THE IMPACT OF MONETARY POLICY ON FOREIGN TRADE IN NIGERIA
This research work examines the impact of monetary policies on foreign trade in Nigeria. The research made use of secondary data which are collected from the Central Bank of Nigeria, Statistical Bulletin (2010). The data were collected for the period of thirty years (i.e.) 981-2010). The study employed a quantitative analysis approach. The variables considered appropriate indices for monetary policy were Money Supply, Interest Rate, Exchange Rate, Inflationary Ratio, and Liquidly Ratio. The major tool of analysis is multiple regression analysis models specified on the basis of the perceived function relationship between monetary policies and foreign exchange earnings in Nigeria. Treating foreign exchange earnings as the explanatory and the others as the explanatory variables, a multiple regression model was specified to forge a link between the variable sets. The model was estimated using the ordinary least squares (OLS) techniques and evaluated based on relevant data from the regression output. The result showed that Money Supply, Exchange Rate, Inflationary Ratio exerted a positive effect on foreign exchange while Interest Rate and Liquidity Ratio exerted a negative influence on foreign exchange. In addition, the model exhibited high explanatory power and indicated the absence of first-order serial correlation in the explanatory variable. Based on the findings, the study concluded that a clear-out and obvious relationship existed between monetary policy and foreign trade in Nigeria and, thus recommended for conscious efforts to be made to fine-tune the various monetary variables in order to provide an enabling environment to stimulate foreign trade.
CHAPTER ONEINTRODUCTION1.1 BACKGROUND TO THE STUDY
Monetary policy is one of the macro-economic instruments with which nations (including Nigeria) do manage the economics. It entails those actions initiated by the monetary authorities which aim at influencing the cost and availability of credits (Wrightsman 1996). It covers the gamut of measures or combinations of packages intended to influence or regulate the volume's price as well as the direction of money in the economy. Specifically, it permeates all the deliberate effort by the monetary authorities to control the money supply and credits conditions for the purpose of achieving deserve macroeconomic objectives, Ajie and Nenbee (2010). Chamberlain and Yueh (2006) add that the supply or price of money-may exerts a powerful influence over the economy. According to Nnana (2006), generally, macroeconomic policies in developing countries are designed to stabilize the economy, stimulate growth and reduce poverty. 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 that 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 earning and market stimulus for accelerated economic growth (Obadan, 2004). Several countries have achieved growth and export-led strategy. Small economies in particular have very little opportunity to achieve productivity and efficiency gains to support growth. Without tapping into a large market through external trade, Nigeria’s relatively large domestic market can support growth but alone cannot deliver sustained growth at the rates needed to make a visible impact on poverty reduction. Hence Nigeria has continued to rely on foreign markets as well (World Bank, 2002). Many economists generally agree that openness to international trade accelerates 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, that it is reasonable to speak of foreign trade openness accelerating growth rather than merely leading to a sudden one-time adjustment in net income (Dollar and Kraay, 2001). In Nigeria, the achievement of these objectives is predicated on the stance of fiscal monetary policies. 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 an appropriate change in the level of the 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). Sequel to our discussions so far, one could be induced to conclude that the use of monetary policy in Nigeria seems not to attract the desired level of economic stability. This conclusion follows the dismal performance of the economy in recent years. Little wonder Donli (2004) writes that the last two decades witnessed series of reforms aimed at the revitalization of the Nigerian economy owing to series of crises that influence the growth of the economy during this period. The problems were seen to be a direct derivative of structural imbalances in our economic system. The imbalance started right from colonial-era nurtured by inappropriate policies after independence in 1960 and reinforced by the wind face gains from petroleum in the 1970s. Donli (2004) further contends that these structural defects consisted of undiversified monolithic and monoculture production bases, undue reliance on agricultural products from 1973. The outcome of those events was that the growth process relied heavily on external factors instead of on internal ones. However, of all the independence, the exclusive reliance on petroleum turned out to be the most devastating to the economy. The dismal economic outlook in Nigeria above the dismal economic outlook in Nigeriasaa above desires