THE ROLE OF MONETARY POLICY AND ITS IMPACT ON THE NIGERIAN FINANCIAL SYSTEM (A CASE STUDY OF CENTRAL BANK OF NIGERIA)
The purpose of this proposal to enlarge important of the modern state of guarantee adequate provision for living and the need for economic growth in large part of the world have donated to the entrance of the prestige of monetary policy as an important instrument of economic policy and the essence would be laid on how the monetary authorities used these in controlling some major micro economic problems now rampart in our society monetary theories : various definition have been given to monetary policy by different economist.
Ginham (1980) define monetary policy as the credit control measure adopted by the central bank while I proposed the monetary policy has a final say who by the central bank of Nigeria because the money generated from there side and also monetary policy order to influence the supply of money, implemented via a wide range of institution both public and private to influence the level of economic activity. The positive role of monetary policy in the finance system having been recognized, the question arise about the objectives and roles of this policy economist have from time to time mentioned different roles of the monetary policy.
The central bank of Nigeria which is the apex financial institution and regulatory body of monetary credit, foreign trade and exchange policy in the country was established in 1958 under the act of parliamentary know as central banks Act for many years before the establishment of the bank a rudimentary monetary system had already begin the process of transforming.
Review of monetary policy in Nigeria: since independence monetary policy regimes in Nigeria can be divided broadly into two: 1960 to 1986 and 1987 to date pre-1986 period.
The economic environment that guided monetary policy before 1986 when the structural adjustment programme (SAP) introduced was characterized by the growing importance of the oil sector, the expanding role of the public sector in economic and over-dependence on the external sector.
During the period, the major objectives of monetary policy were the maintenance of relative price stability and healthy balance of payment position as well as the acceleration of the pace of economic development.
The focus on sectoral distribution of bank credit through the period was stimulate the productive sectors and therefore stem inflationary pressures.
The monetary policy which is one of the policy tool that can be used to achieve the macro-economic objective of a nation is aimed at maintenance of full employment, ensuring domestic price stability stimulation economic growth and development and maintenance healthy balance of payment equilibrium in order to evaluate the adequate of its operation in Nigeria.
TABLE OF CONTENT
TABLE OF CONTENT
CHAPTER ONE INTRODUCTION
1BACKGROUND OF THE STUDY
2 STATEMENT OF THE PROBLEM
3OBJECTIVE OF THE STUDY
4SIGNIFICANCE OF THE STUDY
5SCOPE OF THE STUDY
6 ORGANIZATION AND PLAN OF THE STUDY
CHAPTER TWO LITERATURE REVIEW
2.2 PROCESS OF FORMULATION OF MONETARY
2.3 THE ROLE OF MONETARY POLICY
2.4INSTRUMENT OF MONETARY POLICY
2.5 TARGETS AND INDICATION OF MONETARY
CASE STUDY AND METHODOLOGY
3.1 BRIEF HISTORY OF CENTRAL BANK OF
3.2 RESEARCH METHODOLOGY
3.3 SOURCES OF DATA COLLECTION
3.4 METHOD OF DATA ANALYSIS
4.1 REVIEW OF MONETARY POLICY IN NIGERIA
4.2 MONETARY POLICY OF YEAR 2001 FISCAL
4.3 COMPARING YEAR 2000 AND 2001 FISCAL YEAR
4.4 IMPACT OF MONETARY POLICY ON NIGERIA
SUMMARY, CONCLUSION AND RECOMMENDATION
5. 1 SUMMARY
5.4 LIMITATION OF THE STUDY
1.1 BACKGROUND OF THE STUDY
The growing importance of the modern state at ensuring adequate provision for' living and the need for economic growth in large part of the world have contributed to the entrance of the prestige of monetary policy as an important instrument of economic policy.
This write up will examine and explain various monetary policy instruments that have been used in Nigeria since the. inception of the Central Bank of Nigeria (C.B.N) which is the regulator^ body u6ecl by the Federal Government to regulate and control the money in circulation. The policies are designed in an attempt to change the trends of some monetary.
Variables in particular and directions so as to induce the desired behavioral change in the monetary sector.
Emphasis would be laid on how the monetary authorities used these polices in controlling some mayor macro-economic problems now rampant in our society.
One of the primary responsibilities of any government is to ensure that citizens attain" a high standard of living, the monetary policies consist of action taken by government to help in achieving economic objectives.
