THE IMPACT OF MONETARY POLICY ON FOREIGN TRADE IN NIGERIA

Abstract  

This study examines the impact of monetary policy foreign trade in Nigeria. In doing this, chi-square statistics is used to analyse data for the study. The result of the analysis shows that monetary policy presented by money supply exerts a positive impact on GDP growth and Balance of Payment but negative impact on rate of inflation. The recommendations are that monetary policy should facilitate a favourable investment climate through appropriate interest rates, exchange rate and liquidity management mechanism and the money market should provide more financial instruments that   satisfy the requirement of the ever-growing sophistication of operators.

 CHAPTER ONE

 INTRODUCTION

• Background of the study

Economic development is the brain box of development in any country of the world weather developed, developing and under-develop. A country is classified as developing or under-developed based on their level of economic development. Governments formulate policies, laws and strategies to regulate and control the conduct of economic activities of their countries in order to provide enabling environment for economic growth and development. Monetary policy has always been seen as a fundamental instrument over the years for the attainment of macroeconomic stability, and also as a major requirement for 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. the central bank is the body charge with the responsibility 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. The central bank of Nigeria also use inflation rate to track movement of price of commodity domestically while exchange rate policy are used as a stabilizing tool of macroeconomic variables of the country.   According to Nnana (2006), generally, macroeconomic policies in developing countries are designed to stabilize the economy, stimulate growth and reduce poverty.  In Nigeria, monetary policy has been used since the central bank of Nigeria was saddled with the responsibility of formulating and implementing monetary policy by the (C.B.N act of 1988) since its establishment in 1959, the central bank of Nigeria has continued to play the traditional role expected for a central bank, which is the as to promote the social welfare (Ajayi, 1999) 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. This role by the central bank of Nigeria 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.

The major target of monetary policy for donkeys of years has been thus: inflation targeting and exchange rate policy, The macroeconomic outcomes in 2009 were influenced by developments in both the domestic and international economy. Overall, the Nigerian economy was relatively stable with mixed outcomes. The major challenge to monetary policy in 2009 was the management of tight liquidity in the banking system as against the issue of excess liquidity in the previous years. Specifically, growth rates in major monetary aggregates were below the programmed targets. In particular, the growth in credit to the private sector slowed significantly. Inflation rate (year-on-year) moderated substantially although it remained at double digit at the end of the year. The exchange rate, which remained relatively stable during the first and second quarters of the year, depreciated during the third and fourth quarters. Interest rates rose generally in 2009, influenced by the global financial crisis which precipitated tight liquidity conditions in the banking system. Challenges to the domestic economy included heightened insecurity, exchange rate depreciation pressures, rising inflation, declining crude oil prices, Crude oil production improved in the second half of the year following the amnesty program implemented by the Federal Government in resolving the Niger Delta crisis. In addition, oil prices improved in the international oil market in response to economic recovery in most advanced and emerging market economies during the second half. Provisional data from the National Bureau of Statistics (NBS) indicated that real Gross Domestic Product (GDP) grew by 7.07 per cent in the third quarter of 2009, compared with 7.2 per cent in the second quarter. The projected growth was driven mainly by the non-oil sector, particularly agriculture, which constituted 45.35 per cent of GDP and grew by 5.99 percentage points in the third quarter compared to 6.00 in the corresponding period of 2008. A GDP growth rate of 5.86 per cent is envisaged for 2009 compared with 5.99 per cent in 2008. The primary goal of monetary policies in Nigeria has been the maintenance of domestic price and exchange rate stability since it is critical for the attainment of sustainable growth and external sector viability (sanusi, 2012).Economists have long been interested in factors which cause different countries to grow at different rates and achieve different levels of wealth. One of such factors is foreign trade. Nigeria is basically an open economy with international transactions constituting a significant proportion of her aggregate output. To a large extent, Nigeria’s economic development depends on the prospects of her export trade with other nations. Foreign trade provides both foreign exchange earnings and market stimulus for accelerated economic growth (Obadan, 2004).Several countries have achieved growth an export-led strategy. Developing economy in particular has very little opportunity to achieve productivity and efficiency gains to support growth. Nigeria economy has the potency to develop into the top twenty 20 economy of the world without depending on foreign trade. Hence Nigeria has continued to rely on foreign market as well (World Bank, 2002).Many economists generally agree that openness to international trade accelerate development. The more rapid growth may be a transition effect rather than a shift to a different steady states growth rates clearly, the tradition takes a couple of decades or more so, that it is reasonable to speak of foreign trade openness accelerating growth rather than merely leading to a sudden onetime adjustment in net income (Dollar and Kraay, 2001). Monetary policy formulation is based on the duo of money supply and credit availability in the economy. In ensuring monetary stability, the central bank through the deposit money banks implements policies that guarantee the orderly development of the economy through appropriate change in the level of money supply. The reserves of the banks are influenced by the central bank through its various instruments of monetary policy. These instruments include the cash reserve requirement, liquidity ratio, open market operations and primary operations to influence the movement of reserves (Ajir and Nenbee, 2010 and Masha et al, 2004). According to  Mallam Sanusi Lamido Sanusi in an interview by sahara reporters on 6^th of June 2013  he said  that the advice was rejected based on sound economic theory. IMF’s advice was based on the economic theory which suggests that currency devaluation is good for an economy which is export oriented; meaning, goods and services produced in such countries will be cheaper and thus competitive on the international market, while revenues generated will be able to buy more things in the local economy when converted. However, SLS’s argument was that Nigeria’s main export was oil of which its price was determined by international market forces and had nothing to do with the Naira. He further explained that Nigeria’s economy was largely import dependent and as such devaluation of the Naira would translate into expensive commodities which will in turn hurt Nigerians.

