AN EVALUATION OF MONETARY POLICY IN NIGERIA AND ITS IMPACT ON ECONOMIC GROWTH (1984 – 2015)
The study examined an evaluation of monetary policy in Nigeria and its impact on economic growth.
More specifically, the study sought to assess monetary policy and economic growth in Nigeria.
The study focuses on major growth components such as the Gross Domestic Product (GDP), and price level, while qualitative research method was adopted.
The variables of interest germane of the study are real gross domestic product (RGDP), broad money supply (M2), required reserve ratio (RRR), discount rate (DIT) and inflation rate (INF).
The econometric techniques use to analyze the data are Unit Root test, Johansen Cointegration test, Ordinary Least Square (OLS) technique and the Granger Causality test.
Result from the study indicated that there is no pair wise causality between M2 and RGDP, RRR and RGDP, INF and RGDP, RRR and M2, DIT and M2, DIT and RRR, INF and RRR and INF and DIT at 5% their probability values exceeds the standard 0.05.
Base on this, the study advised that there should be a consistent fight from the demand and supply side plus political approach by means of political and policy stability., secondly, An effective tax policy should be adopted, making it impossible for tax evasions and avoidance to actualize the goal of income policy., lastly constraints to the effectiveness of past monetary policies should be eliminated and consistent and more adopted.
1.0 BACKGROUND TO THE STUDY “Monetary policy is known to be a vital device that a country can set out for the maintenance of domestic price and exchange rate viability, as a critical condition for the achievement of sustainable economic growth and external viability”(Amasomma, 2011).
According to Dwivedi Monetary policy is the deliberate use of monetary instruments (direct and indirect) at the disposal of monetary authorities such as central bank in order to achieve macroeconomic stability. Monetary policy is essentially the tool for executing the mandate of monetary and price stability. Monetary policy is essentially a program of action undertaken by the monetary authorities generally the central bank, to control and regulate the supply of money with the public and the flow of credit with a view to achieving predetermined macroeconomic goals.
Monetary policy refers to the combination of measures designed to regulate the value, supply, and cost of money in an economy in consonance with the level of economic activities. It can also be described as the art of controlling the direction and movement of monetary and credit facilities in the pursuance of stable prices and economic growth in the economy (CBN 1992).
Like any other developing country, the Nigerian government adopts three types of public policies to carry out the objective of income distribution and allocation of resources. These tools of public policy include: monetary policy, fiscal policy and income policy tools. In Nigeria, government has always relied on monetary policy as a way of achieving certain economic objective in the economy such macroeconomic objectives include; employment, economic growth and development, balance of payment equilibrium and relatively stable general price level. The reason for choosing monetary policy is the fact that monetary policy has very serious implications for both fiscal and income policy measures.
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 social welfare (Ajayi, 1999). This role is anchored on the use of a 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; Adesoye et al, 2012). 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 (Aliyu and Englama, 2009).
A close observation of these definitions of monetary policy shows that monetary policy boils down to adjusting the supply of money in the economy to achieve some combination of inflation and output stabilization. Most economists agree that in the long-run output usually measured by gross domestic product (GDP) is fixed, so any changes in the money supply only cause prices to change. But in the short-run, because prices and wages usually do not adjust immediately, changes in money supply can affect the actual production of goods and services (Koshy, 2012).
According to Anyanwu (2003), countries seeking for sustainable economic growth after a period of macroeconomic imbalances must first get stabilized. In Nigeria, the monetary policy effectively implemented is an important tool for stable economic growth.
The primary goal of monetary policy in Nigeria has been the maintenance of domestic price and exchange rate stability since it is critical for the attainment of sustainable economic growth and external sector viability (Sanusi, 2002).
Economic growth is essential in an economy as it reduces poverty as well as improving the standard of living. The growing importance of monetary policy has made its effectiveness in influencing economic growth a priority to most governments. Despite the lack of consensus among economists on how monetary policy actually works and on the magnitude of its effect on the economy, there is a remarkable strong agreement that it has some measure of effects on the economy (Nkoro, 2005).
Economic growth has long been considered an important goal of economic policy with a substantial body of research dedicated to explaining how this goal can be achieved (Fadare, 2010).
