IMPACT ANALYSIS OF MONETARY POLICY MEASURES ON THE NIGERIAN ECONOMIC GROWTH: (1980-2022)

This study examined the impact analysis of monetary policy measures on the Nigerian economic growth. Specifically, the study determined the impact analysis of monetary policy measures on the economic growth of Nigeria, the study assesses the effect of money supply on the economic growth of Nigeria, assesses the effect of exchange rate on the economic growth of Nigerian, analyzes the relationship between interest rate and the economic growth of Nigeria and analyzes the effects of inflation rate on the Nigerian economic growth. The study uses secondary time series data spanning forty-three years (1980-2022) was gathered in the study. Data gathered in the study was estimated using descriptive statistics, unit root test, and Auto Regressive Distributed Lag (ARDL) model. Discoveries from the study reveal that money supply has a positive coefficient with 1% level of significances in long run, while exchange rate, inflation rate and interest rate have a negative coefficient in both the short run and long run with 1% and 5% level of significance in the short run and long run respectively. Again the stability and robustness of the model was also proved by prob. chi square value of the serial correlation LM test and hetroskedasticity test and also by the blue line between the two red lines in CUSUM test and CUSUM of Square test. Therefore, based on the findings ascertained in the study, exchange rate, inflation rate and interest rate cause a significant damage to the economic growth of the Nigerian economy so the government should implement and execute suitable monetary and fiscal policy that is most suitable to the atmospheric condition of the Nigerian economy which is relating to both domestic and international economic activities.

 

 Nigeria being an import dependent economy is faced with stagnated growth, unstable business cycles and economic fluctuation. This usually results to unemployment, inflation, unproductivity and balance of payment disequilibrium. Government has in one way or the other regulated and controlled the economy to maximize the welfare of the citizens by way of ensuring that the resources are efficiently allocated and used.

Like any other developing country, Nigerian government adopts three types of public policies to carry out the objective of income distribution and allocation of resources. These tools of public policy include: monetary policy, fiscal policy and income policy tools. Over the years, the objectives of monetary policy have remained the attainment of internal and external balance of payments. However, emphasis on techniques/instruments to achieve those objectives have changed 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 direct monetary controls, while the second relies on market mechanisms.

In 2021, monetary policy focused on easing the impact of shocks on the Nigerian economy which emanated from the various developments in the global and domestic economies. Notable amongst these were: ongoing supply-side disruptions associated with the post-lockdown, pent-up demand; and poor acceptance and roll-out of COVID-19 vaccines even as the virus continued to mutate aggressively. In the domestic economy, the burgeoning public debt portfolio also posed a considerable challenge to the effective deployment of monetary policy as the increased accommodation by both monetary and fiscal policy to support the recovery of the global economy, could also pose some financial stability risks post-Pandemic.

In the Nigerian case, the design and implementation of monetary policy between 1970 and 1985 had the primary objectives of maintaining relative price stability, a healthy balance of payments position and stimulation of output and employment. Throughout this period, monetary policy depended on the use of direct monetary instruments such as the prescription of aggregate credit ceilings, use of selective controls, and imposition of special deposits, among others. The most popular instrument used at this time was the issuance of credit rationing guidelines to the commercial banks. A number of reserve requirement guidelines were also in use. The prolonged used of these direct controls generated considerable problems and became counter-productive. Some of these negative effects of direct controls include reduced1competition in the financial system, leading to inefficiency and misallocation of resources in the banking sector.

In the specific environment of financial and economic liberalization, monetary policy objectives remained the same – promotion of price stability, maintenance of external equilibrium and stimulation of output and employment. Monetary policy was also to stabilize the economy in the short-run and to induce the emergence of a market-oriented financial sector for effective mobilization of financial savings and efficient allocation of resources. The monetary control framework remained essentially the same at the initial stage of the programme, but several dynamic reforms were introduced and the implementation of the programme progressed. Here, there was a shift in the policy instruments used from the direct instruments to the indirect instruments. As a result of the problems posed by the direct monetary control, the Central bank embarked on the selective removal of all credit ceilings of banks that met some criteria under the prescribed prudential guidelines and the indirect approach to monetary policy was initiated.

Deregulation of interest rates was a major policy instrument early in the program. Early in 1987, the interest rate structure was adjusted upward to improve efficiency in savings mobilization and resource allocation. The use of stabilization securities was reintroduced in 1990 to put a check on the incidence of excess liquidity. The minimum paid up capital for commercial and merchant banks was also raised to ensure the soundness of the banking sector for effective monetary management.

In September 1, 1992, there was a major change in monetary operating techniques, from the use of direct control to indirect control operating techniques. The CBN, lifted credit ceiling imposition on individual banks that met CBN requirements on selective basis in respect of minimum capital base, capital adequacy ratio, cash reserve and liquidity ratio requirement, prudential guidelines, sectorial credit allocation and sound management. On June 30, 1993, CBN commenced OMO in treasury securities with banks through discount houses on a weekly basis. With the introduction of indirect monetary control instrument, CBN now controls the stock of money (from banks and non-bank public) through manipulating the monetary base or reserve aggregates. 

