Problems of monetary policy

implementation by central

bank of Nigeria (CBN)

ABSTRACT

This project has traced the evolution of

Nigeria’s monetary policy and its

performance since the early1980’s, to

provide a background to the reviews; it

discussed same theoretical aspects of

monetary management. On the theoretical

aspect it reviewed the concepts of

monetary management, the objective of

monetary policy and the instruments of

monetary policy.

The highlights of the Nigeria economy of

the 1970’s were the growing importance of

oil, the expending role of the public

sector in the economy and the large

dependable on the external sector. Despite

the family impression economic performance

of the period, some economic problem such

as growing fiscal pressures, assumed more

serious dimensions. In the prevailing

circumstances, monetary central framework

and the large divergence of fiscal

operation from the set monetary and credit

targets.

The oil boom of the 1970’s come to an end

in the early 1980’s. Consequently, the

development strategies, which were

considered appropriate during that period,

became inappropriate under the environment

characterized by substantial reduction in

oil import earnings and revenue. Rigorous

economic controls were mounted to stain

the determination in the general

framework. Monetary policy applied more

vigorously the credit ceiling. Selective

credit controls and regulating on interest

rates.

The currently problem of monetary policy

were largely a carryover from the previous

decade and these included the apparent

inefficiencies of the monetary control

framework based on direct instrument and

government fiscal operations especially

the increased financing of fiscal deficit

by the central bank.

Monetary policy, though having the same

over all objectives as before was employed

to play a unique role in restore my

economic stability. In order to reduce

credit expansion by banks, credit certings

were reduced and backed up liquidity

mopping measures such as the withdrawal of

all deposits on outstanding external

payment arrears and public sector deposits

from the bank in 1986 and 1989

respectively, the sectional credit

flexibility in their credit operation,

which in August 1987 all controls on

interest rates changed by banks were

removed.

Despite the good intentions of monetary

management domestic liquidity expand

substantially during the period,

especially in 1988 and the main source of

increase in aggregate bank credit to the

economy. Similarly, banks performance with

regards to credit certings and sectoral

credit guidelines was very poor.

Full economic recovery could not be

achieved within the short span of the SAP,

even though its impact in light of the

monetary development was to some extent

positive in relation terms. Nevertheless,

the problems of monetary policy appeared

to have persisted in so far as the

fundamental causes had not been removed.

The monetary targets were not being

achieved, been used over time it become

more difficult to enforce compliance

particularly as frequent changes were made

in the composition of credit and timely

data were not usually available.

Above all, monetary policy did not achieve

the type of synchronization with fiscal

policy as envisaged in the monetary

control framework. When fiscal operations

deviated from the targets monetary

developments could not uphold the

underlying assumptions and hence domestic

price stability and external equilibrium,

which are important objective of monetary

policy could be assured.

Under these circumstances, a deliberate

attempt would have to be made to improve

the efficiency of monetary policy in the

1990’s. Towards this general direction,

the plan to shift to the use of indirect

monetary tools was formally announced

early in 1991.

The movement towards market based

instruments of monetary management in a

developing economy is unique and since

financial markets are not fully developed,

it is appropriate to ask whether such

technique can be effectively applied.

However, one of the lessons of recent

financial liberation measures worldwide is

that such measure do infact foster the

development of the financial instrument.

The available evidence seems to suggest

that the Nigeria financial system possess

the critical minimum conditions for

effective use of the market based monetary

instruments. In arrears where the

conditions are not fully met, there is

scope for improving the situation.

TABLE OF CONTENT

Title page

I

Approval page

ii Dedication

iii

Acknowledgment iv

Table of content

v

CHAPTER ONE: INTRODUCTION

1.1 Background of the problem

1.2 State of the problem

1.3 Objective of the study

1.4 Research questions

1.5 Research hypothesis

1.6 Significant of the study

1.7 Scope, limitation and delimitation

1.8 Definition of terms

CHAPTER TWO

2.1 Objective of monetary policy

2.2 Monetary policy instruments

2.3 problems of direct monetary policy in

Nigeria

2.4 Problems of direct monetary policy in

Nigeria

2.5 The shift from direct to indirect

approach

2.6 Indication of monetary policy

2.7 Effectiveness of momentary policy in

Nigeria

2.8 References

CHAPTER THREE

3.0 Research methodology

3.1 Characteristic of the study population

3.2 Limitation of the methodology

CHAPTER FOUR

4.1 Policy analysis

4.2 Analysis of hypothesis

CHAPTER FIVE

5.1 Summary and conclusion

5.2 Recommendation

Appendix (Questionnaires)

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

A policy is a statement of basic

principles that provides a framework in

which performance is measured. One of the

principal responsibilities of the central

bank of Nigeria (CBN) is the formulation,

monitoring and execution of monetary

stability and economic development as well

as ensuring sound financial system.

