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MONETRY AND
FINANCIAL
POLICIES:
THE NIGERIA
PERSPECTIVE.
1
BY
………………………………………..
AKP/WRR/BMG/BUS/HND2007/……….
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IN PARTIAL FULFILMENT OF THE REQUIREMENT
NOVEMBER 2009
CERTIFICATION
This is to certify that this project work was carried out by ………… in
administration.
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………………………….. ………………………….
…………………………... ………………………….
Date Date
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DEDICATION
5
ACKNOWLEDGEMENT
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To God be the glory for its not by my power nor my might but by His
grace that is superfluous and more than sufficient. I thank Him for
the school registrar, the assistance registrar and other friends who
of the programme.
7
I wish to conclude this acknowledgement by expressing my sincere
me during the period of the programme. MAY GOD BLESS YOU ALL.
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ABSTRACT
more effective if the public knows the goals and instruments of policy
for monetary and financial policies that central banks and financial
and in close consultation with officials from central banks and financial
9
agencies from the Fund membership, has prepared a supporting
TABLE OF CONTENT
Title page - - - - - - - - i
Certification page - - - - - - - - ii
Acknowledgment page - - - - - - - iv
Abstract page - - - - - - - - vi
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1.3 The Significance of the study - - - - - 4
11
2.8 Conflicts in the achievement
CHAPTER THREE
3.1 Introduction - - - - - -- 40
12
3.10 Model specification and estimatation techniques 44
CHAPTER FOUR
4.1 Introduction - - - - - - 49
CHAPTER FIVE
5.1 Introductions - - - - - - 55
5.2 Summary - - - - - - - 55
5.3 Conclusion - - - - - - - 57
5.4 Recommendations - - - - -- 61
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CHAPTER ONE
INTRODUCTION
Monetary management deals with the control of the money stock (or
and stage of development of the financial market, and for any one
country, the optimal targets and structure change over time. Where the
relationship between the central bank and its stakeholders. Also, since
14
them with the various policies of government to ensure consistency and
effectiveness.
policy.
attention to a sound and stable financial system, and why attempts are
15
system provides a medium for financial intermediation to take place
(i) To investigate the role and the relative efficiency of the use
16
(ii) To find out whether or not, monetary policy is effective in
policy in Nigerian
economy.
macroeconomic policies.
(Nigerian Economy).
18
1.5 LIMITATION OF THE STUDY
only.
study, the research work was organised into five (5) chapters.
the study, the scope of the study, the significance, and its
limitations.
19
The chapter also disuses the research hypothesis, methodology of
study.
problem under study chapter three (3) deals with the design of
Chapter five (5) which is the last but not the least gives the
20
HYPOTHESIS ONE (1)
and to expose readers to the tenets of the study, some terms which
21
AN ECONOMY
22
CHAPTER TWO
LITERATURE REVIEW
include:
23
Adoption of indirect monetary management in place of the imposition of
and level playing field for the emergence of effective and efficient
opening bank house were liberalized. Prior to 1986, Nigeria had only 40
change were not in existence before 1986. The capital base of all the
points across the country to further reduce customer traffic to banks for
cash withdrawals. The use of debit and credit cards was also being
banking lexicon.
25
-Shift in Monetary Policy Management
Between 1986 and 1993, the CBN made efforts to create a new
credit ceilings for selected banks that were adjudged to be sound. After
stockbrokers are now very active in the primary market for treasury
bills.
In August, 1987 the CBN liberalized the interest rate regime and
adopted the policy of fixing only its minimum rediscount rate to indicate
the desired direction of interest rate. This was modified in 1989, when
26
deposit and lending rates. In 1991, the government prescribed a
maximum margin between each bank’s average cost of funds and its
maximum lending rates. Later, the CBN prescribed savings deposit rate
sympathy with rising inflation rate which rendered banks’ high lending
rates negative in real terms. In 1994, direct interest rate controls were
restored. As these and other controls introduced in 1994 and 1995 had
the basis for setting up electronic links to on-line customers and other
27
service. To further improve the efficiency of the payment system, the
line with global trend. The Bank will continue to encourage banks to
and use of e-money products such as credit cards, debit cards, digital
the environment for efficient e-banking service delivery has been laid.
Time Gross Settlement (RTGS) system. The RTGS will eliminate the risk
in large-value payment,
with the reintroduction of the Dutch Auction System (DAS) in July 2002
28
with the objectives of realigning the exchange rate of the naira,
curbing capital flight from the country. Under this system, the Bank
bought foreign exchange at their bid rates. The rate that cleared the
market (marginal rate) was adopted as the ruling rate exchange rate
for the period, up to the next auction. DAS brought a good measure of
between the official and parallel market exchange rates; and encourage
29
Other measures adopted to enhance the operational efficiency of the
payable in the currency of remittance. All oil and oil service companies
were allowed to continue to sell their foreign exchange brought into the
per quarter for BTA and US$2,000.00 twice a year for PTA for
Cheques.
30
aggregates and inflation, is needed to anchor inflation expectations and
establish credibility.
