When monetary policy is used to influence the level of income, its potential effect is lessened because of the lack of consumer and investor responses to interest rates changes. Other things may occur to dampen the effect of monetary policy on the level of income and keep spending from rising or falling when the Central Bank engages in activities such as open market purchases.
Most economists are of the view that monetary policy plays a limited role in a developing economy like Nigeria’s as a result of the following reasons:
What are the constraints on effective monetary policy? Or what are the weaknesses of monetary policies in Nigeria?
In general, monetary policy refers to the combination of measures designd to regulate the value, supply and cost of money in an economy in consonance with the level of economic activity.
In a nutshell, the objectives or aims of monetary policy are basically to control inflation, maintain a healthy- balance of payments position for the country in order to safeguard the external value of the national currency and promote an adequate and sustainable level of economic growth and development.
However, monetary authorities are not free to deal with these objectives separately but are required to pursue them simultaneously. This makes their tasks very difficult because of the constraints to manipulate a set of policies to achieve sometimes incompatible objectives.
One of the principal functions of the Central Bank of Nigeria (CBN) is to formulate and execute monetary policy to promote monetary stability and sound financial system in Nigeria. the CBN carries out this respon- sibility on behalf of the Federal Government of Nigeria through a process outlined in the Central Bank of Nigeria Decree 24, 1991 and the Banks and other Financial Institutions Decree 25, 1991.
Most economists are of the view that monetary policy plays a limited role in a developing economy like Nigeria’s as a result of the following reasons:
- There is the existence of a largely non-monetised sectors which hinders the success of monetary policy. Most of the people live in the rural areas where there is absence of financial institutions and knowledge. Thus, monetary policy fails to effect the lives and activities of this bulk of the people of these economies.
- The money and capital markets are both inadequate and undeveloped. These markets lack in securities (shares, stocks, and bonds and bills which limit the success of monetary policy.)
- Most of the banks in the banking system possess high liquidity so that they are not affected by the credit and hence monetary policies of the monetary authorities.
- There is the large-scale operation of non-bank financial intermediaries, most of which are not under the control of the Central Banks. Commercial banks are just only one of many types of financial intermediaries that exist in money using economies. In Nigeria today, there are many savings and loans Associations, Insur- ance Companies and Finance Companies that handle huge sum of money. The activities of these non-bank financial intermediaries if not checked may render Central Bank’s expansionary or contractionary policies ineffective.
- In addition, bank money or demand deposits comprise a small proportion of the total money supply in these countries, rendering the monetary authorities ineffective in monetary control.
- monetary policy is hindered by time lags (recognition, administrative and result lags).
- It conflicts with government policies.
- Monetary policy is influenced by politics and hence it is an attempt to fulfill political ambitions of parties in office.
- There is the problem of inability to predict how people will react to any monetary policy measure. It is unable to deal with the business cycle.
Students Assessment Exercise
What are the constraints on effective monetary policy? Or what are the weaknesses of monetary policies in Nigeria?
Conclusion
In general, monetary policy refers to the combination of measures designd to regulate the value, supply and cost of money in an economy in consonance with the level of economic activity.
In a nutshell, the objectives or aims of monetary policy are basically to control inflation, maintain a healthy- balance of payments position for the country in order to safeguard the external value of the national currency and promote an adequate and sustainable level of economic growth and development.
However, monetary authorities are not free to deal with these objectives separately but are required to pursue them simultaneously. This makes their tasks very difficult because of the constraints to manipulate a set of policies to achieve sometimes incompatible objectives.
One of the principal functions of the Central Bank of Nigeria (CBN) is to formulate and execute monetary policy to promote monetary stability and sound financial system in Nigeria. the CBN carries out this respon- sibility on behalf of the Federal Government of Nigeria through a process outlined in the Central Bank of Nigeria Decree 24, 1991 and the Banks and other Financial Institutions Decree 25, 1991.
In formulating and executing monetary policy, the Governor of Central Bank of Nigeria is required to make proposals to the resident of the Federal Republic of Nigeria who has power to accept or amend such proposals. Thereafter, the CBN is obliged to implement the monetary policy approved by the President. The CBN is also empow- ered to direct the banks and other financial institutions to carry out certain duties in pursuit of the approved monetary policy. Usually, the monetary policy to be pursued is detailed out in the form of guidelines to all banks and other financial institutions. The guidelines generally operate within a fiscal year. Penalties are normally prescribed for operators that fail to comply with specific provisions of the guidelines.
The techniques/tools/instruments by which the monetary authority tries to achieve the objectives of mon- etary policy can be classified into two categories – the direct control approach and indirect market approach.
The indirect/portfolio control instruments place restrictions on a particular group of institutions, especially deposit banks by limiting their freedom to acquire assets and liabilities. Examples of such instruments for indirect control are quantitative ceilings on bank credit, selective credit controls and administered interest and exchange rate.
The indirect method of control relies on the power of the monetary authority as a dealer in the financial markets to influence the availability and the rate of return on financial assets, thus affecting both the desire of the public to hold money balances and the willingness of financial agents to accept deposits and lend them to users. Examples of such instruments are reserve requirements discount rate and open market operations.
This unit enlightens the reader/student on monetary management in Nigeria with specific focus on the con- cept, objectives, tools/techniques of monetary policy, its administration and general direction in Nigeria.
Q1 - Examine the objectives of monetary policy of the Federal Government. Access its ability to achieve its goals.
Q2 - discuss the various tools that the Central Bank of Nigeria can use to influence the flow of money and credit in Nigeria in order to achieve government economic objectives.
Q3(a) Identify and discuss the various stages the Central Bank of Nigeria goes through in the process of formulating its annual monetary policy circular.
(b) What crucial issues are normally covered in such circulars?
The techniques/tools/instruments by which the monetary authority tries to achieve the objectives of mon- etary policy can be classified into two categories – the direct control approach and indirect market approach.
The indirect/portfolio control instruments place restrictions on a particular group of institutions, especially deposit banks by limiting their freedom to acquire assets and liabilities. Examples of such instruments for indirect control are quantitative ceilings on bank credit, selective credit controls and administered interest and exchange rate.
The indirect method of control relies on the power of the monetary authority as a dealer in the financial markets to influence the availability and the rate of return on financial assets, thus affecting both the desire of the public to hold money balances and the willingness of financial agents to accept deposits and lend them to users. Examples of such instruments are reserve requirements discount rate and open market operations.
Summary
This unit enlightens the reader/student on monetary management in Nigeria with specific focus on the con- cept, objectives, tools/techniques of monetary policy, its administration and general direction in Nigeria.
Tutor-marked Assignments
Q1 - Examine the objectives of monetary policy of the Federal Government. Access its ability to achieve its goals.
Q2 - discuss the various tools that the Central Bank of Nigeria can use to influence the flow of money and credit in Nigeria in order to achieve government economic objectives.
Q3(a) Identify and discuss the various stages the Central Bank of Nigeria goes through in the process of formulating its annual monetary policy circular.
(b) What crucial issues are normally covered in such circulars?
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