THE EFFECTIVENESS OF MONETARY POLICY AS A TOOL FOR CONTROLING INFLATION IN NIGERIA (1980-2004)

ABSTRACT

This study is designed to empirically analyze the effectiveness of monetary policy as a tool for controlling inflation in Nigeria.

To investigate on this, hypothesis were formulated as follows:

          Ho: Monetary policy measures adopted over the years have no significant impact in inflation control in Nigeria.

          Hi: monetary policy measures adopted over the years have significant impact on inflation control in Nigeria.

          The researcher adopted the method of linear regression, the ordinary least square (OLS) technique in analyzing the secondary data of inflation rate and money supply (1980-2004). The researcher were further subjected to t-ratio and f-tests, the result of which confirmed.

I.             Monetary policy measures adopted by the monetary authorities between 1980 and 2004 were not effective and had no significant impact in controlling inflation.

2. Quick monetary remedies for inflation control do not 

     exist.

Based on the above findings, the following are the policy recommended:

          The elimination of inflation requires the eradication of inflationary expectation.

          Government should concentrate more on productive investment, which will reduce inflationary pressure in Nigeria.

          The monetary authorities should maintain vigilance in its efforts to keep inflation in check by adhering to effective monetary and fiscal policies.

          Government should monitor the implementation of monetary policies to ensure its success.

          It is believed that if the monetary authorities  follows the above recommendation, effective will be achieved.

TABLE OF CONTENTS

CHAPTER ONE

1.0 INTRODUCTION

1.1   BACKGROUND OF THE STUDY

1.2   STATEMENT OF THE PROPLEM

1.3   OBJECTIVES OF THE STUDY

1.4   HYPOTHESIS OF THE STUDY

1.5   SIGNIFICANT OF THE STUDY

1.6   SCOPE OF THE STUDY

1.7   DEFINITION OF TERMS

2.0 LITERATURE REVIEW

2.1   THE MEANING OF MONETARY POLICY

        EVOLUTION AND APPLICATION OF MONETARY POLICY  

         INSTRUMENTS IN NIGERIA

2.2    EMPIRICAL LITERATURE

2.2.1 OBJECTIVE OF MONETARY POLICY IN NIGERIA

2.2.2  RECENT DEVELOPMENT OF THE NIGERIA MONETARY

          POLICY

2.2.3  PRE-STRUCTURAL ADJUSTMENT PROGRAMME (SAP)

          MONETARY POLICIES IN NIGERIA

2.2.4  POST-SAP MONETARY POLICIES IN NIGERIA

2.2.5 THE IMPACTS OF NIGERIA’S MONETARY POLICIES IN

         THE INFLATION CONTROL     

2.3    ECONOMIC IMPLICATION / CONSEQUENCES OF       

            MONETARY POLICY.

 3.0  METHODOLOGY

3.1   THEORITCAL FRAMEWORK

3.2   MODEL SPECIFICATION

3.3        METHOD OF EVALUATION

3.4        DATA REQUIREMENT AND SOUCE

4.0   DATA PRESENTATION AND ANALYSIS

4.1   EMPERICAL RESULTS

4.2   STATISTICAL TEST OF SIGNIFICANCE

4.3     EVALUATION OF THE WORKING HYPOTHESIS

4.4   IMPLICATION OF THE RESULT

5.O  SUMMARY OF FINDING, CONCLUSION AND

        RECOMANDATION      

5.1   SUMMARY OF FINDING

5.2   CONCLUSION

5.3   RECOMMENDATIONS

1.0                INTRODUCTION

1.1                BACKGROUND OF THE STUDY

          Nigeria still presents a clear reflection of the third world economy in which the growing economy has some working machinery, monetary and fiscal policies that aimed towards maintaining a balance in the entire economy so that growth and development, which is the ultimate goal of every economy, is realized.

     Generally, monetary policy refers to combination  of measures designed to regulate the values, supply and cost of money in an economy in consonance with the level of economic activity. Monetary policy is a deliberate effort by the monetary  authorities to control its monetary supply and credit conditions for the purpose of achieving certain broad economic goals. The aims of monetary policy are basically to control the inflation, maintain a healthy balance of payment positions for the country in order to safeguard the external value of the national currency and promote an adequate and sustainable level of economic growth and development. The formulation is done by the Federal government, mostly announced during budget speeches while the enforcement of the policy is solely the responsibility of the central bank of Nigeria (CBN)>

          Inflation is the greatest challenge faling most developing countries like Nigeria today.

Inflation is defined as a persistent and appreciable increase in the general prices level of goods and services in the economy. Inflation has being the “clas in the wheel” that motivates economy. It has made export products to become expensive in the international market and this impeded the expansion of the export market.

          Effective monetary policy produces economic growth and development. For a country such as Nigeria to achieve economic stability, she must place priority on efficient monetary policy. It is pertinent to note that the central bank has not been able to come up with credible monetary policy in the recent times (years) to cure the unemployment, low saving, debt burden, low investment, unfavorable balance of payment, mass poverty treating the nation interest rate and high exchange rate.

