CHAPTER ONE
1.0 INTRODUCTION
The monetary policy of a country deals with control of money stock
(liquidity) and therefore interest rate; in order to influence such macro
economics variables as inflation, employment, balance of payment, aggregate
output in the desired direction. There is no standard and ideal structure of
monetary policy target and instrument, the instrument varies from country to
country, depending on the size and stage of development of the financial
market.
Over the years, the objective of monetary policy have remained the
attainment of external balance. However emphasis on techniques/instrument to
achieve this objective have change over the years. There have been two major
phases in the pursuit of monetary policy namely, before and after 1986. the
first phase placed emphasis on the direct monetary control, while the second
relies on market mechanisms.
The monetary policy before 1986: the economic environment that guided
monetary policy before 1986 was characterize by the dominate of the oil sector,
the expanding role of the public sectors
in the economy, and over dependence on the external sector. In order to
maintain price stability and a healthy balance of payment position, monetary
management depend on the use of direct monetary instrument such as credit
ceiling, selective credit controls, administered interest and exchange rate, as
well as the perception of cash reserve requirement and special deposits. The
use of market – based instrument was not feasible at that point because of the underdeveloped
nature of the financial market and the
deliberate restraint of interest rate.
The most popular instrument of monetary policy was the insurance of
credit rationing guideline, which primary set rate on the change for the
component of commercial bank loan and advances to the private sector. Globally
the problem of the inflationary is not peculiar to Nigeria, but it is a general
problem confronting the majority, if not all countries of the world. The
attempt by Nigerian government to attain a higher level of economic development
at this period, generally lead to inflationary spiral in the country.
But whether inflation in Nigeria is due to monetary mismanagement on the
part of the authorizes concerned or caused by interest structural deficiencies,
still remain uncertain. Many factors have been identified to be responsible for
inflationary pressure in the country. In a symposium of inflation in Nigeria
held at university of Ibadan in 1983, November, most of the participant stressed on money supply,
nature of government expenditure limitations in real output and the inflation
(imported) as the major causes of inflation in Nigeria. In the case of
formulating monetary policy, it is of paramount importance to specify
objectives and also impossible to evaluate performances.
Analysis of the institutional growth and structure shows that the
financial growth rapidly in the mid 1980s and 1990s. the number of commercial
banks rose from 34 – 64 in 1995 and decline to 51 in 1998 while the number of
merchant banks increased only to 12 in 1986, to 54 in 1991 and subsequently
decline to 38. in the network, the combined commercial and merchant bank
branches rose from 12,549 in 1996. There was also substantial growth in the
number of non – financial institutions especially insurance companies.
The objective of monetary policy
since 1986 remained the same as in the earlier period namely; the stimulation
of output and employment and the promotion of
domestic and external stability. In line with the general philosophy of
economic management under structural adjustment programme (SAP). Monetary
policy can be developed for encouraging investment and controlling inflation,
while fiscal policy can be effective to reducing consumption of luxury and
ostentation goods. But our major concern will be to explore the efficiency of
monetary policy in an economy in controlling inflationary pressure in an
economy like Nigeria.
It is generally believed by some economist that inflationary effect are
quite harmful to some business establishment. Thus could be so because vender
often lose in the sense that the valve of the money falls short of it original
purchasing power. The extent of the effect of inflation in Nigeria could be appreciated from
the following examples: in 1985, it stood at 5.5 percent, indicating an annual
percentage increase of 20.1 percent compared to 40.9 percent in 1989.
It has been accompanied with high level of unemployment rate at 4.3 percent in 1985 and 18.5 percent in 1989. Thus
has force Nigeria to adopt several monetary measures within and the problem of
inflation as could be seen from the associated increases in the cost of
production during the periods under consideration.
It is therefore under the above that we will like to adopt some of the
mix of policy instrument used and hence their efficiency as regard inflation
control.
1.1.
