1.1 Introduction
Monetary policy action is the prerogative of the central bank and monetary authorities of the country used for the management of money supply and interest rate in order to achieve macroeconomic objectives like employment, industrial growth, inflation, consumption, etc. Through monetary policy, economic activities and objectives of the country can be influenced either by expansionary or contractionary stance. Monetary policy stabilizes the economy better under a flexible exchange rate system than a fixed exchange rate system and it stimulates growth better under a flexible rate regime but is accompanied by severe depreciation, which could destabilize the economy meaning that monetary policy would better stabilize the economy if it is used to target inflation directly than be used to directly stimulate growth (Busari et al. 2002).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.
1.2 Background of Study
Monetary Policy is associated with interest rate and availabilities of credit, the instruments used include short-term interest rates and bank reserves through the monetary base. There are two forms of monetary policy; Decision about coinage and Decision to print papers money in order to create credit. The interest rate as part of the monetary authority was not generally coordinated with the other forms of monetary policy. The Central Bank of Nigeria (CBN) since its establishment in 1959 has been playing a traditional role expected of a central bank, which is the regulation of money in a way to regulate the social and industrial welfare of the country. The achievement of full-employment equilibrium, rapid industrial growth, price stability and external balance is anchored on the use of monetary policy. The major objectives which have dominated CBN’s monetary policy focus is based on assumption that, essential tools of achieving industrial stability and the goals are been anchored on two major objectives. Thus, inflation targeting and exchange rate policy.
Monetary policy has always been seen as a fundamental instrument over the years for the attainment of macroeconomic stability, often viewed as prerequisite to achieving sustainable output growth. Thus, in the pursuit of macroeconomic stability, the managers of monetary policy have often set targets on intermediate variables which include the short term interest rate, growth of money supply and exchange rate. Among these intermediate variables of monetary, the exchange rate is argued to have a greater influence on the economy through its effect on the value of domestic currency, domestic inflation, the external sector, macroeconomic credibility, capital flows and financial stability. Increased exchange rate directly affects the prices of imported commodities and an increase in the price of imported goods and services contributes directly to increase in inflation (CBN, 2008). The central bank is the authority with the mandate of manipulating monetary policy; through monetary policy tools, to achieving desired macroeconomic objectives which includes; the achievement of price stability with respect to both domestic and external prices. In the same vein uses inflation rate to track movement in the domestic price while exchange rate policy are used as tool in contribute towards stabilizing the macroeconomic environment of the country.
Busari et-al (2002) state that monetary policy stabilizes the economy better under a flexible exchange rate system than a fixed exchange rate system and it stimulates growth better under a flexible rate regime but is accompanied by severe depreciation, which could destabilize the economy meaning that monetary policy would better stabilize the economy if it is used to target inflation directly than be used to directly stimulate growth. They advised that other policy measures and instruments are needed to complement monetary policy in macroeconomic stabilization. In addition Batini (2004) stresses that in the 1980s and 1990s monetary policy was often constrained by fiscal indiscipline. Monetary policies financed large fiscal deficit which averaged 5.6 percent of annual GDP and though the situation moderated in the later part of the 1990s it was short lived as Batini, described the monetary policy subsequently as too loose which resulted to poor inflation and exchange rates record. With the achievement of price stability, the conditions in the financial market and institutions would create a high degree of confidence, such that the financial infrastructure of the industry is able to meet the requirements of market participants. Indeed, an unstable or crisis-ridden financial sector will render the transmission mechanism of monetary policy less effective, making the achievement and maintenance of strong macroeconomic fundamentals difficult. This is because it is only in a period of price stability that investors and consumers can interpret market signals correctly. Typically, in periods of high inflation, the horizon of the investor is very short, and resources are diverted from long-term investments to those with immediate returns and inflation hedges, including real estate and currency speculation. It is on this background that this study would investigate the Impact of Monetary Policy on Industrial Growth in Nigeria with special focus on major growth components.
1.3 Statement of Problem
Industrialization has always constituted a major objective of development strategy and government policy. Through industrialization, developing nations aspire to achieve higher economic growth, and to eventually attain developed nation status. Yet, it remains doubtful whether the approach of industrial policy-making in Nigeria has indeed been successful in transforming the economy. Over the past three decades, the outlook of industrial growth and development in Nigeria has been gloomy and uncertain. Industrial output, measured in terms of aggregate index and its contribution to GDP has fluctuated vary widely.