1.1 STATEMENT OF PROBLEM
“Monetary policy is known to be a vital instrument that a country can deploy for the maintenance of domestic price and exchange rate viability, as a critical condition for the achievement of a sustainable economic growth and external viability”(Amasomma et al, 2011). on a yearly basis, the monetary authority formulates 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 guidelines as well as satisfying depositors and shareholders (Chimezie, 2012). Central bank of Nigeria uses various instruments to achieve its stated objective and these include: open market operation (OMO), required reserve ratio (RRR), bank rate, liquidity ratio, selective credit control and moral suasion. There have been various regimes of monetary policy in Nigeria. Sometimes, monetary policy is tight and at other times it is loose, mostly used to stabilize prices. The economy has also witnessed times of expansion and contraction but evidently, the reported growth has not been a sustainable one as there is evidence of growing poverty among the populace. The controversy bothering on whether or not monetary policy measures actually impact on the Nigerian economy is a problem this study sets to solve. Therefore, the main thrust of this study is to evaluate the effectiveness of the CBN’s monetary policy over the years. This would go a long way in assessing the extent to which the monetary Policies have impacted the growth process of Nigeria using the major objectives of monetary policy as a yardstick.
1.2 OBJECTIVES OF THE STUDY The research objectives are:
To evaluate the impact of monetary policy on the economic growth of Nigeria. To examine the trend of monetary policy over the years in Nigeria. To determine if there is a significant long-run relationship between monetary policy variables and Nigeria’s gross domestic product
1.3 RESEARCH QUESTIONS Based on the research objectives, the research questions are:
What impact does the monetary policy have on the economic growth of Nigeria? What is the nature of the trend of monetary policy in Nigeria, over the years? Is there a significant long-run relationship between monetary policy variables and Nigeria’s gross domestic product?
1.4 STATEMENT OF HYPOTHESIS
H0: Monetary policy has no impact on the economic growth of Nigeria.
H1: Monetary policy has an impact on the economic growth of Nigeria.
H0:There is no significant long-run relationship between monetary policy variables and Nigeria’s gross domestic product.
H1: There is a significant long-run relationship between monetary policy variables and Nigeria’s gross domestic product.
1.5 JUSTIFICATION OF THE STUDY The study is significant, as it would add to existing literature on monetary policies in Nigeria and its impact on growth in the Nigerian economy. It would provide an objective view of the effectiveness of the monetary policy in Nigeria and provide an econometric basis upon which to examine the effect of monetary policy on the Nigerian economy. It will serve as a guide to further research, academic work, and as a self-help study material for those who might wish for firsthand knowledge about the study. The practical significance of the study lies in the fact that Nigerian policy makers will find it is a helpful material in the formulation and implementation of policies in Nigeria.
1.6 SCOPE OF THE STUDY This study will only focus on major growth components such as the Gross Domestic Product (GDP), and price level. This study will cover all the facets that make up the monetary policy but shall empirically investigate the effect of the major ones. The empirical investigation of the impact of the monetary policy on the macroeconomic variables in Nigeria shall be restricted to the period 1984 to 2014.
This period is chosen since it corresponds with the period for which uniform data on the relevant variables are available and meets the minimum requirement for relevant theoretical tests that would be carried out. More importantly, this period witnessed various monetary and economic policy regimes.
1.7 METHODOLOGY The study adopts a quantitative research method. The method involves the collection of quantitative data in form of statistical data from CBN.
The statistical data from CBN on the impact of monetary policy on the economic growth of Nigeria will provide secondary data for the study, to enable the historical trend analysis of changes in naira.
Theoretical literature will also be collected, providing data for literature review to provide background and guide to the study. Secondary data can also be derived from these studies depending on their relevance to this research
This chapter consists of the background to the study, the statement of the problem addressed by the research, the research aim, the research objectives, the research questions, the research deliverables, and the scope of the study, the project outline, and the justification of the study.
Chapter two- Literature review This chapter covers review of articles on relevant literature to the study, the theoretical review, conceptual review and empirical review.
Chapter three- Methodology This chapter covers the research philosophy adopted, the methods of data collection, and methods of data analysis, reliability and validity of the research, ethical and legal concerns, and limitations to the methodology.
Chapter four- Data Analysis and Discussion of findings Here, data collected from the CBN statistical bulletin is presented and analyzed. It also shows the reliability analysis of the study. The results are discussed and used to answer each research question.
Chapter five- Conclusion This chapter provides a conclusion and summary of the study. It also provides recommendations on the impact of monetary policy on economic growth.