MONETARY POLICY AND ECONOMIC GROWTH IN NIGERIA

ABSTRACT

This research examined themonetary policies and economic growth in Nigeria specifically from 1991 to 2022. Relevant conceptual, theoretical and empirical literature was reviewed. The result revealed that interest rates have a significant impact on economic growth in Nigeria. The finding of the study also reveals that exchange rates have a significant impact on economic growth in Nigeria. The findings of the study also reveal that money supply have a significant impact on economic growth in Nigeria. The finding of the study also reveals that liquidity have a significant impact on economic growth in Nigeria. It was therefore concluded that monetary policies significantly impacts the economic growth in Nigeria. It was recommended that the Central Bank of Nigeria should be granted full autonomy on its monetary policy functions. It was also suggested that monetary policies should be used to create a favorable investment climate by facilitating the emergency of market based interest rate and exchange rate regimes that attract both domestic and foreign investment.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

          Monetary policy is the purposeful action taken by monetary authorities to control the quantity, cost, and availability of money credit in order to achieve desired macroeconomic goals of internal and external balances(CBN, 2011). The activity is carried out by adjusting the money supply and/or interest rates in order to manage the amount of money in the economy.Thus, nations have pursued monetary policy as a strategy of economic management to achieve sustainable economic growth and development, and formal articulation of how money impacts economic aggregates dates back to the time of Adams Smith and was later championed by monetary economists.Since the expositions of the function of monetary policy in influencing macroeconomic objectives such as economic development, price stability, balance-of-payments equilibrium, and a slew of other goals, monetary authorities have been saddled with the task of utilizing monetary policy to expand their economies.

          Economic growth can be described as an increase in the quantity of products and services available in a specific country at a certain time. This, of course, illustrates that economic growth occurs when a country's actual per capita income rises over time.A rising economy creates commodities and services over time, indicating that the economy's production capacity is increasing. In general, economic growth entails boosting people's living standards and lowering income distribution inequities(Jhingan, 2004).

          In Nigeria, monetary policy has been used since the Central bank of Nigeria was saddled the responsibility of formulating and implementing monetary policy by Central bank Act of 1958. This role has facilitated the emergence of active money market where treasury bills, a financial instrument used for open market operations and raising debt for government, have grown in volume and value becoming a prominent earning asset for investors and source of balancing liquidity in the market. Two major periods have characterized monetary policy in Nigeria: the post-and pre-1986 periods. Before 1986, direct monetary control was used in achieving price stability in Nigeria, while the emphasis shifted to market mechanisms after the 1986 market liberalization (Chimeizie, 2009). Prior to 1986, direct monetary instruments such as selective credit controls, administered interest and exchange rates, credit ceilings, cash reserve requirements and special deposits to combat inflation and maintain price stability were employed. The fixing of interest rates at relatively low levels was done mainly to promote investment and growth. Occasionally, special deposits were imposed to reduce the amount of excess reserves and credit creating capacity of the banks (Okafor, 2009). In the above period, the monetary control framework seems to have failed to achieve the set monetary targets as their implementation became less effective with time. The rigidly controlled interest rate regime and the non-harmonization of fiscal and monetary policies may have contributed immensely to the adverse effect ofconstraining growth of the money and capital markets. In the Structural Adjustment Programme (SAP) era instead of relying on direct control mechanism for monetary policy, a shift to market-oriented reform was introduced for effective mobilization of savings and efficient resource allocation. Open market operation was the main instrument of the market-based framework.

          The study ofMishkin (2002); Bolagun (2007); and Precious and Palesa (2004) showed that there is substantial evidence of the effectiveness of monetary policy innovations on real economic parameters in developed economies like the United States (US) and some core European countries. However, there have been various regimes of monetary policy in Nigeria. The economy often witnessed either expansionary or contractionary monetary policy in an attempt to achieve its set objectives. Nevertheless studies by  Batini (2004); Folawewo and Osinubi (2006); Onyemu (2012); Fasanya et al. (2013) observed that despite efforts made towards achieving the desired macroeconomics objectives through monetary policy that the results have not been sustainable enough as there are evidences of relatively high rate of unemployment, increased poverty rate, low standard of living, unacceptable rate of inflation etc. especially in less developed economies. The prevalence of these macroeconomic vices as mentioned above clearly showed that the issues of economic development especially in Nigeria has not been visibly addressed by monetary policy. This therefore gave rise to the need to investigate the actual relationship existing between the monetary policy and economic growth in Nigeria. The question remains: "Could the period of growth and development be attributed to appropriate monetary policy, or could the period of economic downturn be blamed on factors other than inefficiencies in monetary policy?"It is in against the following backdrop that the objectives of this study is to reassess the impact of monetary policy on economic growth in Nigeria by determining the relationship existing between reserve ratio (RR) and the gross domestic product (GDP), the relationship existing between interest rate and GDP and the relationship existing between monetary policy rate (MPR) and the GDP.

