1.1 BACKGROUND TO THE STUDY
Economic development is the back born of development in any society. Countries of the world are classified as developed, developing and under-developed based on their level of economic development. Governments formulate laws to regulate and control the conduct of economic activities of their countries in order to provide enabling environment for economic growth and development. In Nigeria, governments formulate policies and guidelines with aview to achieve economic growth and development. Central Bank is charged with the task of implementing the monetary policies of the government. Since its establishment in 1958, the objectives of the Central Bank of Nigeria have remained broadly the same, but the strategies for achieving these objectives have changed in consonance with the varying legal, institutional and macroeconomic environments.
Over the years, the objective of monetary policy had been the attainment of internal and external economic balance. However, emphases on techniques/instruments to achieve those objectives have changed over the years. There have been two major phases in the pursuit of monetary policy, namely, before 1986 and since – 1986. The first phase placed emphasis on direct monetary controls, while the second relies on market mechanism. The economic environment that guided monetary policy before 1986 was characterized by the dynamics of the oil sector, the expanding role of the public sector in the economy and over dependence on the external sector. In order to maintain price stability and healthy balance of payments position, monetary management depended on the use of direct monetary instruments such as credit ceilings, selective credit control, administered interest and exchange rates, as well as the prescription of cash reserve requirements and special deposits.
The monetary control framework, which relied heavily on credit ceilings and selective credit controls, increasingly failed to achieve the set monetary targets as their implementation became less effective with time.
As a result of drastic fall in oil market internationally, economic conditions in Nigeria worsen, and this informed the introduction of Structural Adjustment Programme (SAP). It was designed to achieve fiscal balance of payments viable by altering and restructuring the production and consumption patterns of the
economy, eliminating Price distortions, reducing the heavy dependence on crude oil exports and consumer goods imports, enhancing the non – oil export base and achieving sustainable growth. The main strategies of the programme were deregulation of external trade and payment arrangements, the adoption of a
market-determined exchange rate for Nigeria, substantial reduction on market forces as a major determinant of economic activity. The main instrument used is the Open Market Operations (OMO). OMO is the primary indirect monetary policy instrument for promoting non-inflationary economic growth and development and other policy goals. It is the buying and selling of Treasury securities agency obligations and bankers acceptances by the Central Bank in the financial market in order to influence the volume of liquidity and level of interest rates which ultimately will affect money supply in the economy. The adoption of a market based framework such as OMO in an economy that had been under direct control for long, required substantial improvement in the macroeconomic, legal and regulatory environment. In order to improve macroeconomic stability, efforts were directed at the management of excess liquidity; thus a number of measures were introduced to reduce liquidity in the system. These include the reduction in the maximum ceiling on credit growth allowed for banks, the recall of the special deposits requirements against outstanding external payment arrears to CBN from banks, abolition of the use of foreign grantee/currency deposits as collaterals for Naira loans and the withdrawal of public sector
deposits from banks to the CBN. Also, cash reserve requirements were increased in 1989, 1990, 1996 and 1999. Capacity utilization in the Teal sector, poor performance of major infrastructural facilities, large budget deficits, rising level of unemployment and inflation. In addition, the economy bad grave problems of
dependence, reliance on a single commodity (oil), weak industrial base, low level of agricultural production, a weak private sector, high external debt overhang, inefficient public utilities, low quality of social services and an unacceptable rate of unemployment are all the undesirable conditions in the Nigerian economy.
This study focused on measures taken by Central Bank of Nigeria to salvage our economic system. Pertinent questions included: what are the monetary policies adopted by Central Bank of
Nigeria? What actions have CBN taken to enhance development in the financial sector and real sector of the economy to foster economic growth and development in Nigeria? Answers to these questions are provided as solutions through the efforts of this research study.
