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.
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
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
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
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
Reporting for easykobo on Friday Dec 2018 in Lagos, Nigeria.
A serving corp member of the Nigerian youth service corp.
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