CHAPTER
I
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 are aimed at 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 the 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
refers to the credit control measure adopted by the central bank of a country.
Monetary policy
according to Olumechere (2008) is a deliberate effort by the monetary
authorities to control supply and credit conditions for the purpose of
achieving certain broad economic goals. Johnson
(2006) define monetary policy as policy employing central bank control
of the supply of money as an instrument for achieving the objectives of general
economic policy.
According to Salvin
(2009) monetary policy is the use of open market operations change in discount
rate, change in reserve requirement and other measures available to the
monetary authorities to control the rate of growth of money supply. He further
noted that the goals of monetary policy are price stability relative full
employment and satisfactory rate of economic growth.
As Akatu (2003) noted, monetary
policy in the Nigeria context encompasses actions of the central bank of
Nigeria that affect the availability and cost of commercial and merchant bank
reserve balances and thereby the overall monetary and credit condition in the
economy.
The main objective of
such action is to ensure that over time, the long-run needs of the growing
economy at stable prices. The aim 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) yearly.
Economic growth on the
order hand according to Kindleberger (2005) means more output, while Friedruan
(2002) defines growth as an expansion of the system in one or more dimensions
without a change in its structure, and development as an innovative process
leading to the structural transformation of social system.
This economic growth is
related to a quantitative sustained increase in the countries per capital
output or income accompanied by expansion in its labour force, consumption,
capital and volume of trade. An economy on the other hand can be said to be
developed when there is a quantitative and qualitative increase in
the amount and quality of goods and services produced in the country. In its
widest aspect economic growth and development implies raising the standard of
living of the people and reducing inequalities in income distribution.
According to Stephen, (2011) development is the
process of improving the quality of all human lives and capabilities by raising
people’s levels of living, self-esteem, and freedom.
In most countries, the
central bank is saddled with the responsibility of conducting monetary policy.
In the case of Nigeria, the responsibility entirely lies with the central bank
of Nigeria (CBN). The discretionary control of money stock by the monetary
authority involves the expansion or contraction of money, influencing interest
rate to make money cheaper or more expensive depending on the prevailing
economic situation.
The evaluation of
monetary policy intends to show how this macroeconomic policy is formulated and
executed in practice particularly in an environment of federal government
fiscal dominance and highly liquid banks.
Between April 1992 and March 1976, the use of an
aggregate credit ceiling was dropped for specification on several distribution
of bank credit throughout the period they also served quitted 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. In-evitable a period
of economic adjustment has to come with the introduction of the structural
adjustment programmed1 in July 1986. Te 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 the elimination
of price distortion and reduction of the over dependence of the economy on the
export of crude oil and impart the raw materials and consumer goods.
In the course of these
project, detailed attention will be paid to monetary policy in which its frame
work and implementation will be analyzed and its impact on economic growth in
the period of 1990 to 2017.
1.2 Statement of the Problem
The Nigeria economy has encountered the problem of
disequilibrium, inability to mobilize domestic savings and unsatisfactory
expansion of domestic output. These problems have consistently and presently
done severe damage to Nigeria economy; but most strikingly these problems have
continued to play the economy unabated that is, the economy is becoming less
strong.
The monetary policy implementations in the economy
over the past years were detrimental to, and inconsistent with the development
needs of economy. This concern has exerted pressures on the view to finding
possible solutions. As a result of this the structural adjustment program was
introduces in the economy and to liberalized the financial system.
According to Anyanwu (2003), monetary policy is a
major economic stabilization weapon which involves measures designed to
regulate and control the volume, cost, availability and direction of money and
credit in an economy to achieve macroeconomic objectives or
goals. 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 and supply will reduce.
Another problem is how
to restructure the production and consumption pattern of the economy through
the elimination of price distortion.
Also,
another major problem is the power response of the financial system to monetary
policies control measures which has to do with lack of transparency in the
separation of financial intermediaries. It is against this background that this
study seeks to investigate the impact of Nigerian Monetary Policy on Economic
Growth.
1.3 Objectives of the Study
The main objective of
the study is to investigate the impact of Nigerian Monetary Policy on Economic
Growth. The specific objectives are:
1. To
examine the trend and structure of monetary policy in Nigeria.
2. To
empirically investigate the impact of monetary policy on Nigeria’s economy
3. To
evaluate the performance of monetary policy in Nigeria over the years under
review.
4. Proffer
possible solution and recommendations
The study sought
to answer the following specific research questions:-
1.
What are the trend and structure of
monetary policy in Nigeria?
2. What
are the impact of monetary policy on Nigeria’s economy?
3. Has
monetary policy in Nigeria brought about good economy performance?
1.5 Research Hypothesis
To effectively achieve the above mentioned
objectives and for valid and effective work on this topic, the
following key research hypotheses would be addressed in the course of this
study:
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