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, Limitation of the study and Definition of technical terms.
1.2 Background of Study
Monetary policy in Nigeria has been conducted under wide ranging economic environment since the establishment of the central bank of Nigeria (CBN) over forty years ago. However, in recent years, the federal, government has made conscious and determined efforts to set and attain a high standard of macro-economic variables in order to highlight the impact of monetary policy on economic growth in Nigeria however, due to present challenging conceptual and technical problems these efforts have not shown their full weight on the position of the economy. In essence right from the formulative years achieving aggregate economic potentials, the main objectives of the monetary policy were healthy balance of payment position as well as the acceleration of the price of economic development and full employment.
The Nigeria economy experience serious economic problems from late 1970 are to mid 1980’s. The country’s balance of payment came under severe pressure and was in persistent difficult during the period. The government current expenditure expanded without appreciable increase in revenue leading to widening fiscal deficit, which were largely financed with bank credit with adverse consequences on the general price level. Generally, monetary control depends on the use of direct monetary instruments such as bank rate, open market operation changes in reserve ration and selective credit control. The usually targets of monetary policy are money supply, availability of credit and interest rates. The major objectives of monetary policy are full employment, price stability (which also includes controlling fluctuations), economic growth and maintaining balance of payment equilibrium.
The uses of market based instruments such as the open market operation (omo) were not feasible because of extreme narrowness and under development nature of the financial market. Between April 1992 and March 1976, the use of an aggregate credit ceiling was dropped for specifications on several distribution of bank credit. Throughout the period they also served quite effectively as instruments of monetary control. The situation was particularly serious between 1982 and 1985 when stringent economic controls were not effectively used in arresting the deteriorating situation. Inevitable a period of economic adjustment has to come with the introduction of the structural adjustment programme in July 1986. The overall aim of the economic adjustment process embarked upon by the federal government in July 1986 was to restructure – the federal production and consumption pattern of the economy through the elimination of price distortion and reducing of the over dependence of the economy on the export of crude oil and impart the raw materials and consumer goods. According to the monetary policy measures adopted under the programme ere designed on inflationary pressure and restricted the demand for available foreign exchange resources.
In the process of monetary management policy formulation is of utmost importance to specify the focus of the policy, otherwise it will be impossible to evaluate performance for example the objective of price stability and growth are infrequent conflict inflationary policies may enhance the rate of growth in the shortrun which may be sustainable in the longrun. Monetary expansions may raise output of goods and services and level of employment and consequently lead to price stability in the longrun. In Nigeria the CBN wielded the primary responsibilities of initiating, implanting articulating and appraising a monetary policy, the result level of, macro economic instability in Nigeria is as a result of the sustained pursuit of expansionary fiscal and monetary policies coupled with inadequate response of output. There have been some record of success and failures in the role of those policies are shown by empirical result of their performance. a good examination of monetary policy in Nigeria’s case shows that a better result will be attain if independence is being granted to the people concern in the implementation of such policies. It is on this background that this study would investigate the Impact of Monetary Policy on the Nigeria Economy with special focus on major growth components.
1.3 Statement of Problem
Investigation revealed that monetary policy encompasses actions of the central bank, such actions are to ensure that the expansion of money and credit will be adequate for the long rum needs of the economy at stable prices. Monetary policy is not only the macro-economic instrument or tool. In Nigeria the effectiveness of monetary policy has in fact depends crucially on the stance of fiscal policy exchange rate has also exerted an important influence on the economy, particularly from the supply side.
The problem lies on making use of policy that will solve the economic problems instead of the economy to have low level of investment, income and also the level of demand supply will reduces. Another problem is how to restructure the production and consumption pattern of the economy through the elimination of price distortion. Another problem is the power response of the financial system to monetary policies control measures which has to do with lack of transparency in the operation of financial intermediaries.
1.4 Aim and Objectives of Study
The aim of the study is to examine the Impact of Monetary Policy on the Nigeria Economy. In achieving this aim, the following specific objectives were laid out as follows:
- To investigate the impact of the monetary policy on economic growth in Nigeria;
- To evaluate the performance of monetary policy in Nigeria over the years under study;
- To examine the trend and structure of monetary policy in Nigeria; and
- To investigate the impact of the Monetary Policy 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:
- What is the impact of the monetary policy on economic growth in Nigeria?
- What is the trend and structure of monetary policy in Nigeria?
- What is the performance of monetary policy in Nigeria over the years under study?
- What is the impact of the Monetary Policy Rate on the Nigerian Manufacturing Sector Gross Domestic Product?
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: The monetary policy instruments do not have significant impact on the economic growth in Nigeria.
- H1: The monetary policy instruments have significant impact on the economic growth in Nigeria.
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 scope of this research is focused on the impact of monetary policy on the Nigeria economy.
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
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:
They 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.
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