1.2 Statement of the Problem

          Nigeria has manipulated her economy throughout the years by changing her money supply. Following the drop of oil prices in the 1980s and the resulting balance of payment deficits, different techniques of stabilization (fiscal and monetary) were employed, and interest rates were regulated(Ojo, 1987). While evaluating the effect of the Structural Adjustment Programme (SAP), Ikhide and Alawode (1993) concluded that reducing money stock through increased interest rates reduced the Gross National Product, which was consistent with the assertions of (Laidler, 1993) that the variations between money stock and economic activities apply to the Nigerian economy. Monetary policies can only generate the desired results if there is a highly linked and monetized economy with an efficient networking structure. However, the Nigerian economy as at present lacks the fundamentals to make this work (Familoni,1989).

          To fulfill its stated aims, the Central Bank of Nigeria employs a variety of measures, including Open Market Operations (OMO), Required Reserve Ratio (RRR), Bank Rate, Liquidity Ratio, Selective Credit Control, and Moral Suasion. Various monetary policy regimes (tight and loose) have existed in Nigeria over the years, with the overarching goal of containing inflationary pressures. Furthermore, the Nigerian economy has experienced periods of expansion and decline, with an unsustainable growth pattern.The country suffers from institutional and market flaws that keep its citizens destitute indefinitely. Recent sustained exchange rate depreciations have increased the relative profitability of investing in tradables, which is why bouts of undervaluation are unfortunately significantly associated with faster economic growth. Thus, interest rate is an important determinant of economic growth in Nigeria. Therefore, the question on whether or not monetary policy measures actually impact on the Nigerian economy still remains unsolved. The aim of this study is to evaluate the impact of monetary policieson economic growth in Nigeria.

1.3 Objectives of the Study

          Themain objectives of this study is to examine the monetary policies and economic growth in Nigeria. Other specific objectives of the study include;

1. Determine the impact of interest rate economic growth in Nigeria.

2. Evaluate the impact of exchange rate on economic growth in Nigeria.

3. Examine the impact of money supply on  economic growth in Nigeria.

4. Determine the impact of liquidity rate on on  economic growth in Nigeria.

1.4 Research Questions

In light of this, therefore, the questions to guide this research study include the following:

1. What is the impact of interest rate economic growth in Nigeria?

2. What is the impact of impact of exchange rate on economic growth in Nigeria?

3. What is the impact of money supply on  economic growth in Nigeria?

4. What is the impact of liquidity rate on on  economic growth in Nigeria?

1.5 Research Hypotheses

In this study we shall examine the following hypotheses that:

Hypothesis 1

H0: Monetary policies have no significant impact on economic growth in Nigeria.

H1: Monetary policies have a significant impact on economic growth in Nigeria.

Hypothesis 2

H0: There is no relationship between monetary policies and economic growth in Nigeria.

H1: There is a relationship between monetary policies and economic growth in Nigeria.

1.6 Significance of the Study

The findings of this study will contributes to the discussions on how economic agents respond to monetary policy changes. This is achieved by examining the role of monetary policy changes in explaining the risk-taking behaviour in the banking sector.

The findings of this study will also add to the understanding of the monetary transmission mechanism so as to facilitate the appropriate design and implementation of monetary policy for sustainable growth and development in Nigeria.

The findings and recommendation of this study will be useful to monetary authority and economic policy planners who can adopt the recommendations in reducing and controlling inflation in the country.

This research will be a source of information base on future researchers (both academic and non-academic) on matters regarding the relationship between monetary policy and economic growth.

The study of monetary policy on economic growth is a timeless topic as it remains a paramount topic as long as inflation still exist. Therefore, it shall be of great benefit to students who intend to do more research in this area, while serving as a reference material in the near future to other researchers.

1.7 Scope of the Study

          This study will focus on assessing the impact of monetary policy on economic growth in Nigeria. The data covers the period from 1991 to 2022.

1.8 Operational Definition of Terms

Monetary Policy: Monetary policy can  be defined as the measures taken by the Central Bank to determine the cost, availability and use of money and credit to achieve pre-determined macroeconomic goals.

Economic growth: Economic growth is a sustained rise in the output of goods, services and employment opportunities with the sole aim of improving the economic and financial welfare of the citizens.