The central bank of Nigeria employs

various instruments in caring out these

responsibilities. Before 1992, the CBN was

under the federal ministry of finance.

This has change presently, central bank

reports directly to the presidency under

the central bank of Nigeria degree.

The CBN carries out this responsibilities

on behalf of the federal government of

Nigeria under the status of the central

bank of Nigeria Act of 1958 and banking

Act of 1967 which have been replaced with

CBN Degree No. 24 of 1991 and Bankers and

other financial institutions Decree

(BOFID) NO. 25 of 1991.

In formulating executing monetary policy,

the government of the CBN is required to

make proposals to the president of the

federal republic of Nigeria who has the

final power to accept or amend such

proposals. It is after the presidency has

approved it that the CBN is monetary

policy proposals are made as an integral

part of the federal government annual

budget which combines to approve monetary

policy.

The aim of monetary policy may be to check

inflation or to stimulate production to

aid recovery from a recession. The method

adopted to achieve the designed aim is

through changes in the monetary supply. A

policy aiming at increasing the quantity

of money is inflationary, and one that

aims at a contradiction of the supply of

money is deflationary.

Monetary policy is mainly the concern of

the central bank, but the consequences of

monetary policy can be so far – reacting

for the whole community that no modern

government can leave the choice of policy

entering to its central bank.

The paper will therefore examine the

various instruments of monetary policy

measures introduced by CBN since inception

in 1959. It will therefore evaluate the

effectiveness of the instruments taking

into consideration the major constraints

the CBN have to grapple with.

The instruments used by the central bank

of Nigeria to implement its monetary

policy objectives can be classified

broadly as direct or portfolio control

approach and indirect or market

interaction approach (CBN research

departments). The direct control

instruments place restrictions on the

freedom to acquire more assets to insure

liabilities. This is employed essentially

because of the poor infrastructure based

and low development of money (financial)

and capital market over the years. The

central bank has employs the following

direct monetary controls.

1.The reserve requirement

2.Interest rate policy

3.Sectoral allocation of credit

4.Maximum credit expansion.

5.Stabilization securities

6.Loans to indigenous borrowers

7.Rural banking scheme

The indirect polices are usually market

determined as well as use of reward

system by the CBN in achieving its

polices. They include the following:

1.Open market operation (OMO)

2.Moral suasion

3.Discount rate mechanism

Below is the brief explanation of the

instruments:

DIRECT POLICIES

THE RESERVE REQUIREMENT

The central bank of Nigeria also uses the

reserve requirements of banks as an

instrument of monetary policy. Banks will

ordinarily, either from custom or

prudence, and to keep a certain percentage

of demand deposits in their bank as a

reserve. They do this because of the

necessary for ensuring that the bank will

always have sufficient funds on hand to

pay off depositors who would like to

withdraw their money in the ordinary

course of business.

An increase in the legal reserve

requirement will reduce the amount by

which member banks can make loans and

expand the money supply and a decrease in

the legal reserve requirement will

increase the amount by which member banks

can make loans and expand the money

supply.

SECTROAL ALLOCATION OF CREDIT:

Sectoral allocation of credit is aimed at

ensuring that priority is accorded the

growth sectors of the economy such as

agriculture and the many acting industry

in the allocation of credit with a view to

stimulating growth in the non-oil sector.

INTEREST RATE POLICIES:

Interest rate can be defined as the return

or guild on equity or opportunity cost of

differing current consumption in the

future. It can also be identified as the

cost of credit. In Nigeria, the interest

rate structure is directly managed by the

government under the advice of the making

authority due to the under – developed

nature of the financial market couples

with the relative scarcity of capital

resources in the economy.

