IMPACT OF MONETARY POLICY ON ECONOMIC GROWTH OF NIGERIA (1981 -2012)
1.1 Background to the Study
If money and credit flows are left unchecked to allocate themselves freely in an economy, cost and direction are very unlikely to achieve some specific macro-economic policy objectives, which can change from time to time, depending on the economic fortunes of a particular country. To achieve balanced and steady economic growth and development, and to instil some sanity into a country’s financial system the need for monetary policy becomes inevitable.
Consequently, monetary policy can be viewed as measures designed to regulate and control the volume, cost and direction of money and credit in an economy. Monetary policy influence the volume and direction of purchasing power in an economy and is an instrument of market intervention to achieve rationally stipulated objectives which would otherwise be impossible on attainment, at least in terms of volume, speed and direction (Anyanwu, 1996).
As the watchdog of the economy, the Central Bank Nigeria has the duty to ensure that policies are set in motion to cause the monetary system and the real system move hand in hand and that monetary variables do not constitute hindrance in the achievement of national objectives. The level of monetary supply in the economy must not be too high as to be capable of creating inflation and must not be too low as to hinder investment. If the monetary sector is not controlled in line with changes in the real system a situation of disequilibrium will occur, therefore, creating problems in the economy.
Monetary policy in the economy is made up of six components or different policies dealing with the volume of or quantity of money i.e. the supply of money and credit, its price, the rate of interest and its allocation (Afolabi, 1991). It also includes policies on balance of payments on the exchange rates and on external reserve managementnagement. In other words, monetary policy that limits itself merely to establishing and controlling the quantity of money or its price or indeed omits or excludes any of the six components is not complete and cannot be effective.
Generally, the objectives of monetary policy include full employment, rapid economic development, and maintenance of price stability and balance of payments equilibrium (Folawewo and Osinubi, 2006). In Nigeria the overriding aim of her development efforts remains that of bringing about improvement in the living conditions of Nigerian citizens.
In recent years, there has been a growing recognition in many countries of the important contributions, which an effective Central Bank of Nigeria can make to enhance economic performance. Although, Central Bank activities are diversified and have evolved overtime, it is through the conduct of monetary policy that it makes its most pervasive impact on an economy. More specifically, a Central Bank of Nigeria (CBN) has a significant impact on a broad range of Macro economic variables including output growth, employment, inflation, interest rates, exchange rates and the balance of payments. It is on this background that this study would examine the trend and structure as well as investigate the impact of the monetary policy on macro economic variables in Nigeria.
1.2 Statement of the Problem
One of the major objectives of monetary policy in Nigeria is price stability. However, despite the various monetary regimes that have been adopted by the Central Bank of Nigeria over the years, inflation still remains a major threat to Nigeria’s economic growth.
Nigeria has experienced high volatility of inflation rates. Since the early 1970’s, there have been four major episodes of high inflation, in excess of 30 percent (CBN, 2009). The growth of money supply is correlated with the high inflation episodes because money growth was often in excess of real economic growth. However, preceding the growth in money supply, some factors reflecting the structural characteristics of the economy are observable.
Structural factors have proven to be important in the inflation spiral. Reduction in oil revenue (a supply shock) led to a reduction in real income, with serious distributional implications. As workers pushed for higher nominal wages, while producers increased mark-ups on costs, an inflationary spiral followed. In addition to these factors the government also had a transfer problem in order to meet debt obligations.
The failure of the monetary policy to curb price instability has caused growth instability and thus, poor development. In contrast to most developing countries, its GDP was insignificantly higher in the year 2000. As many economic indicators show, Nigeria’s economy has experienced different growth stages. The GDP growth rate recorded negative growth in the early 1980s (-2.7 in 1982, 7.1 in 1983 and -1.1 in 1984). The growth rate increased steadily between 1985 and 1990 but fell sharply in 1986 and 1987 to 2.5% and -0.2%. Except in 1991 when a negative growth rate of -0.8% was recorded, 1990s witnessed an unstable growth. However, the growth rate has been relatively high since 2001. An examination of the long-term pattern reveals the following secular swings: 1965-1968 Rapid Decline (civil war years), 1969-1971 Revival, 1972-1980 Boom, 1981-1984 Crash, 1985-1991 Renewed Growth, 1992-2010 Wobbling (CBN, 2010).
The main thrust of this study shall be to evaluate the effectiveness of the CBN’s monetary policy over the years. This would go along way in assessing the extent to which the monetary policies have impacted on the growth process of Nigeria using the major objectives of monetary policy as yardstick.
1.3 Research Questions
- Does monetary policy instrument have significant impact on Nigeria’s economic growth performance?
- Is there any significant long-run relationship between the monetary policy variables and the gross domestic product in Nigeria?
1.4 Objectives of the Study
The main objective of the study is to examine the impact of monetary policy on the economic growth of Nigeria.
The specific objectives are to
1) Investigate if monetary policy variables have positive significant impact on Real Gross Domestic Product Performance in Nigeria.
2) Determine the existence or not of any significant the long-run relationship between the monetary policy variables and Nigeria gross domestic product.
1.5 Research Hypothesis
H0: Monetary policy instrument does not have significant impact on Gross Domestic Product performance in Nigeria
H0: There is no significant long-run relationship between the monetary policy instruments and the gross domestic product in Nigeria.
1.6 Significance of the Study
This study aims at making meaningful contribution to the general knowledge and how monetary policy variables has fared towards the achievement of some macroeconomics objectives in Nigeria settings. The study will be of great importance to the monetary authorities, government and its agencies, student of economics, the general public and lastly to all academic researcher who may have interest in this field.
1.7 Scope and Limitation of the Study
The economy is a large component with lot of diverse and sometimes complex parts. This study will only focus on some macroeconomic variables such as the economic growth, price level and the balance of payment equilibrium. The empirical investigation of the impact of the monetary policy on growth parameters in Nigeria shall be restricted to the period between 1981 and 2012.
The researcher encountered a number of constraints in the course of this work to include; data sourcing or data inconsistence due to poor nature of information management in Nigeria. In spite of these problems, efforts were put in place to enhance the quality of this study.