Some of these objectives are as follows
i. Full employment
ii. Rapid economic growth and development
iii. Price stability
iv. Equality in distribution of income
v. Stable foreign exchange rates
vi. Attainment of self reliance in the economy
vii. Correction of balance of payment deficit.
Any government whether a developed or a developing country economic objectives which might be economic growth so as to increase the wealth per head of the population or the prevention of loss or real output and the cost that result from the failure to maintain the economy at its full potential output level, the improvement of the functioning of the economy by restraining excess demand and inflationary price increase from imposing real cost on society and the restraint off any tendency of the economy towards a chronic balance of payments Disequilibrium.
Therefore, in an effort to achieve these objectives government have put in place a number of different policy tools such as monetary policy that is topic under discussion other policy tools are fiscal policy, credit policy, foreign trade policy and exchange rate policy.
The research work will also look into the instruments or weapons of monetary policies such as open market operations, interest rate, special deposit, reserve requirement, request and directives and finally given suggestions and recommendations on how these policies could be effectively used.
1.2 STATEMENT OF THE PROBLEM
Monetary policy has a major role to play in the Nigeria finance system and the economy in general.
To ensure efficient and effective growth in the economy. Monetary policy must be allowed to stay for a period of three to four year -to ensure stable economy growth and enhance the control of monetary in the money and capital market.
The monetary policy when not in good planning and control will contribute to the inflationary trend of the nation economic. Although the performance sheet of the economy shows that economy is on good track but inflation rate continues to gallop for instance during 1999 fiscal year the rate of inflation stood at 15 percent, in year 2000 its reduced again to 0.9 percent at present it as shoot up to 5.5 percent.
These have contributed to the poor economic growth, in stabilization in the market system, inequitable distribution of income. The above discussions shows that not allowing the monetary policy to last for longer period before introducing another current measure is a problem facing the economy of the country and also the regulatory body of the policy ought to take caution and exercise adequate economic skills aim at achieving the best for the country.
1.3 OBJECTIVE OF THE STUDY
The main objective of this study is to indemnify the importance and impact or to evaluate the role of monetary policy and its impact on the financial system.
And to examine critically the adequate of monetary policy in Nigeria and then relate the general theoretic-background and establish specific monetary policy indicated by the structure and character of Nigeria economy.
In addition, it will also examine the historical potency of contemporary monetary policy in the changing economic circumstances of Nigeria growing effort and
possible prefer suggestions.
1.4 SIGNIFICANCE OF THE STUDY
This research work is important to every sector and everyone within the nation. Economists agree that money plays an important role in the economic development and growth process of a nation, ever since the days of an ancient Greek writer - Philosopher - Plato Aristotle and Xylophone write dealing with., money have dwelt on the issue of monetary policy. Monetary policy involves some process which will bring about the growth of the economic; these are the objective of monetary policy (the goals of the policy), policy formulation, and choice of policy instrument, policy implementation and policy evaluation / adjustment.
All these process will bring about great impact on the activities of the financial institutions that helps in the successful execution of the policies through their dealing^" with-general public, the introduction of these policy have increase the level of activities in the economy.
1.5 SCOPE OF THE STUDY
The research work is designed to cover almost all the areas of the goals of monetary policy and its instrument. It will deals with the impact, trend and indicator of various monetary tools been used in Nigeria finance system to the supply of money and cost of money-is .Nigeria banking system.
1.6 ORGANIZATION AND PLAN OF THE STUDY
In line -with the above discussion, these stages briefly states the outline of the various' chapters in the project work. In the light of the above, the project shall be divided into five chapters in order to achieve the aims of the project; each chapter shall deals with all the important aspect of the topic. Chapter one of the report will contain the introduction of the theme of the project work by giving the background of the study, statement of problem of study, objective of the study; significance of the study, scope and limitation of the study and the organization of the study.
.Chapter two will focus and deals with review of various literature materials on monetary policy.
Chapter three will focus on the brief history of the regulatory body of monetary policy in Nigeria which is the Central Bank of Nigeria (CBN) and the research methodology used.
Chapter four will analysis stating the information received so far on the on the monetary policy that is the review of monetary policy in Nigeria, comparison of current year monetary policy with previous year and the impact of monetary policy and Nigeria finance system.
Lastly, chapter five would cover or will be devoted to summary, conclusion and recommendation.
Through its influences on aggregate demand and hence on output. This school of thought even argues that a modest rate of growth because it is only in such circumstances that the rate of profit would rise and the motivation to invest would increase.