STATEMENT OF THE PROBLEM
Many attempts being made by the Nigeria authorities to attain higher rate
of economic growth and development have generally being accompanied by certain
degree of price increase in recent years, the phenomenon developed into several
and prolonged inflation and stag inflation. Indeed, it is increasingly being recognizes
that a process of rapid economic growth is likely to provoke inflationary
pressures. However, whether the problem of inflation in this country is due to
mismanagement of monetary policy tools or structural deficiencies still remain
a controversial matter.
During the last decade the problem of inflation and deflation to economic
growth and development have been extensively discussed. The problem is not
peculiar to Nigeria but has assumed a global phenomenon. It is generally agreed
worldwide that inflation is socially unjust. Inflation also affects general
economic behavior and the pattern of resource allocation. By distorting price
relations and undermining general confidence, prolonged inflation tends sector;
and thus slackens growth.
Furthermore, inflation discourages private saving and encourages
speculation among the various economic units. Another consequence is that it
result to balance of payment difficulties and reduces the external valve.
Nigeria being a market economy and therefore having its national economic
management strategies largely informed by Neo-classical and Keynesian persuasions
have sought over the decide for the solution to this problem through the adoption of the
analysis and recommendation of these school of thoughts.
Economic aggregate as; national income, savings, investment and
consumption expenditure have been experimental upon to varying degrees with
respect to taxes public expenditure, savings campaign, credit controls wages
adjustments and all the conceivable anti- inflation measures affecting the
propensities to consume, save and invest which all combined should determine in
general level.
All the measure so far adopted were
inadequate in solving the problem of inflation in the country. The
suffering of masses are unending as
daily price surges occur indeed a more for reaching solution to the problem is needed hence, this study seek to
find what control has monetary policy on inflation.
1.2 OBJECTIVE OF THE STUDY
It is necessary to state the primary objective of this research having
identified the ruling monetary policy instrument in Nigeria and some the
economic objective that they are expected to influence.
These
objectives include:
1.
to
investigate the major causes of inflation in Nigeria during 1980s
2.
To
investigate if the Nigeria monetary policy is efficient or not in the
achievement of certain objectives of the economy and inflation control in particular.
3.
To
see if the non-realization of the economic objective is due to chosen
instrument or inappropriate application of the instrument.
4.
To
recommend policy solution based on the above finding.
The policy recommendation based on the above findings will be used as a
guide in the further application of monetary policies.
1.3 STATEMENT OF HYPOTHESIS
Based on the statement of the problem and the purpose of
study, the following hypothesis were formulated.
1. H1: there is a positive and significant
relationship between the stock of money supply and inflation rate in the
economy.
HO: There is no positive and
significant relationship between stock of money supply and inflation rate in
the economy.
2. H1: There is inverse and significant
relationship between inflationary rate and economic growth.
HO: There is no inverse and
significant relationship between inflationary rate and economic growth.
1.4 SIGNIFICANCE OF THE
STUDY
Full employment, equilibrium balance of payment, economic growth and
price stability are the four primary goals of any economy which Nigeria is not
an exception.
It is therefore the aim of this study first and foremost to study the
efficiency of monetary policy in controlling inflation in Nigeria. The
important of this study to policy makers cannot be over- emphasized in the
economy considering the alarming rate of inflation increment over the years
especially in the 90s.
This study will therefore be of immense help to policy makers, government
and it agent, ministers of finance, investors – both foreign indigenous and the
entire Nigeria populace.
This study will also study the type of inflation, causes and ways of
controlling it and it impact on economic development of Nigeria.
1.5
SCOPE OF THE STUDY
Since inflation arises when aggregate demand exceed aggregate supply, we
shall focus our attention at examining the control monetary policy has on thus primary variables.
In this a year period is adopted 1984 to 1985. We hereby try to analyze
the causes effect of Nigeria inflation in terms of some qualifiable as; money supply, real output
etc.
1.6 LIMITATION OF STUDY
The limitation of our study centers around time, availability of material
and money. The time limit with which this study has to be completed is little
more than three months.
Social Plugin