The research study is aimed at showing the impact of
monetary policy on the manufacturing sector of the economy. It also shows how
the monetary policy instruments have affected the sector as regards output and
productivity efficiency from 1979 to 2008.
The data used were secondary data sourced from CBN and
FBS statistical bulletin and the method of analysis used is the econometric
technique with special focus on multiple -regression analysis. This would help
to establish the relationship that exists among monetary policy variables which
affect the output of manufacturing sector.
It was observed from the output of the analysis that
monetary policies are used by. the Central Bank to Control various economy
activities. From all data collected and analysed, and the hypotheses tested, it
has been realized that monetary policy instrument of the Central Bank has
positive but insignificant effects on manufacturing sector performance in
The Central Bank should exploit other alternative
policies scenarios which could shed more light on the effectiveness of monetary
policy. To this end, I suggest the use of exchange rate, bank credit as
alternative policy stimulation experiment in future to be able to equate the
demand of the manufacturing industry output and the degree of policy.
TABLE OF CONTENTS
Table of Content
Chapter One: Introduction
to the Study
1 .2 Statement of
of the Study
of the Study
1 .5 Statement of
1.6 Statement of
1 .7 Methodology
of the Study
1 .8 Model
1 .9 Scope of
of the Study
1.12 Definition of
Chapter Two: Literature
of Monetary Policy
of Monetary Policy
2.4 Concept of
for Monetary Policy Effectiveness
2.6 Target and
Indicators of Monetary Policy
2.7 Lag and
Uncertainty in Monetary Policy
Affecting the Impact of Monetary Policies
Demand for Money and the Supply of Money
Chapter Three: Research Methodology
of Data Analysis
Chapter Three References
Data Presentation, Analysis and Interpretation of Results
Summary, Conclusion and Recommendations
1.1 BACKGROUND TO THE STUDY
One of the major traditional functions of the Central
Bank is to manage the nation's money and economy through the issue of various
monetary policy circular (MPCS).
We can view monetary policy circulars according to Patric
I. Osiegbu (2006) as measures designed to regulate and control volume, cost and
direction of money and credit in the economy to achieve some specified macro-economic
policy objectives which can change from time to time depending on the economic
position of a particular country. The monetary policy circulars are often
issued after meetings between the Central bank officials, Federal Ministry of
Finance and Managing Directors of various banks or their representatives. When
the rate of increase or decrease in various sectors of the economy must have
been discussed and agreed, they are sent to the Presidency through the Minister
of Finance to be incorporated into the national budget.
The primary objective of monetary policy is the
achievement of price and exchange rate stability. According to Nnanna (2001),
the importance of price stability derives from the harmful effects of price
totality, which determine the ability of policy makers to achieve other
laudable macro-economic objectives. There is indeed a general consensus that
domestic price fluctuations undermines the role of money as a store of value
and frustrates efficient manufacturing sector of the economy.
The manufacturing sector ended in the year 2007 with
little or no significant growth, even as the fate of the sector hangs in the
balance in the new year 2008 with anxieties over an anticipated increase in
Value Added Tax (VAT), from 5 percent to 15 percent amongst other persisted
harsh operating environment that have continued to bedevil the sector over the
years. This is evident in the continued low-level capacity utilization recorded
in 2007, which went up slightly by 1.14% from 44.06% in 2006 to 45.2% in 2007.
(CBN 2007) According to Manufacturers Association of Nigeria (MAN)'s survey (2008)
this performance led to the near collapse of the manufacturing sector. Reports
indicated that 30% of industries were classified as closed down, 60% of
industries classified as oiling, and 10% of industries classified as operating
at sustainable level.
The reasons adduced to the poor performance of the sector
were as follows: poor power supply to industries by Power Holding Companies of
Nigeria (PHCN), inaccessibility to long term funds and high cost of funds and
multiple taxes and levies from the three tiers of government despite Decree Act
21 of 1998 which clearly stimulated the list of approved taxes.
Prudent monetary policy forced inflation down to 11.5%
2009, (est.value) from 11.6% in the
third quarter of 2008 (est. value). However, food inflation remained in double
digits for most of the year as increasing transportation costs and other
overheads prices of basic commodities escalate astronomically.
Generally, Central Bankers and economist are less divided
in their perceptions of the objectives of monetary policy than in their views
about what role the central bank should play in accomplishing these objectives.
