MONETARY POLICY AND ECONOMIC GROWTH IN NIGERIA

Abstract

The purpose of this project work is based on the relative of monetary policy and economic growth in Nigeria. The study shows further, the aims and objectives of monetary policy which includes price stability, maintenance of balance of payment equilibrium, promotion of employment, tackling inflation, output growth and sustainable development. The literature review shed more light on conceptual and evolutionary framework of monetary policy in Nigeria, review of monetary policy before and offer the structural adjustment programme (SAP), and appraisal of the performance of monetary policy in Nigeria were thoroughly discussed. also appropriate measures for managing inflation in the economy were also suggested from the research instruments and techniques, if was observed that there are leakages in velocity of money through corrupt practices in the system and diabolic means of creating cash flow which causes inflation, multiplicity of unemployment and low output growth. The research work, also showed the interplay between the gross domestic product (GDP) and other monetary policy variables (real exchange rate, real interest rate, money supply and liquidity ratio), and their respective contribution to the economy. In conclusion this project suggests total means of curling corruption using the various law enforcements in the country.

 Chapter one

Introduction

1.1Background of the study

Since its establishment in 1959, the Central Bank of Nigeria (CBN) has continued to play the traditional role expected of a central bank, which is the regulation of the stock of money in such a way as to promote the social welfare. This role is anchored on the use of monetary policy that is usually targeted towards the achievement of full-employment equilibrium, rapid economic growth, price stability, and external balance (Fasanya et al, 2013). These objectives are necessary for the attainment of internal and external balance, and the promotion of long-run economic growth. Evidence in the Nigerian economy has shown that since the 1980’s some relationship exist between the stock of money and economic growth or economic activity. Over the years, Nigeria has been controlling her economy through variation in her stock of money. Hence monetary policy comprises those government actions designed to influence the behaviour of the monetary sector.

Over the years, the major goals of monetary policy have often been the two later objectives. Thus, inflation targeting and exchange rate policy have dominated CBN’s monetary policy focus based on assumption that these are essential tools of achieving macroeconomic stability (Ajayi, 1999). In Nigeria, monetary policy has been in use since the Central bank of Nigeria was saddled the responsibility of formulating and implementing monetary policy by Central bank Act of 1958. This role has facilitated the emergence of active money market where treasury bills, a financial instrument used for open market operations and raising debt for government has grown in volume and value becoming a prominent earning asset for investors and source of balancing liquidity in the market. Monetary policy has two fundamental goals to promote maximum sustainable output and employment and to maintain sustainable price level in the economy. The job of stabilizing output in the short run and promoting price stability in the long run involves several steps first, the central bank tries to estimate how the economy is doing now and how it is likely to do in the medium term, then, it compares this estimates to its goals for the output and the price level, if there is a gap between the estimates and the goals, the CBN have to decide on how forcefully and swiftly to act to close the gap. Estimate of the current economic conditions are not as even as the most up-to-date data on key variables like employment, growth, productivity etc, largely reflect condition in the past. So to get a reasonable estimate of the current and medium term economic conditions, the central bank tries to find out what the most relevant economic developments are such as government spending, economic conditions abroad, financial conditions at home and abroad and the use of new technologies that boost productivity. These developments are the incorporated in an economic model to see how the economy is likely to evolve over time. In doing this, the central bank is confronted with some unexpected development such as the Niger- Delta crisis that disturbed the oil production and slowed down the revenue generation by the government they therefore, have to build uncertainties into their model. Uncertainty seems to be problem at every part of the monetary policy process and there is yet no set of policy and procedures that policy makers can use to deal with all situations that may arise (Chimezie, 2012). Indeed, the central bank spends a great deal of time and effort in researching into the various ways to deal with different kinds of situation.

The economy of Nigeria is faced with unemployment, low investment and high inflation rate and these factors militate against the growth of the economy. Thus, adopting monetary policy in manipulating the fluctuations experienced so far in the economy, CBN undertakes both contractionary and expansionary measures in tackling the problems observed above.

1.2 Statement of the problem

one a yearly basis, the monetary authority formulate guidelines geared towards the enhancement and development of policy variable designed to ensure optimal performance of the banking industry and ultimately to advise the macroeconomic goals or objectives but in the implementation of such policy variable certain conflicting issues are to be addressed ranging from the ability to comply with various monetary policy goodliness as well as satisfying depositors and shareholders. In fact, commercial banks are reluctant in their responsibility to comply with the rules and regulations set by the central bank such as the open market operation (OMO), required reserve ratio (RRr), bank rate, liquidity ratio, selective credit control and moral suasion. These are the instruments of central bank in controlling the activities and operations of commercial banks in other to achieve the macroeconomic objective such as growth, price stability balance of payment equilibrium, full employment. The central bank of Nigeria (CBN)

guidelines helped in setting of the interest rates charged by the commercial banks, sales or purchases of securities to control the money supply, and changes in the required reserve ratios of banks and other financial institutions. The guidelines affected other interest are both through open market operations to affect the probability that the banks are going to need to borrow at its own lending rate, and by the announcement effects of changes in the central bank’s minimum lending rate, which are regarded by the markets as statement about the authorities forecasts and objectives. The CBN guideline on monetary policy works through the effect of the cost and availability of loans to real activity, and through this on inflation, and on international capital movement and thus on exchange rate.

1.3 Objective of the study

The main objective of the study is to determine the effect of monetary policy and economic growth in Nigeria. The specific objectives of the study are;

1. To assess the impact of money supply on economic growth in Nigeria
2. To determine the impact of liquidity ratio on economic growth in Nigeria
3. To ascertain the effect of interest rate on Nigeria’s GDP

1.4 Research Hypotheses

The following research hypotheses are formulated to guide the study;

H1: Money supply has no significant impact on GDP in Nigeria

H2: Interest rate in Nigeria has no significant impact on GDP

H3: There is no significant relationship between liquidity ration and GDP in Nigeria

1.5 Significance of the study

The study will be beneficial to study and Nigeria economy. The study will give a clear insight on the monetary policy and economic growth in Nigeria. The study will educate the public on the effect of monetary policy on economic growth in Nigeria. The study will also serve as a reference to other researcher that will embark on the related topic

1.6 Scope of the study

The scope of the study covers monetary policy and economic growth. The data for the study will be gotten from CBN bulletin. The time series for the study will cover 1986-2021

1.7 Limitation of the study

1.8 Definition of terms

Monetary policy: Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing or the money supply, often as an attempt to reduce 

Economic growth: Economic growth is an increase in the production of goods and services in an economy. Increases in capital goods, labor force, technology, and human capital can all contribute to economic growth.

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