One of the major objectives of monetary policy in Nigeria is price stability. But despite the various monetary regimes that have been adopted by the Central Bank of Nigeria over the years, inflation still remains a major threat to Nigeria’s industrial growth. Some factors reflecting the structural characteristics of the economy are observable. Some of these are supply shocks, arising from factors such as famine, currency devaluation and changes in terms of trade.
1.4 Aim and Objectives of Study
The aim of the study is to scrutinize the impact of the monetary policies on the growth of the Manufacturing sector in Nigeria. In achieving this aim, the following specific objectives were laid out as follows:
- To investigate the impact of the Open Market Operation on the Nigerian Manufacturing Sector Gross Domestic Product.
- To investigate the impact of the Cash Reserve Ratio on the Nigerian Manufacturing Sector Gross Domestic Product.
- To investigate the impact of the Monetary Policy Rate on the Nigerian Manufacturing Sector Gross Domestic Product.
- To investigate the impact of the Exchange Rate on the Nigerian Manufacturing Sector Gross Domestic Product.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- Does the Open Market Operation (OMO) have an impact on the Nigerian Manufacturing Sector Gross Domestic Product (MGDP)?
- Does the Cash Reserve Ratio (CRR) have an impact on the Nigerian Manufacturing Sector Gross Domestic Product (MGDP)?
- Does the Monetary Policy Rate (MPR) have an impact on the Nigerian Manufacturing Sector Gross Domestic Product (MGDP)?
- Does the Exchange Rate (EXCR) have an impact on the Nigerian Manufacturing Sector Gross Domestic Product (MGDP)?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One:
- H0: Open Market Operation (OMO) does not have a significant effect on the Nigerian Manufacturing Sector Gross Domestic Product (MGDP).
- H1: Open Market Operation (OMO) has a significant effect on the Nigerian Manufacturing Sector Gross Domestic Product (MGDP).
Hypothesis Two:
- H0: Cash Reserve Ratio (CRR) does not have a significant effect on the Nigerian Manufacturing Sector Gross Domestic Product (MGDP).
- H1: Cash Reserve Ratio (CRR) has a significant effect on the Nigerian Manufacturing Sector Gross Domestic Product (MGDP).
Hypothesis Three:
- H0: Monetary Policy Rate (MPR) does not have a significant effect on the Nigerian Manufacturing Sector Gross Domestic Product (MGDP).
- H3: Monetary Policy Rate (MPR) has a significant effect on the Nigerian Manufacturing Sector Gross Domestic Product (MGDP).
Hypothesis Four:
- H0: Exchange Rate (EXCR) does not have a significant effect on the Nigerian Manufacturing Sector Gross Domestic Product (MGDP).
- H1: Exchange Rate (EXCR) has a significant effect on the Nigerian Manufacturing Sector Gross Domestic Product (MGDP).
1.7 Significance of Study
The following are the significance of the research work;
- It has open my knowledge on how to carryout research problem.
- It is important to everybody especially those who are into banking business that is the customers and bankers.
- Helps in adding to the stock of existing literatures in banking and the adequate survival of zenith banks.
- Aid government in the regulator policy and control of money, credit in the economy.
This study will be of immense benefit to researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. This study contributes to knowledge and could serve as a guide for other study.
1.8 Scope of Study
The study focuses on the impact of the monetary policies on the growth of the Manufacturing sector in Nigeria.
1.9 Limitations of the Study
During the course of this study, many things militated against its completion, some of which are:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Research material: availability of research material is a major setback to the scope of the study.
- Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
1.10 Definition Of Terms
The following terms have been precisely defined as rates to the context of this research work:
Monetary Policy: An economic stabilization weapon used by the monetary authority to regulate the volume, cost, availability and direction of money and credit in the economy.
Monetary Circulars: Are guidelines the country used to direct the affairs in the allocation of credit within the economy.
Regulation: This is system where the activities of the zenith banks like interest rates are controlled by the central government (CBN).
Profitability: The ability of the bank to make a maximum returns to satisfy the interest of its customers.
Liquidity: The availability of money to meet current or maturing obligations.
OMO (Open market operation): Ability of the CBN to go into market to buy securities when the economy is tight and sell when inflated (i.e. one of the quantitative tools of the CBN).
Securities: Refers to various promissory documents adopted as evidence of claim in the Market.
Bank Discount Rate: The rate that the CBN allows commercial bank to borrow short-term in order to meet liquidity positions or loan demand.
Prime Lending Rate: The rate allow to worthy credit customers on borrowing.
Quantitative Instruments: Those instrument that deal with the volume and quantity of money.