Monetary policy acts through the supply of

money, as the name implies, to change

interest rates and the planes of

businessmen for investment. The idea is

that an increase in the supply of money,

just as an increase in the supply of any

good, is likely to cause a decrease in the

price you must pay for it. The shorter,

the supply of money for low, the more

businessmen who wish to borrow for

investment proposed will have to pay for

their fund.

If the central bank of Nigeria arranges a

contraction in the supply of money, the

price of borrowing (the interest rate)

will be accepted to rise, and higher rates

increase the cost of any investment

project. The final result is that planned

investment tends to decline.

On the other hand, if the government can

increase the supply, this will means more

funds available for lending; thus the

interest rate declines, and investment is

encouraged.

MAXIMUM CREDIT EXPENDITURE:

This is a policy measure adopted by

central bank or regulates the level of

inflation in the economy. By this policy,

CBN specifies maximum growth of credit the

bank would enter to the economy.

STABILIZATION SECURITIES:

Stabilization securities are issued by the

CBN to banks at given interest rates

designed to reduce banks excess cash

holdings and then credit expansion. This

instrument was first employed between 1976

and 1979 (CBN Research department, 1979).

LOANS TO INDIGENOUS BORROWERS:

This policy was intended to accelerate the

business opportunities of indigenous

borrowers especially doing the

indigenisation scheme. The guideline

stipulate minimum credit that must be

entered to indigenous borrowers.

LOAN TO RURAL AREA:

In purpose of the government policy on

rural banking, banks, are requires to lend

a certain minimum percentage of the deport

mobilized in the rural areas to borrowers

in the rural areas.

INDIRECT CONTROL

OPEN MARKET OPERATION (OMO):

Open market operations involve the central

bank discretionary power to purchase or

sell securities, in order to influence

volume of credit and subsequently interest

rates, which subsequently affects money

supply. For central banks to use this toll

successfully, the financial market must be

well developed such that the large volume

of government securities in the system

will be responsive to the interest rate

changes.

The securities are usually short – term

securities, which they sell and purchase

long – term securities. Thus by altering

the relative supplies of securities of

difficult maturities, the CBN is able to

affect the term structure of interest

rate. The open - market purchase or sale

of government bounds to gives the central

bank of Nigeria flexible tool of monetary

control. Transactions can be started,

stopped, or received very quickly, and

they can be made in any amount designed.

Unlike change in reseme requirements,

which imply very large changes in the

money supply. Open – market transactions

can be tailed to fit any size change the

central bank of Nigeria think is called

for.

MORAL SUASION:

This involves the use of the power

persuasion to influence the tending

operations of the commercial banks in the

direction desired by the monetary

authorities. It does not involve the issue

of official directives. The government of

the central bank merely uses his position

to persuade and appeal to the banks to

enerase restraints in credit expansion,

under an inflationary situation for

instance, this policy is not hand to

understand, when inflation or deflation

threat the CBN can use its persuasive

powers to see what can be done to avent

then the central bank of Nigeria may adopt

the following ways:

Warning

Entorlation

Pleading and

Phone call

THE DISCOUNT RATE MECHANISM

This is the interest rate charged by the

central bank on its loans. The rate is set

to reflect the banking and credit

conditions available in the market.

Discount rates are adjusted from time to

time in the light of changing market

conditions and complement (OMO) and the

thrust of monetary policy generally.

STATEMENT OF PROBLEM

Monetary policy implementation by central

bank of Nigeria have some position returns

if it is wisely applied, but the monetary

policy becomes a problem when it conflits

among the objections and instruments of

monetary policy and other policies as well

as the constraints if faces. The

inadequate implementation of the varies

policies as well as constraints faces. The

inadequate implementation of the various

policies as well as constraints if faced.

The inadequate implementation of the

various policies are as well as

inconsistency in such policies have been

the major problems of monetary policy in

Nigeria.

Fiscal deficits of the federal government

in the recent past have been but out of

time with monetary target largely because

of improper co – ordination of the fiscal

and monetary programme. Fiscal imbalance

has adverse consequences on the monetary

base and the effective use of indirect

tools.

OBJECTIVES OF THE STUDY

The major objective of this present study

is to ensure monetary policy issued and

its implementation by the CBN Above the

entire major problem encountered in its

implementation is a major objective of

this study. The study is to pay attention

in the following issues:

1.The monetary policy objectives and

philosophy

2.The various policy instruments called

instrumental variables used by CBN in

monetary policy.