Directors also welcomed the plans to move forward cautiously with the
focused on price stability, noting that the level of the naira is consistent
31
violated governance and prudential regulations during the recent period
for the sustained development of the financial sector and lauded the
“It will also be important to develop a clear framework for dealing with
borders.
The Fund commended the proposed overhaul of the framework for the
oil and gas sector, noting its critical importance from a macroeconomic
32
“Achieving these improvements will require further detailed quantitative
infrastructure,” it stated.
fiscal policy, and its focus on actions to improve budget execution and
fiscal policy over the medium term will need to be more consistently
It noted that reforms initiated earlier this decade have done much to
soften the impact of the global financial crisis on the nation’s economy.
when oil prices were surging, together with bank consolidation and
33
The authorities’ commitment to a strong macroeconomic and financial
policy framework that can support an early recovery and lay the basis
plan is welcomed”.
The Central Bank of Nigeria (CBN) as the apex financial institution, has
The latter function is, however, carried out in collaboration with other
attention to a sound and stable financial system, and why attempts are
34
system provides a medium for financial intermediation to take place
would foster exchange rate and price stability, and savings and
on the size and stage of development of the financial market, and for
35
any one country, the optimal targets and structure change over time.
policy stance.
relationship between the central bank and its stakeholders. Also, since
effectiveness.
36
thereby, enable it to act more pro-actively and promptly in its policy
37
Experience shows that monetary policy and banking activities have
institutions and vice versa. Thus, while some policy measures are
As you are all aware, the CBN issues its approved monetary and
default.
money stock, and the health of the banks are regularly reviewed while
38
Monetary and financial policy outcomes in recent years, have been
You will recall that excess liquidity persisted in year 2000, especially as
a result of the lagged effect of the CBN financial of the huge fiscal
deficit in the first half of 1999. This situation was further compounded
year 2000. Also, the wide spread between bank deposit and lending
were guided by the desire to keep inflation within a single digit level,
had their licenses revoked and were transferred to the Nigeria Deposit
decisive manner.
financial policies, which has become the norm globally, the bank has
40
The CBN GOVERNOR SAID-I have sought to review some conceptual
financial system. In this regard, I should stress that the central bank
industry.
credit.
41
deposits direct control over lending by banks and other Financial
pint in time.
42
An expansionary (or easy) monetary policy is used to overcome a
He further say that for this purpose, the Central Bank purchases
measure.
43
This is to say that monetary policy is a deliberate effort by the
economic objective
availability of credit.
measures.
44
By such measure as enumerated above, the central Bank of
in the economy.
interference.
thereafter.
45
2.7 OBJECTIVE & ROLES OF MONETARY
goals which can change from time to time defending on the economic
growth.
economy
46
one may preclude the attainment of another or others. In other
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if Maintenance of full employment encourages reliance on the
status quo.
enough to inhibit it
48
2.8.3 CONFLICT RESOLUTION
(the Central Bank) and the government, based on the state of the
economy
view.
49
(i) Large Non-monetised Sector - Thingan (1983),
economy.
operate on a large scale in the LDCs, but they are not under the
these countries.
50
(iv) High Liquidity:
effective.
monetary policy.
51
situation makes the Central Bank to be unable to control credit
effectively.
52
CHAPTER THREE
3.1 INTRODUCTION
instruments employed.
The chapter also presents the methods used in analysing the data
the hypotheses.
53
experimental method, econometric method, comparative, etc. It
54
The use of historical data for the study, was informed by the need
approach.
The source of the data collected and used in the course of this
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bulletins, as well as other related sources.
(NCEMA).
In searching for the relevant and necessary data needed for the
56
the Nigerian economic between 1979 - 2008.
from where the data considered necessary for the purpose of this
The model specified for the explanation and the analysis of the
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economic, as shown below :
DEFINITION OF VARIABLES
the model.
in the model.
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Equation four (4) above deficts inflation rate in the Nigerian
focus of this study, and falls within the critical area of this
study.
study, the student 't' test was used in analysing and testing the
specified for this study. The 't' test involves the comparison of the
the assumption that the null hypothesis is true. The value of the
t* =bi
se (bi)
where
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t* = the observed 't' value
i = 0,1,2,3 - - - - - - - - n
In caring out this test the researcher used 95% (Ninety five
If the value of the observed 't' (T- Ratio) is greater than the value
( H1) accepted.
ie If t* bi > tcri(0.025) at n _ k df
If t*bi<tcri (0.025) at n_ k df
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Accept the Null Hypothesis (Ho)
model specified for the for this study. The R2 shows the
global test was test (R2), along with the parametric test was to
R2 = Rss
Tss
CHAPTER FOUR
61
DATA PRESENTATION, ANALYSIS OF RSULTS
AND INTERPRETATION
4.1 INTRODUCTION
The objective of this chapter were to present the data collected in the
course of this study analyse and interpret the results emanating from
the statistical and other tests carried out on the data, as well as
discussing the findings. The principal objective of this chapter was also
The purpose of this research had been the investigation of the relative
Nigerian economy between 1979 and 1998 Vis-à-vis the use of fiscal
report.