1.2 STATEMENT OF THE PROBLEM
The main thrust of this study is the evaluation of the impact of CBN monetary policy on the development of the Nigerian economy. The Nigerian economy is characterized by capacity utilization in the real sector, poor performance of major inftastructural facilities, large budget deficits, rising level of unemployment and inflation. In addition, the economy had grave problems of import dependence, reliance on a single commodity (OIL), weak industrial base, low level of agricultural production, a weak private sector, high external debt overhang, inefficient public utilities, low quality of social services and an unacceptable rate of unemployment are all the undesirable conditions in the Nigerian economy.
This study focused on measures taken by Central Bank of Nigeria to salvage our economic system pertinent questions include: what are the monetary policy adopted by Nigeria (CBN)? What are the impact of these policies to the development of Nigerian economy? What actions have CBN taken to enhance development in the
financial sector and real sector of the economy to foster economic growth and development in Nigeria? Answers to these questions are provided as solution through the efforts of this research study.
1.3 OBJECTIVES OF THE STUDY
The objective of this study is to evaluate the impact of Central Bank of Nigeria’s monetary policy to the development of the Nigerian economy. This study examined the soundness of these policy measures and their impact on the public sector. It is intended to provide better understanding and appreciation of the monetary policies, the tools used towards the achievement of these policy measures and their impact on the development of the Nigerian economy as well as solutions to the problems of
implementing these monetary policies.
To achieve the above objectives, the research examined;
1. The monetary policies used from 1999 to 2004.
2. To bring out their strengths and weaknesses.
To suggest measures that would enhance improvement in our
future monetary policies in Nigeria.
1.4. SCOPE OF THE STUDY
The study is limited in scope to the monetary policies of CBN between 1999 to 2004 and their impact on the development of the
Nigerian economy. Here the study is limited in scope to the monetary policy objectives under the following:
I. Reduction in the level of inflation.
II. Maintenance of healthy balance of payment.
III. Sustenance of growth in the economy, and
IV. Economic stability.
1.5. METHODOLOGY OF THE STUDY
The research methodology used for this study is the historical research method. Textbooks, journals, CBN publications were used in collecting data for the study.
1.6. LIMITATION OF THE STUDY
The researcher encountered some constraints in the course of gathering data and conducting the research work. Among the major constraints are;
i. Difficulty in accessing Central Bank Officials to cooperate in releasing data.
b. Time for the study was too short and financial problems were also experienced by the researcher. But with greater enthusiasm, all these constraints were overcome,
and enough data colleted which assisted in conducting the research.
1.7. JUSTIFICATION OF THE STUDY
This is an area of interest not only to policy makers but students, academicians as well as the public sector. The study is intended to guide us understand and appreciate monetary policy, the tools used towards the achievement of the policy, and to evaluate its impact in the development of the Nigerian economy, and to proffer
solutions to problems of implementing monetary policy. The study is important to policy makers, students of finances, economics, academicians, and also a guide to the public sector generally in understanding monetary policies, their implementation and their impact on economic growth and development in Nigeria.
1.8. DEFINITION OF TERMS
LIQUIDITY; The ability of a bank to meet its current obligations when they are due, and is normally a short term debt measures.
RESERVE REQUIREMENT; This refers to the proportion of total deposit liabilities which the commercial and merchant banks are expected to keep as cash in vaults and deposits with the Central Bank of Nigeria.
QUANTITATIVE DIRECTIVES: These are directives from the Central Bank of Nigeria to the banks and other financial institutions under its control as to the total amount of money which they may lend.
NARROW MONEY (Ml): An “immediately spendable money”. All changeable deposits, currency and travelers cheques in the hands of the public.
BROAD MONEY (M2): Ml plus non – chequeable savings deposits and money market mutual funds shares.
FINANCIAL SYSTEM: The channel or conduct through which the sayings of surplus sectors (the household) flow to the deficit sectors (business organizations).
MONETARY SYSTEM: A system whose main function is the provision of adequate stock of money or currencies i.e. notes and coins for the economy.
CAPITAL ADEQUACY: The regulations imposed on the banks both national and internationally that they should have sufficient capital to support the business and services that they offer in whatsoever currency such operations takes place.
MACROECONOMIC: The branch of economics that considers the relationships between the large-scale movements of unemployment gross national products, savings and investments,