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  AN EVALUATION OF MONETARY POLICY IN NIGERIA

      

14 December 2018 (Lagos) : The fundamental problem of any government is its economic or otherwise its implementation. A number of government monetary policy instrument have been designed and applied in Nigeria with the hope of achieving the desired result of stable price level, low level of unemployment, efficient banking system etc.  However, the application of direct monetary instrument have not brought forth the desired objectives stated above hence, left the government with no any other alternative than to turn to the direct monetary instrument. Therefore, the problem under study is the application of OMO as an instrument of monetary policy in Nigeria.

 

Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.

For instance, liquidity is important for an economy to spur growth. To maintain liquidity, the RBI is dependent on the monetary policy. By purchasing bonds through open market operations, the RBI introduces money in the system and reduces the interest rate.

 

The core idea of the monetary policy regime in Nigeria has been construed to mean price stability at the expense of other key macroeconomic indicators like job creation that measures growth performance of a nation. Although the Nigerian economy has a fragile private sector, financial resources to the private sector in Nigeria, such as through loans, purchases of non-equity securities, trade credits and other accounts receivable have been constrained over the years following insolvency in many banks and effects of the global financial crisis in Nigeria. This triggered a hike in interest rate to the domestic private sector in Nigeria since 2006. The upward adjustment of monetary policy rate by the Monetary Policy Committee to force inflation to single digit has created adverse effects on activities of the private sector and the economy.

 

During the past two years, central banks worldwide have cut policy rates sharply, some cases to zero. Nonetheless, they have found unconventional ways to continue easing policy. The Monetary Policy Rate (MPR) is the rate at which banks borrow from Central Bank to cover their immediate cash shortfall. The higher the cost of such borrowing, the higher also will be the rate banks will advance credit to the real sector. Unfortunately, reverse is the case in Nigeria, the monetary policy rate has increased from 12% to 13% in 2014. The present MPR- 13% position is as a result in the response to the uptick in food inflation, and its reduction will lead to reduction in core inflation, Gross Domestic Growth; the decision was as a result of structural nature of inflationary pressures. 


The Nigerian banking system started in the late 19th century, but grew with influence of colonial masters, who introduced banking services in Nigeria. Banking activities, mostly commercial, was not regulated in Nigeria until 1952, when the Banking Ordinance was promulgated. The Ordinance Act of 1952, led to the establishment of Central Bank of Nigeria (CBN) in July 1, 1958, started operation in 1959; but with amended CBN Act, 2007, the apex bank has continued to play the traditional roles of regulating the stock money in order to promote monetary stability, sound financial system, to achieve high employment opportunities, rapid economic growth, price stability, effectively managing inflation and creating enabling environment to achieve national economic growth.


 However, these objectives among others have been realized via the use of monetary policy tools. The global economic activities are towards downside risks to growth trend, including the softening commodity prices, and heightening threats to financial system in the emerging economies (i.e. including Nigeria). Developments in the international oil market have intensified the risks and vulnerabilities due to decline in global price; and where oil importing country (i.e. United States), which has also emerged as a major oil exporter calls for concern.


 However, CBN use methods to stabilize the economy via economic parameters such as Open Market Operations (OMO). These operations are conducted wholly on Nigerian Treasury Bills (TBs) and complimented with the use of reserve requirements, the Cash Reserve Ratio (CRR) etc. The Cash Reserve Ratio (CRR) is the amount of cash that banks have to keep with the Central Bank and is often used to control excess liquidity in the economy. Cash Reserve Requirement (CRR) has increased from 50% to 75% on all government deposit with commercial banks and increase from 12% to 15% on private deposit with commercial banks.


 The adoption of 75% on public deposit and 15% on private deposit of CRR would not protect the pressure on exchange rate and inflation as a result of continuous increase in government spending culture most especially during election year -2015. But, it is good to know that these set of instruments are used to influence the monetary aggregates via a monetary processes. Changing monetary policy has a very crucial effects on aggregate demand, and thus on both output and prices. There are number of ways in which policy actions get transmitted to the real economy, which may be via the interest rate channel. 


During the rise in borrowing costs of CBN, consumers are a likely to involve in finance and businesses, which may hardened the likelihood of channeling funds to investment opportunities; and this reduced the level of economic activity, but with a consistent lower inflation, this would likely result to lower demand, which usually means lower prices. It must be noted that a rise in interest rates also tends to reduce the net worth of businesses and individuals (i.e. making it tougher to qualify for loans at any interest rate and reducing spending and price pressures). 


Also, banks’ profits are less in general and not willing to lend; it further leads to an appreciation of the currency, as foreign investors seek higher returns and increase their demand for the currency further argued that through the exchange rate channel, exports are reduced as they become more expensive, and imports rise as they become cheaper. In turn, GDP shrinks.


 Monetary policy has an important additional effect on inflation through expectations. Many wage and price contracts are agreed to in advance, based on projections of inflation, if policymakers hike interest rates and further communicate anticipated hikes at appropriate time, this may convince the public that policymakers are serious about keeping inflation under control. Long-term contracts will then build in more modest wage and price increases over time, which in turn will keep actual inflation low. 


It must be noted that the Minimum Rediscount Rate (MRR) was used as the price-based technique to influence the movement of cost of funds in the economy; though, the changes in this rate provides a platform for the monetary disposition of the Bank. This rate has continuously been pecked within the range of 26 and 8 percent since Structural Adjustment Programme (SAP) regime in August, 1986. However, to compliment the use of the MRR, the CBN eventually introduced the Monetary Policy Rate (MPR) in 2006 which establishes an interest rate corridor of either plus (+) or minus (-) two (2) percentage points of the prevailing MPR.

 

Reporting for easykobo on Friday Dec 2018 in Lagos, Nigeria.

Bankole Stephen.

A serving corp member of the Nigerian youth service corp.





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