This issue of Nigeria’s import dependent economy is what brings me to the macro-economic policy direction of the current administration since its inception. SLS was right in his rebuff of the IMF but there is a bigger issue at the heart of his argument which is that the import dependent economy appears to be the reason for the current tight monetary policy regime of the CBN.

STATEMENT OF THE PROBLEM

Monetary Policy is a key component of any pro-growth economic system and much so in developing economies such as the Nigerian Economy.  Since specifying the role of monetary policy in influencing macroeconomic objectives like economic growth price stability, equilibrium in balance of payments and host of other objectives, monetary authorities are saddled the responsibility of using monetary policy to growth their economies. Over the years, the objectives of monetary policy have remained the need for attainment of internal and external balance (that is equilibrium in the balance of payments). However, emphases on technique/instrument to simultaneously achieve internal balance and equilibrium in the balance of payments have changed over the years. There have been two major phases in the pursuit of monetary policy in Nigeria before and after 1986. The first phase placed emphasis on direct monetary controls, while the second relies on market mechanisms.  It is in view of this that the researcher intend to investigate the impact of monetary policy on foreign trade in Nigeria.

• OBJECTIVE OF THE STUDY

The main objective of this study is the impact of monetary policy on foreign trade in Nigeria. But for the successful completion of the study; the researcher intends to achieve the following sub-objectives;

1. To examine the impact of monetary policies on foreign trade.
2. To examine the hindrances to monetary policies operations in Nigeria.
3. To proffer suggestions on how monetary policies can be managed for better contribution to foreign trade and the economy development
4. To evaluate the effect of money supply on manufacturing output, inflation rate, exchange rate, interest rate and economic growth in Nigeria.
   • RESEARCH HYPOTHESES

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H₀:   Monetary policies have no significant impact of foreign trade in Nigeria

H₁: Monetary policies has significant impact on foreign trade in Nigeria

H₀²: there is no significant relationship between monetary policy and foreign trade in Nigeria

H₂: there is a significant relationship between monetary policy and foreign trade in Nigeria

• SIGNIFICANCE OF THE STUDY

It is believed that at the completion of the study, the findings will be of benefit to the management of central bank of Nigeria, as the study seek to enumerate the benefit of healthy monetary policy on the development of Nigerian economy. The study will also be important to the national economy committee as the findings may be of help to guide them in policy formulation.The study will also be of great benefit to the researchers who intends to embark on research on similar topics as it will serve as a guide. Finally, the study will be of great importance to academia’s, lecturers, teachers, students and the general public.

• SCOPE AND LIMITATION OF THE STUDY

Scope of this study covers the impact of monetary policy on foreign trade in Nigeria. In the course of the study, the researcher encounters some constrain which limited the scope of the study;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
3. c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities

1.7 DEFINITION OF TERMS

IMPACT: The action of one object coming forcibly into contact with another.

MONETARY POLICY: Monetary policy is the process by which the monetary authority of a country, like the central bank or currency board, controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

FOREIGN TRADE: Foreign trade is nothing but trade between the different countries of the world. It is also called as International trade, External trade or Inter-Regional trade. It consists of imports, exports and entrepot.

• ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study.

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