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The data so collected, for the purpose of these research were as
The researcher built up a model for the results of the statistical analysis
carried out on the data, were also presented in appendix two (2) of this
report. The Regression Reports of the model used fro this study ere as
Model:
Y = ao + a1X1 + a2X2 + U
Where:
X 1 = Government Expenditure
X2 = Money supply
U = Error term
Reports:
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F (2,17) =2.184209, W- statistic = 0.8939
weak and insignificant relationship between money supply and the rate
In order to pursue the objective of this study, which has been the
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section of the research report was devoted to the testing of the
The statistic or tools used in testing the research hypotheses was the
student ‘t’-ratio the procedures and the rules governing the tests or
DECISION RULE:
If the value of the observed ‘t’ (t-ratio) is greater than the value of the
65
Accept the null hypothesis (Ho) and reject (H1).
RESULT :
The result showed that t* (a1) is – 1.18223 and teri (0.025) at 17 d.f is
2.110. based on the validation rule governing this test, the null
ALTERNATIVE HYPOTHESIS
DECISION RULE:
If the value of the observed ‘t’ (t-ratio) is greater than the value of the
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If t* bi > teri (0.025) at n-k d.f.
Accept the mill hypothesis and (HO) and reject the atternative hypothsis
(HI)
RESULT
The result should that t* (a2) is i.408536 while tori (0.025) at 17 d.f, is
2.110. from the statistics given above, toh < tori since 1.408536 <
2.110.
course of this study were successfully carried out by the research, and
the summary of the result & findings of the study were summarized in
Table
HYPOTHSIS N K DF R2 Tob Teri Level of Remark
significance
1 20 3 17 NA -1.18226 2.110 0.025 Not significant
2 20 3 17 NA 1.40854 2.110 0.025 Not significant
CHAPTER FIVE
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SUMMARY, CONCLUSIONS AND REMMENDATION
5.1 INTRODUTIONS
5.2 SUMMARY
The study had each organised in fire (5) chapters, with each
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Chapter one introduces the study and given a general overview of the
problem under study. it also states the problems of the study, its
Chapter tow (2) of the study, dwelt on the review of related literatures
Chapter three (3) dealt with the research methodology and design of
the study, the sources of data collected, which were mainly secondary
for data collection, method of data analysis and the statistics for testing
rejection of hypotheses.
Then chapter four (4) of the study formed the hallmark of the research
in that the data collected in the course of this study were presented,
analysed and interpreted in line with the objective of the study. The
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findings include among other things, that government expenditure, and
money supply are not the causes of inflation in the Nigerian economy.
Finally, chapter five (5), which is the last chapter of the research
report, dealt with the summaries of the study, the conclusions drawn,
5.3 CONCLUSION
From the data collected from different sources such as the central bank
It is on the basis of the analysis of the data collected for the purpose of
this study, and the statistical and econometric tests and analysis
carried out on those data, that the researcher draws the following
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(i) Theoretically, economic science has always been built on
or one of the major factors that shave been responsible for the high
the model built for this study, turn out to be statistically insignificant in
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(iv) In Nigeria, and indeed other third world or less developed
heavily to inflation because they are pre occupies with their profit of
of sales some of the sellers charge prices as they like, through the
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(d) A high rate of interest reduces the level of investment in the
economy, and this leads to low level of output of goods and services.
they agitate for pay increases which are eventually paid, but not
revenue on items that are not investment oriented. This frustrates the
regulation of spending.
(g) The importation of foreign goods into our market, with the
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materials and capital equipment. This is typical about all developing
inputs.
(v) Monetary and fiscal policies are critical for the development and
turns out to be a menace to the economy. But the use of either fiscal or
contribute to elude the nation except monetary and fiscal viability are
5.4 RECOMMENDATIONS
In view of the analysis carried out in the course of this study and
the findings there from, the researcher is poised to make the following
inflation.
facilities like health care delivery system and education for the
citizenry. The private sector should also partake that it does not
(iii) There should be a match between wage level and the productivity
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(iv) All macroeconomic policy framework should consistent in both
(v) The policy markers should include population and its growth rate,
(vii) The federal government should rank all capital projects according
to its priorities or the need of the economy at the time of imitating the
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(viii) Monopolistic tendencies of our producers and sellers should be
economy. Also, element of flexibility should be built into the tax system
(x) Government should re-assess the value Added Tax (VAT) system
and the roles of tax on consumable goods, with a view to sharing the
tax burden between the producer and the consumers. If this is done,
sellers or producers will not have the opportunity to shift the total tax
burden to the consumers this resulting in higher prices for goods and
services.
difficult, this resulting in tieing down funds which could have otherwise
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(xii) As much an practicable, defeat financing should be reduced to the
long way in reducing the problems and burden of debt servicing and
from internal sources rather than taking foreign loans which will further
compound our foreign debt situation, sand worsen the exchange rate
position. s
nation.
Due to financial and time constraints, the researcher limited the study
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