investigation into whether or not monetary policy as claimed by the monetarist's impact on Nigeria’s economic stability and foreign trade.1.2 STATEMENT OF THE RESEARCH PROBLEM Monetary policy as a technique of economic management to bring about sustainable economic growth and development through foreign trade has been the pursuit of nations and formal articulation of how money affects economic aggregates dates bank the Adams Smith and water championed by the monetary economists. Since the expositions of the role of monetary policy in influencing macroeconomic objectives like economic growth price stability, equilibrium in the balance of payments, and a host of other objectives, monetary authorities are saddled with the responsibility of using monetary policy to grow their economies. In Nigeria, monetary policy has been used since the central Bank of Nigeria was saddle the responsibility of formulating and implementing monetary policy by the Central Bank act of 1958. this role has to facilitate the emergence of an active money market where treasury bills, a financial instrument used for open market operations and raising debt for the government have grown in volume and valued becoming a prominent earning asset for investors and a source of balancing liquidity in the market. There have been various regimes of monetary in Nigeria some times, monetary policy is tight and at other times it is loose mostly use to stabilize the price. The economy has also witnessed times of expansion and contraction but evidently, the reported growth in foreign trade has not been a sustainable one as there is evidence of growing poverty among the populace. The question is, could the period of growth in foreign trade be attributed to appropriate monetary policy? And could the periods of the economic down term be blamed on factors other than monetary policy ineffective? What measures are to be considered if the monetary policy would be effective in bringing about sustainable economic growth and development?1.3 OBJECTIVES OF THE STUDY The main objective of the study is to investigate the impact of monetary policies on foreign trade in Nigeria's economy and how they affect economic development. Specifically, the study seeks to: To examine the impact of monetary policies on foreign trade. To examine the hindrances to monetary policy operations in Nigeria. To proffer suggestions on how monetary policies can be managed for better contribution to foreign trade and economic development.1.4 RESEARCH HYPOTHESES Ho: A monetary policies have no significant impact on foreign trade in Nigeria. Hi: A monetary policy has a significant impact on foreign trade in Nigeria. Ho: A monetary policy has no significant impact on economic development in Nigeria. Hi: A Monetary policy has a significant impact on economic development in Nigeria. 1.5 SCOPE AND LIMITATION The research work will be centered on the beginning structure, operations, and objectives of monetary policies on foreign trade market management in determining the foreign trade in Nigeria. This study will be particularly limited to the pre-oil and post-oil boom in mid-1981, so as to be able to make a rational comparison between. A historical and current article like an unpublished project, journals, and textbooks of a different author. The publication data ranging from 1981 up till 2010. Finance is one of the elements that assist good research of financial constraint created difficulties in the process of this research work however, it did not hinder the research. Chapter two is basically literature reviews limited book was found to accomplish this work. The time frame within which the research must be carried out Is another problem. 1.6 DEFINITION OF TERM Monetary policies: Monetary policy can be defined as the measures or combination of measures designed to influence or regulates the volume price and direction of money and credit. [Nwankwo, 1979]. It can as well be seen as the management of the expansion and contraction of the volume of money in circulations for the purpose of achieving certain declared national objectives (Uzoaga, 1981). The stock of money is managed through expansion (lowering the cost and reducing/increasing the quantity) of money depending on the macroeconomic policy target. Economists agree that monetary policy entails the process of determining and varying the cost and availability of credit. They are also unanimous on the fact that the purpose is to enhance monetary stability (Nwikina, 1993).Economic growth: Refers to the increased every time of an economy’s capacity to produce those goods and services needed to improve the well-being of the citizen in increasing number and diversity. It is the study process by which the productive capacity of the economy is increased every time to bring about the rising level of national income.Economic development: Economic development is a multidimensional process involving the provision of basic needs, acceleration of economic growth reduction of inequality and unemployment, eradication of poverty as well as changes in attitude institution and structure in the economy. Foreign trade is the trade between two or more countries; it involves trade outside the national boundaries of a country.