolution of Nigeria’s monetary policy and its performance since the early1980’s, to provide a background to the reviews; it discussed same theoretical aspects of monetary management. On the theoretical aspect it reviewed the concepts of monetary management, the objective of monetary policy and the instruments of monetary policy.

 

The highlights of the Nigeria economy of the 1970’s were the growing importance of oil, the expending role of the public sector in the economy and the large dependable on the external sector. Despite the family impression economic performance of the period, some economic problem such as growing fiscal pressures, assumed more serious dimensions. In the prevailing circumstances, monetary central framework and the large divergence of fiscal operation from the set monetary and credit targets.

 

The oil boom of the 1970’s come to an end in the early 1980’s. Consequently, the development strategies, which were considered appropriate during that period, became inappropriate under the environment characterized by substantial reduction in oil import earnings and revenue. Rigorous economic controls were mounted to stain the determination in the general framework. Monetary policy applied more vigorously the credit ceiling. Selective credit controls and regulating on interest rates.

 

The currently problem of monetary policy were largely a carryover from the previous decade and these included the apparent inefficiencies of the monetary control framework based on direct instrument and government fiscal operations especially the increased financing of fiscal deficit by the central bank.

 

Monetary policy, though having the same over all objectives as before was employed to play a unique role in restore my economic stability. In order to reduce credit expansion by banks, credit certings were reduced and backed up liquidity mopping measures such as the withdrawal of all deposits on outstanding external payment arrears and public sector deposits from the bank in 1986 and 1989 respectively, the sectional credit flexibility in their credit operation, which in August 1987 all controls on interest rates changed by banks were removed.

 

Despite the good intentions of monetary management domestic liquidity expand substantially during the period, especially in 1988 and the main source of increase in aggregate bank credit to the economy. Similarly, banks performance with regards to credit certings and sectoral credit guidelines was very poor.

 

Full economic recovery could not be achieved within the short span of the SAP, even though its impact in light of the monetary development was to some extent positive in relation terms. Nevertheless, the problems of monetary policy appeared to have persisted in so far as the fundamental causes had not been removed. The monetary targets were not being achieved, been used over time it become more difficult to enforce compliance particularly as frequent changes were made in the composition of credit and timely data were not usually available.

 

Above all, monetary policy did not achieve the type of synchronization with fiscal policy as envisaged in the monetary control framework. When fiscal operations deviated from the targets monetary developments could not uphold the underlying assumptions and hence domestic price stability and external equilibrium, which are important objective of monetary policy could be assured.

 

Under these circumstances, a deliberate attempt would have to be made to improve the efficiency of monetary policy in the 1990’s. Towards this general direction, the plan to shift to the use of indirect monetary tools was formally announced early in 1991.

The movement towards market based instruments of monetary management in a developing economy is unique and since financial markets are not fully developed, it is appropriate to ask whether such technique can be effectively applied. However, one of the lessons of recent financial liberation measures worldwide is that such measure do infact foster the development of the financial instrument. The available evidence seems to suggest that the Nigeria financial system possess the critical minimum conditions for effective use of the market based monetary instruments. In arrears where the conditions are not fully met, there is scope for improving the situation.

 

TABLE OF CONTENT

CHAPTER ONE: INTRODUCTION

  • Background of the problem

1.2     State of the problem

1.3     Objective of the study

1.4     Research questions

1.5     Research hypothesis

1.6     Significant of the study

1.7     Scope, limitation and delimitation

1.8     Definition of terms

 

CHAPTER TWO

2.1 Objective of monetary policy

2.2 Monetary policy instruments

2.3 problems of direct monetary policy in Nigeria

2.4 Problems of direct monetary policy in Nigeria

2.5 The shift from direct to indirect approach

2.6 Indication of monetary policy

2.7 Effectiveness of momentary policy in Nigeria

2.8 References

CHAPTER THREE

3.0 Research methodology

3.1 Characteristic of the study population

3.2 Limitation of the methodology

 

CHAPTER FOUR

4.1 Policy analysis

4.2 Analysis of hypothesis

CHAPTER FIVE

5.1 Summary and conclusion

5.2 Recommendation

Appendix (Questionnaires)

 

 


CHAPTER ONE

INTRODUCTION

  • BACKGROUND OF THE STUDY

A policy is a statement of basic principles that provides a framework in which performance is measured. One of the principal responsibilities of the central bank of Nigeria (CBN) is the formulation, monitoring and execution of monetary stability and economic development as well as ensuring sound financial system.

 

The central bank of Nigeria employs various instruments in caring out these responsibilities. Before 1992, the CBN was under the federal ministry of finance. This has change presently, central bank reports directly to the presidency under the central bank of Nigeria degree.

 

The CBN carries out this responsibilities on behalf of the federal government of Nigeria under the status of the central bank of Nigeria Act of 1958 and banking Act of 1967 which have been replaced with CBN Degree No. 24 of 1991 and Bankers and other financial institutions Decree (BOFID) NO. 25 of 1991.

 

In formulating executing monetary policy, the government of the CBN is required to make proposals to the president of the federal republic of Nigeria who has the final power to accept or amend such proposals. It is after the presidency has approved it that the CBN is monetary policy proposals are made as an integral part of the federal government annual budget which combines to approve monetary policy.

 

The aim of monetary policy may be to check inflation or to stimulate production to aid recovery from a recession. The method adopted to achieve the designed aim is through changes in the monetary supply. A policy aiming at increasing the quantity of money is inflationary, and one that aims at a contradiction of the supply of money is deflationary.

 

Monetary policy is mainly the concern of the central bank, but the consequences of monetary policy can be so far – reacting for the whole community that no modern government can leave the choice of policy entering to its central bank.

 

The paper will therefore examine the various instruments of monetary policy measures introduced by CBN since inception in 1959. It will therefore evaluate the effectiveness of the instruments taking into consideration the major constraints the CBN have to grapple with.

 

The instruments used by the central bank of Nigeria to implement its monetary policy objectives can be classified broadly as direct or portfolio control approach and indirect or market interaction approach (CBN research departments). The direct control instruments place restrictions on the freedom to acquire more assets to insure liabilities. This is employed essentially because of the poor infrastructure based and low development of money (financial) and capital market over the years. The central bank has employs the following direct monetary controls.

  1. The reserve requirement
  2. Interest rate policy
  3. Sectoral allocation of credit
  4. Maximum credit expansion.
  5. Stabilization securities
  6. Loans to indigenous borrowers
  7. Rural banking scheme

 

The indirect polices are usually market determined as well as use of reward system by the CBN in achieving its polices. They include the following:

  1. Open market operation (OMO)
  2. Moral suasion
  3. Discount rate mechanism

 

Below is the brief explanation of the instruments:

DIRECT POLICIES

THE RESERVE REQUIREMENT

The central bank of Nigeria also uses the reserve requirements of banks as an instrument of monetary policy. Banks will ordinarily, either from custom or prudence, and to keep a certain percentage of demand deposits in their bank as a reserve. They do this because of the necessary for ensuring that the bank will always have sufficient funds on hand to pay off depositors who would like to withdraw their money in the ordinary course of business.

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