Monetary policy refers to the attempt to achieve the national economic goals of full employment without inflation, rapid economic growth and balance-of-payments equilibrium through the control of the economy’s supply of money and credit (Iyoha, 2014). Since the rate of interest is the cost of credit, monetary policy includes the control of money supply and the rate of interest. Monetary policy also refers to attempts to influence the external value of a nation’s currency (exchange rate management). In Nigeria the Central Bank of Nigeria (CBN) is charged with operating monetary policy although ultimate responsibility lies with the Federal Executive Council. The CBN in addition to this has other important functions which include the issuing of currency, acting as banker to the government and managing public debt (internal and external). To be able to fully implement monetary policies, the CBN makes use of some instruments namely: 

• Open Market Operations (OMO) 

• Discount rate Mechanism

 • Reserve Requirements 

• Moral Suasion 

• Direct Control of Banking System Credit 

• Direct Regulation of Interest Rates

Monetarists believe that the money supply is the most important element that impacts the economy's health. They believe that increasing the money supply will boost nominal demand, and that increasing output will increase where there is excess capacity. The monetarist believes that an increase in money supply will be inflationary in the long run, with no impact on investment, employment, or aggregate demand (Okoro, 2018). Despite these controversies, the Nigerian government, in partnership with its monetary authority, continues to regulate the economy through monetary policy. The Central Bank of Nigeria (CBN) uses monetary policy to manipulate the economy's currency fluctuations. It employs both contractionary and expansionary measures. Monetary policy has been successfully adopted and implemented in developing economies, this move is warranted. As a result, it is important to look into how monetary policy (money supply) can be used to influence output.

Nigeria as a country has been plagued by many macroeconomic problems, including low level of economic growth and instability. As a result, there has been a need for all stakeholders to contribute their quota in ensuring that the economy’s performance is at its peak. The government, as well as the Central Bank is instrumental in achieving this. The government carries out its obligations of ensuring a healthy macroeconomic environment by way of administering fiscal policies while the Central Bank carries out its own duty by means of monetary policies. The state of economic degradation brings about the need for appropriate and workable monetary policies to ensure that pre-determined macroeconomic objectives are achieved.

The adoption of monetary policies in Nigeria is not a recent development but is one that has been in use since the early 1970s. Since then, there have been a lot of problems in the conduct of monetary policy in the economy. This resulted in the shift from the use of direct monetary policy instruments to the indirect monetary policy instruments that are in use till date.

Answers were sought to the following questions in the course of this study

The broad objective of this study is to find out how effective the instruments of monetary policy are promoting economic growth in Nigeria. The specific objectives are as follows:

As a means of achieving the above stated objectives, the following hypotheses were tested to determine the relationship between the variables:

Hₒ1: There is no relationship between money supply and economic growth

Hₒ2: There is no relationship between exchange rate and economic growth

Hₒ3: There is no causation between interest rate and economics growth

Hₒ4: There is no causation between inflation rate and economics growth

Hₒ5: There is no causation between monetary policy and economics growth

Using monetary policy to stabilize short run fluctuations in order to achieve sustained growth has been one of the major challenges of the developing nations. In addition to low capacity and infrastructure deficient, this has been the main causes of their inability to achieve long-term growth and development, thereby subjecting the economy to severe volatility, unemployment, financial crises, low investment, debts etc., (Bleaney, 1996, Montiel and Servén, 2006, United Nations 2012).Nigeria as a Nation with abundant resources has great potential for growth. Yet it has been struggling to achieve sustained growth devoid of economic instability in order to achieve economic growth, policymakers in the past and present administrations have experimented with several nationwide, sectoral, regional and issue-based policies (The World Bank, 1994; Okonjo-Iweala and Osafo-Kwaako, 2017; Ibietan and Ekhosuehi, 2019).More so, an analysis of the monetary policies in Nigeria will present an insight into their effects on a developing country. In addition to this, the limitation of these policies as adopted by developing countries will be uncovered and improve upon. So, the weakness and strength of conventional monetary policies are ascertained and this tool better enriched. This can be achieved if there is adequate knowledge on the effect of the tool on economic growth. In the light of the importance of monetary policy, this study becomes relevant since it will help to ascertain impact of monetary policy on the Nigerian economic growth.

The study attempts to examine the relationship between monetary policy and economic growth in Nigeria for the period of 1980 to 2022. The choice of this period is necessitated by various factors. First, both positive and negative effects of monetary policy have been observed.  It also focuses to verify if there is any contribution made toward economic growth of Nigeria via gross domestic product (GDP) through monetary policy. It will be limited to investigate the impact of monetary policy, interest rate, exchange rate, money supply and inflation rate in the growth of Nigerian economy. Data to be used are secondary and time series which will be amassed from various sources such as CBN data bank, NBS and World Bank data base.

It consists of technical or special terms and their definitions used in the article these are: -Monetary policy, Economic growth, Inflation rate, Money supply, Interest rate, and Exchange rate.

1.Monetary policy: - Monetary policy refers to the combination of measures designed to regulate the value, supply and cost of money in an economy in consonance with the level of economic activities.

2.Inflation: - Is a rise in price which can be translated as the decline of purchasing power over time.

3. Money supply: - is the sum total of all the currency and other liquid assets in a country’s economy on the date measured. The money supply includes all cash in circulation and all bank deposit that the account holder can easily convert to cash.

4.Interest rate: - Is the amount charged over and above the principal amount by the lender from the borrower.

5.Exchange rate: - Is a rate at which one currency will be exchanged for another currency.

6.Economic growth:- Is an increase in the production goods and services in an economy. Increases in capital goods, labour force, technology, and human capital can all contribute to economic growth.