          It has been observed that the Nigerian economy within the last 25 years has been engulfed in some economic problems. In Nigeria, inflation has been a serious economic problem for many years. Prices of goods and services has been on the increase and this has affected every aspect of the economy. Cost of living has been very high with the consequences of poor living standard and less savings.

          With the present economic crisis playing the nation, Nigerians are yawning for credible monetary policy either expansionary or contractionary monetary policy depending on what economic goal the policy maker want to achieve. It becomes necessary for the monetary authorities to use various monetary policy. Instrument available to them. Such instruments are the general credit control and selective credit control instruments. Under the general credit control instruments are the open market operation (OMO), Rediscount rate, Reserve Requirement and Moral suasion, while the stock market margin requirements, control of terms of installment sales, mortgage credit restrictions and special directive belong to the selective credit control instrument.

          Given the above policy tools, it is expected that the monetary authorities through its agents, the commercial banks and financial intermediaries e.t.c will be able to make monetary policy reform for the economic well being of the country and thus the monetary policy objective such as inflation control will be attained. The measure of a country’s monetary policy rests on the extent to which it has achieved the aims and objectives of its monetary policy. Hence the focus of this policy is on effectiveness of monetary policy as a tool for controlling inflation in Nigeria. This is to find out whether the monetary measures adopted so far has been able to achieve the desired objectives.

1.2         STATEMENT OF THE PROBLEMS

The application of the monetary policy by the monetary authorities using the monetary instruments such as open market operation, Banks reserve e.t.c, in consonance with the prevailing economic situation is aimed at achieving the macro economic goals of the country such as low level of inflation, stable price rate and full employment, etc but in Nigeria, in spite of the numerous monetary policy measures adopted, the economy still suffers the problem of inflationary pressure, poverty, unemployment e.t.c.

          The question that follows are: How effective are monetary policies in controlling some of these variables, inflation in particular, in Nigeria and how effective are these instruments employed? Why has inflation persisted in the Nigerian economy in the face of sustained government effort to curb it? Why have monetary policies failed in our country despite that they have worked in other countries? Do their functioning conform with a prior economic expectation? What may be the other reasons militating against the effectiveness of monetary policies?

          It is against this that the researcher is undertaken in order to find out the effectiveness of monetary policy in controlling the rate of inflation and money supply in Nigeria.

1.3       OBJECTIVES OF THE STUDY

The objective of the study is to identity some of the highlights of the monetary measures designed and adopted in this country since the establishment of CBN to achieve the desirable economic goal. Despite the adoption of these seemly far- reaching and suitable measures, the achievement of these objectives seems to have eluded as so far.

          It was based on this background that this projects sets out:

1.           To find out if monetary policy measures adopted by the monetary authorities have succeeded in controlling inflation in Nigeria.

2.           To examine the relationship between money supply and inflation.

3.           To find out the effectiveness of monetary policy in achieving economic growth during the period under study (1980-2005)

1.4       HYPOTHESIS OF THE STUDY

Ho:    Monetary policy measures adopted over the years have no impact on        inflation control in Nigeria.

Hi:     Monetary policy measures adopted over the years have impact on inflation control in Nigeria.

1.5       SIGNIFICANCE OF THE STUDY

          The finding of this study, if a comprehensive and thorough research on this work is done would be relevant in the following ways.

          The study will be of immense value to monetary authorities in formulating monetary policy especially this time around the nation is faced with economic crisis. Economic development is the dream of every nation, this study is timely and will go a long way to show how effective the use of monetary policies are used to achieve there charming national economic objectives and to redirect future economic planners or monetary authorities.

          To the business world, this study will throw on insight into the working of Nigeria economy and will form a guide to their business.

          Finally, it would be great benefit to those who may embark on a similar study.   

1.6       DEFINITION OF TERMS

MONETARY POLICY: According to CBN Briefs (1994) monetary policy refers to the combination of measures designed to regulate the value, supply and cost of money in an economy, in consonance with the level of economic activity.

MONEY SUPPLY: This refers to the total value of money in the economy and this consists of currency (notes and coins) and deposit with the commercial bank and merchant bank. Types of money supply include M1, M2 and M3 .

  Money supply (M1): This is the currency in circulation (notes and coins) outside banks, plus demand deposite held in banks, (c+ DD).

QUASI MONEY: refers to the saving and time deposite with commercial banks.

MONETARY BASE: Also known as high powered money or reserve money comprises certain liabilities of the CBN and include currency with the non- bank public and total banks reserve.

MONETARY AUTHORITIES: The money sub-sector is responsible for currency issues, credit control, managing the country’s informational reserves and maintaining general supervision of the monetary system.

RESERVE REQUIREMENT: Refers to the proportion of total deposit liabilities, which the commercial and merchant banks are expected to keep as cash in their vault and deposite with the CBN.

OPEN MARKET OPERATION:  Involve the discretion and power of the CBN to purchase or sell securities in the financial markets in order to influence the volume of liquidity and levels of interest rates, which ultimately will affect the monetary supply.