It is further argued that the use of monetary policy to achieve growth can aid the achievement of some other objectives such as full employment,
The other view on monetary policy is the classical view as redefine by Milton Friedman. According to this view, monetary policy cannot-be used, to achieve a legal unemployment which is lower than the natural rate of unemployment. However in an attempt to correct the new unemployment problem with an increase in money supply will simply lead to a repetition of the business cycle and this would destabilized the economy, the monetary policy which have been discussed above can further be illustrate with the use of business cycle which clearly show the rate of stabilization in the economy.
Keynesian view is that monetary policy should be directed at interest rates rather than money supply and that monetary policy should at all times be directed at interest rates rather than money supply and that monetary policy should at all times be subsidiary to fiscal
policy, the monetarists recommend that control of money supply should the major concern of the monetary authorities.
The Keynesian view says since inflation is a sign of
Economic over heating and rise in interest rate will tend to cool it down by checking investment and thence overall demand conversely during the period of recession economic activities could be stimulated by lowering the interest rates.
However, Keynesian argue that monetary policy will be more effective if the authorities aim'-to- control interest rate directly rather than indirectly through the money supply.
Therefore, the Keynesian versus monetarist’s debate given the conflicting advice to government on the role and effectiveness of monetary policy. According to Paul Einzigg, monetary policy is the altitude of the political authority towards the monetary system of the communicate under the control. Declaring this definition tool vague to be of sufficient practical use, the same writer defined an idea monetary policy "as the effort to reduce to a minimum the disadvantage and increase the advantages, resulting from the existence and operation of monetary system".
M.C Vaish (1981) gave his own definition of monetary policy this is meant/ the Central Banks control over the supply and cost of money as an instrument for achieving the objectives of economic policy of the government.
2.1 MONETARY THEORIES
Various definitions have been given to monetary policy by different economists.
Gingham (1980) defined monetary policy "as the credit control measure adopted by the Central Bank". This definition only emphasizes the Central Bank control over the credit base. Livesey (1978) gave his own definition of monetary policy as "order to influence the supply of money, implemented via a wide range of institutions both public and private to influence the level o!" economic activity. It is alsp concern, with the cost of money which is influenced not only by supply but also by demand condition".
This definition emphasize monetary policy as the management of controlling the cost of money in circulation and in achieving economic growth by minimizing fluctuation in prices and business activity and by providing economic environment conducive for nigh levels of saving and investment.
Furthermore, Uzoga (1981) defined the policy in a more elaborated way as "the management of the extension of contraction of the volume of money in circulation for the specific purpose of achieving objectives of an economy include:
a. High level of employment
b. Stable price level
c. Rapid growth of gross national product
d. Favorable balance of payment position
e. Promotion of a free market economy
f. Satisfaction of collective demands
g. Equitable income distribution
h. Protection of infant industries and the encouragement of priority sectors.
i. Encouragement of balance population development.
j. Promotion, of labour and capital mobility.
These objectives are determined by the nature of the problems to be solved and by the environment in which those problems exist, in the light of this, however, only the first four objectives can be influenced to some extent-through the application of monetary policy instruments alone. The rest of the objectives require the application of the instruments of fiscal policy or those of direct control.
Therefore, the above definitions stressed the same idea about monetary policy deal with how money supply is controlled in an economy.
The general aims and objectives of monetary policy in an economy are to maintain full employment to ensure domestic price stability stimulate economic growth by avoiding mis-allocation of resources and maintain healthy balance of payment equilibrium. To achieve these objectives different '''monetary policy instruments can be used effectively.
Falegan (1978) says monetary policy deals with the discretionary control of money supply by the monetary authorities in order to achieve stated or desired economic goals. However governments believe that it rate of growth has an effect on the rate of inflation. So, monetary policy comprises those government actions which are designed to influence the behavior of the ‘monetary sector.
There are two views on the efficiency of monetary policy, the first view believes that monetary of the economy definition is concerned with administering and controlling country's money supply including currency and demand deposits and management of the foreign exchange rate. M.C.Vash view monetary policy for developing countries in the context of sustained economic growth has to be directed toward achieving the stability of the domestic price level and maintaining the stability of foreign exchange rate at some realistic level, this calls for such monetary policies that are calculated to prevent recurrent inflation and frequent devaluation of currencies of the developing countries.
Therefore, the above definition stressed the same idea about monetary policy but in different ways. This monetary policy deals with how money supply is controlled in an economy..