Introduction
1.1 Background of the Study
The role of the central bank in promoting national economic policy and development has in recent years become a topical international economic policy issue. Although the empirical evidence on the relationship between central bank operations and macroeconomic stability proxied by price stability is not conclusive (Folawewo and Osinubi, 2006), the prevailing wisdom supports the need to accord a central bank a reasonable degree of autonomy that will give it substantial discretion to conduct its monetary policy in a manner that will help achieve its assumed central mandate of maintaining domestic price stability, defined as a regime of relatively low inflation rate and an environment free of inflation expectations.
While monetary policy’s aim at long-run price stability is critical to fostering sustainable economic growth, central banks’ role in promoting growth and, more generally, a healthy economy goes beyond the conduct of monetary policy (Sanusi 2002). Through involvement in financial regulation and supervision as well as in the oversight of payments system operations, central banks play a key role in preserving and enhancing the safety and soundness of the banking and financial system (Alicia and Rio 2003).
The Central Bank of Nigeria (CBN), like most central banks in the developing economies, undertakes some non-traditional central bank functions such as promotion of economic development, especially during the formative years in the 1960s and 1970s. The contribution of the CBN in this regard, was focused on the creation of the financial environment and institutional framework conducive to the mobilization and channeling of financial resources into productive investment. Thus, during the first decade of its establishment, the Bank concentrated on the task of promoting and transformation of the rudimentary financial structure of the economy. These included the issuance of money and capital market securities such as the Nigerian Treasury Bills and Federal Government Development Stocks. Moreover, it provided technical assistance to other relevant institutions, and start-up capital for the development of money and capital market institutions. The CBN initiative to encourage long-term bank lending to the economy included the establishment of various refinance and guarantee schemes, focused on the priority sectors of the economy. Two of such schemes are the Agricultural Credit Guarantee Scheme Fund (ACGSF), and Export Refinance Scheme.
1.2 Statement of the Problem
Given the number of years since the Central Bank of Nigeria was established and the substantial 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 economic growth. Nigeria has experienced high volatility in inflation rates. Since the early 1970’s, there have been four major episodes of high inflation, in excess of 30 percent. The growth of money supply is correlated with the high inflation episodes because money growth was often in excess of real economic growth. However, preceding the growth in money supply, 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.The first period of inflation in the 30 percent range (12 months moving average) was in 1976 (CBN, 2009). One of the factors often adduced for this inflation is the drought in Northern Nigeria, which destroyed agricultural production and pushed up the cost of agricultural food items, significant increase in the proportion of the average consumer’s budget. In addition, during this period, there was excessive monetization of oil export revenue, which might have given the inflation a monetary character. In addition, in the late 1980’s, following the Structural Adjustment Program, the effects of wage increases created a cost-push effect on inflation. In the long run, it was the structural characteristics of the economy, coupled with the growth in money supply that translated these into permanent price increases. In1984, inflation peaked at 39.6 per cent at a time of relatively little growth in the economy. At that time, the government was under pressure from debtor groups to reach an agreement with the International Monetary Fund, one of the conditions of which was devaluation of the domestic currency. The expectation that devaluation was imminent fuelled inflation as prices adjusted to the parallel rate of exchange.
Over the same period, excess money growth was about 43 percent and credit to the government had increased by over 70 percent (CBN, 2010). In other respects the cause of the inflation may also be adduced to the worsening terms of external trade experienced by the country at that time. It is possible therefore that Nigeria’s inflationary episodes were preceded by structural or real factors followed by monetary expansion. The third high inflation episode started in the last quarter of 1987and accelerated through 1988 to 1989. This episode is related to the fiscal expansion that accompanied the1988 budget. Though initially the expansion was financed by credit from the CBN, it was later sustained by increasing oil revenue (occasioned by oil price increase following the Persian Gulf War) that was not sterilized. In addition, with the debt conversion exercise, through which “debt for equity” swaps took place, external debt was repurchased with new local currency obligations. However, with the drastic monetary contraction initiated by the authorities in the middle of 1989, inflation fell, reaching one of its lowest points in1991i.e13 %(CBN, 2010). The fourth inflationary episode occurred in 1993, and persisted through the end of 1995.Though inflation gathered momentum towards the tail end of 1992, it reached 57 percent by the end of 1994, the highest rates since the eighties, and by the end of1995, it was 72.8 per cent (CBN, 2009). As with the third inflation, it coincided with a period of expansionary fiscal deficit and money supply growth. The authorities found it too difficult to contain the growth of private sector domestic credit and bank liquidity.
Continuous fall of the inflation rate has been experienced since 1996 as a result of stringent monetary policies of the Central bank. It however, increased in 2001, 2003, 2005, and 2008 to 16.5%, 23.8%, 11.6%, and15.1% respectively (CBN, 2010; CBN, 2011). Structural factors have proven to be important in the inflation spiral. Reduction in oil revenue (a supply shock) led to a reduction in real income, with serious distributional implications. As workers pushed for higher nominal wages, while producers increased mark-ups on costs, an inflationary spiral followed. In addition to these factors the government also had a transfer problem in order to meet debt obligations. The failure of the monetary policy in curbing price instability has caused growth instability as Nigeria’s record of development has been very poor. In marked contrast to most developing countries, its GDP was not significantly higher in the year 2000. It was 35 years before. As many economic indicators show, Nigeria’s economy has experienced different growth stages. The GDP growth rate recorded negative growth in the early 1980s (-2.7 in 1982, 7.1 in1983 and -1.1 in 1984). The growth rate increased steadily between 1985 and 1990 but fell sharply in 1986and 1987 to 2.5% and -0.2%. Except in 1991 when a negative growth rate of -0.8% was recorded, 1990s witnessed an unstable growth. However, the growth rate has been relatively high since 2001. An examination of the long-term pattern reveals the following secular swings: 1965-1968 Rapid Decline (civil war years),1969-1971 Revival, 1972-1980 Boom, 1981-1984 Crash,1985-1991 Renewed Growth, 1992-2011Wobbling. The main thrust of this study is to evaluate the effectiveness of the CBN’s monetary policy over the years. This would go a long way in assessing the extent to which the monetary policies have impacted on the growth process of Nigeria using the major objectives of monetary policy as yardstick.
1.3 Objectives of the Study
The main objectives of the study are as follows:
- To examine the nature of the relationship that exist between monetary policy tools (bank rate, exchange rate and interest rate) in economic growth in Nigeria.
- To offer some recommendations based on the findings of the study.
1.4 Research Hypothesis
H0: The role of central Bank of Nigeria has no significance impact on gross domestic production.
H1: The role of central Bank of Nigeria has significance impact on gross domestic production.
…
