MODELING AND FORECASTING CURRENCY IN CIRCULATION FOR MANAGEMENT IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The currency in circulation of a country is currency that is physically used to conduct transactions between consumers businesses rather than stored in a bank, financial institution or central bank. Currency in circulation(CIC) is part of the overall money supply, with a larger portion of the overall supply being stored in checking and savings accounts.

CIC accounts for approximately seventy percent of reserve money in Nigeria. As such, estimating CIC is a crucial part of the reserve money forecast which guides daily liquidity management at the Central Bank of Nigeria (CBN). The observed volatility in the interbank call rate and other money market interest rates suggests that improvements could be made to the liquidity forecasting and management process at the CBN.

This project documents a comprehensive investigation of the methods used to forecast monthly, yearly Currency in circulation. Time series analysis were applied to Nigeria data in order to develop a suitable models which will be automated and utilized to enhance, the liquidity forecasting and management process at the CBN. Rather than the forecasting process more proactive liquidity management will reduce the volatility of money market interest rates and facilitate price stability. The prediction of CIC traditionally utilizes time series models which seek to replicate the patterns observed from International Training Institute, Central Bank of Nigeria, Abuja.

Initial exploration with monthly data suggested that CIC is sensitive to the exchange rate. This is perhaps motivated by currency substitution when the actual or expected rate of inflation is high. Thus, we developed time series in forecasting CIC.

Developed monthly and yearly models of CIC which incorporate the trend, seasonality, cycles and dummy variables for CIC.

In monetary economics, circulation is the continuing use of individual units of currency for transactions. Thus currency in circulation is the total value of currency (coins and paper currency) that has ever been issue minus the amount that has been removed from the economy by the central bank.

The total amount of paper currency, coins and demand deposits that is held by consumers and business rather than by financial institutions, central banks

1.2 Aim and Objectives

The aim of this research is to develop a model for monthly, forecasting of Currency In Circulation in Nigeria (CIC) using time series analysis.

The specific objectives of the study are to;

           i.            fit the trend of Currency In Circulation in Nigeria (CIC) over the period of (2000- 2016)

         ii.             test the stationary of the data. 

        iii.             select the best model that will best predict the Currency in Circulation in Nigeria based on information available and use it for forecasting.

1.3 Significance of the Study

Understanding the Currency in circulation (CIC) is a crucial part of the reserve money forecast which guides daily management at the Central Bank of Nigeria (CBN) and other money market interest rates, suggests that improvements could be made to the forecasting and management process at the CBN. The study will be of great benefit to the entire country, especially in allocating of budget in different part of the state in the country (Nigeria).It will also help government to over view the fluctuating of currency in circulation from the plotted graph in order to plan for the future. The research work also will serve as tool for allocating money in circulation across the country.

 1.4 Scope of the Study

The study covered only data on reported monthly currency in circulation in Nigeria from the central bank of Nigeria portal, from 2000 to 2016.

1.5 Background of CIC

The West African Currency Board was responsible for issuing currency notes in Nigeria from 1912 to 1959. Prior to the establishment of the West African Currency Board,

Nigeria had used various forms of money including cowries and manilas (CBN Data base, On 1st July, 1959 the Central Bank of Nigeria issued the Nigerian currency notes and coins and the West African Currency Board notes and coins were withdrawn. It was not until 1st July, 1962 that legal tender status was changed to reflect the country’s new status. Nigerian has then started her own monetary policies.

History of the CBN In 1948, an inquiry under the leadership of G.D Paton was established by the colonial administration to investigate banking practices in Nigeria. Prior to the inquiry, the banking industry was largely uncontrolled. The G.D Paton report, an offshoot of the inquiry became the cornerstone of the first banking legislation in the country: the banking ordinance of 1952. The ordinance was designed to prevent non viable banks from mushrooming, and to ensure orderly commercial banking. The banking ordinance triggered a rapid growth in the industry, with growth also came disappointment. By 1958, a few numbers of banks had failed. To curtail further failures and to prepare for indigenous control, in 1958, a bill for the establishment of Central Bank of Nigeria was presented to the House of Representatives of Nigeria. The Act was fully implemented on July 1, 1959, when the Central Bank of Nigeria came into full operation. In April 1960, the Bank issued its first treasury bills. In May 1961 the Bank launched the Lagos Bankers Clearing House, which provided licensed banks a framework in which to exchange and clear checks rapidly. By July 1, 1961 the Bank had completed issuing all denominations of new Nigerian notes and coins and redeemed all of the West African Currency Board's previous money.

The major objectives of the bank are to: Maintain the external reserves of the country, promote monetary stability and a sound financial environment, and to act as a banker of last resort and financial adviser to the federal government. The central bank's role as lender of last resort and adviser to the federal government has sometimes pushed it into murky regulatory waters. After the end of imperial rule the desire of the government to become pro-active in the development of the economy became visible especially after the end of the Nigerian civil war, the bank followed the government's desire and took a determined effort to supplement any short falls in credit allocations to the real sector.

1.6 statement of the problem

As in common sense, we don’t called it over until is over, while doing the research, I encountered a lot of problems especial in chapter four, because, I have to used four difference software in order to analyzed my work such as: Minitab, SPSS, NCSS, and Gretl. During the proposal, I have mentioned clearly that, my work would be analyze using only Minitab in which I realized that, there are so many thing that I can’t do base on my knowledge with Minitab, finally I dedicated myself to learned how to used NCSS and Gretl, this took me a lot of time and energy to analyze my work. Also, I chose the project topic base on the CBN Journal glance from my supervisor, it was became so difficult for me to even start the project, but at long last with the support of my great supervisor and school’s wireless we can called it over.