3.Constraints in policy formulation and

execution

4.Evaluation of impact of financial

policy reforms especially the policy

of deregulation of the banking system

on the economic performance of the

ratio.

5.Targets and indicatives of monetary

policy

6.Recommendation in improving policy

guideline.

Laud banking policy by the central bank

of Nigeria and in particularly, the

problems encountered in its

implementation. It also covers the

measures, old and recent, used in its

implantation.

So far, I have chosen to study on the

problems that arise from the monetary

policy mentioned above.

For the areas covered, I have been able to

expose the progress of the central bank in

carrying out monetary policy

implementation in Nigeria and also

suggested ways to solve the problems that

arise from its implementation.

The study does not look at the economic

decisions not covered by the monetary

policy. This is aimed at ensuring a

framework of analysis.

Time factors, which is one of the assets

which a student have in his project, is

not enough due to many things I have to

accomplish with the time limit I have in

order to equip myself academically.

……………….. constraint is also a delimiting

factor to this project.

Finally, the difficulties involved in the

means of getting information from the

direct source which was due to lack of

trust in each other, has delayed this

project and at the same time where it is

extremely difficult to has limited thus

area so far.

DEFINITION OF TERMS:

1. CENTRAL BANK OF NIGERIA: This is the

government bank in charge of monetary

policy and the supervision of

commercial banks in Nigeria.

2. MONEY: Broad term consisting of

coins, paper notes, and demand

deposits of commercial banks.

3. MULTIPLE EXPANSION AND CONTRACTION:

This is the phenomenon whereby the

money supply is raised or covered by

the action of commercial banks who

receives deposit and then land these

deposits to borrowers.

4. DISCOUNT RATE: This is the interest

rate charged by the central bank on

loans made to member banks. A lot of

money policy.

5. EXCESS RESERVES: This is the holding

of reserves by the commercial banks

over and above the level required by

law.

6. RESERVE REQUIREMENT: This is the

situation where banks will

ordinarily, either from custom or

produce, land to keep a certain

percentage of demand deposits in

their bank as reserve. The CBN

stipulate the rate of this reserve to

control inflation and deflation

7. OPEN MARKET OPERATION: The weapon

must often, and the one capable of

being adjusted with the utmost

delicacy. This comprise the buying

and selling of government securities.

8. OMO: Open market operation

9. CBN: Central bank of Nigeria.

RESEARCH QUESTION

Questions that radity comes to kind in

this content are:

1.What is monetary policy implantation

2.What is the impact of monetary policy

implementation

3.We also ask what effort has the

central bank of Nigeria made towards

tacking the problems of this policy

implementation

4.What is the best monetary policy

method or instrument to use?

5.What factors influence the monetary

policy implementation

RESEARCH HYPOTHESIS

I have emphasis on the problems, which

arises as a result of monetary policy

implementation and the ways to tackle

these problems.

These project lakes if for grated that:

HO: There are no inherent problems in the

implementation of the monetary policy in

Nigeria by central bank of Nigeria.

HI: There are inherent problem in the

implementation of the monetary policy in

Nigeria by central bank of Nigeria.

HO: Central bank monetary implantation has

not been effective with the autonomy

granted if by the federal government.

HI: Central bank monetary has been

effective with the autonomy granted it by

the federal government.

HO: The major tool of central bank has not

been more of direct policy than indirect

policy measure.

HI: The major tool of central bank has

been more of direct policy than indirect

policy measure.

SIGNIFICANCE OF THE STUDY

The significance of this study is geared

towards exposing to the populace the

instruments used by the central bank of

Nigeria in monetary policy implementation.

This study is also to expose what

monetary policy is all about and why it

should be implemented.

This project will also enlighten the

reader of the existence of problems

associated with the monetary policy

implementation by the central bank of

Nigeria.

Furthermore, after the above analysis we

will set a challenging face for the

central bank of Nigeria to check if they

are improving or not improving.

This study on conclusion will expose

suggested ways by which the problems of

monetary policy implementation could be

solved.

Finally, this project will provide for any

student researching on problems of

monetary policy implantation by CBN a

solid foundation for realization of

his/her research purpose.

SCOPE, LIMITATION AND DELIMITATION.

The study covers in general, the

implantation of monetary.

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