Consistent with its legal mandates, the objectives of the monetary policy of
the CBN since its inception have been the following:-
domestic price and exchange rate stability
Maintenance of a
healthy balance of payments position
Development of a
sound financial system.
Promotion of rapid
and sustainable rate of economic growth and development
1.2 STATEMENT OF PROBLEM
It is believed that structure of the economy of the
developed and underdeveloped countries are inevitable proofs of such problems
as unstable economics growth unemployment etc. Due to the economic problems,
government in various parts of the world usually distributes resources and
channels their efforts towards developing the appropriate policy to ensure
economic stability. The impact depends on the nature of the Nigeria economy,
the effectiveness of monetary policy in regulating micro economy has been quite
unrealistic, therefore, a research of this type would aim at finding out the
effectiveness or otherwise of the monetary policy and it instruments like open
market operation, reserve ratio, liquidity ratio, bank ratio and interest rate
in regulating inflation in Nigeria.
1.3 OBJECTIVES OF THE STUDY
The aim of the study is to examine the impact of monetary
policy on the manufacturing sector of the economy.
i. The study will also examine the effects
of interest rate and legal reserve requirement on the manufacturing sector of
ii. The study seeks to analyse how the
monetary policy instruments have
influenced the manufacturing industry.
1.4 SIGNIFICANCE OF THE STUDY
The study is significant to stakeholders and participants
in the economy as it seeks to measure the impact of monetary policy on capacity
utilization and how government makes use of it to control economy activities.
The study will add to the existing body of knowledge in
this area. of research, it will shed light on the instrument of monetary policy
and how it is used to attain its aim and objectives.
1.5 STATEMENT OF RESEARCH QUESTION
In other to give a direction and guide towards the
actualization of the study, the following questions will be introduced to
assist the researcher during the course of the study. Among such questions
includes the following:-
i. Does monetary policy have any impact on
the performance of the manufacturing sector of the economy?
ii. What effect do Reserve Ratio, Liquidity
Ratio and Interest Rate have on manufacturing sector?
iii. To what extent does exchange rate affect
the performance of the manufacturing sector?
1.6 STATEMENT OF HYPOTHESIS
Hypothesis is conjectural statements about the
relationship that exist between two or more variables. In the light of the
objectives stated above, we therefore hypothesized that:
1. H0: Monetary Policy has no effect
on manufacturing sector performance.
H1: Monetary Policy has an effect on
manufacturing sector performance.
Monetary policy has no effects on the level of inflation.
H1: Monetary policy has effects on the level
1.7 METHODOLOGY OF THE STUDY
The study made use of secondary data which are sourced
from the Central Bank of Nigeria bulletin (2008), National Bureau of Statistics
bulletin and analyzed through the use of multiple regression analysis, (i.e.
the Ordinary Least Square method) vide the SPSS programme.
1.8 MODEL SPECIFICATION
For the purpose of this research Work the following model
CU =a0 + a1RR + a2 INTRATE
CU = Capacity utilization (dependent variable)
RR = Reserve
INTRATE = Interest
µ = Error Terms
a0 = Constant
INF =a0 + a1 MS + a2
INTRATE + a3 EXCRATE + µ
INF = Inflation (dependent variable)
MS = Money Supply
INTRATE = Interest Rate
EXCRATE = Exchange Rate
µ = Error Terms
1.9 SCOPE OF STUDY
The study is aimed at evaluating the role of monetary
policy on capacity utilization in the Nigerian economy. The scope of this study
is between 1979 to 2008.
1.10 LIMITATIONS OF THE STUDY
In the course of the study, there are some limiting
factors experienced by the researcher and they include:
Time constraint: The time available for the research to
carry out and complete the research is relatively short, considering the vast
and demanding nature of the topic. Also finance, considering the financial
status of the researcher getting the required amount of money to conveniently
conduct the research was a bit difficult and this form part of the limiting
factor of the study. And finally the epileptic power supply in the nation that
has disrupt the compilation of various findings obtained, as the researcher had
to improvise for other source of power.
1.11 ORGANISATION OF STUDY
The research work is divided into five (5) chapters.
Chapter One covers the introduction, the aim and
objectives as well as the methodology of the study chapter two reviews
literature on monetary policy in general. The views and related studies of
scholars on the research topic are considered and examined. Chapter three focus
on the methodology used in analysing data and determine relationship between
concepts in the study. Chapter four presents the data analysis, interpretation
of results and test of validity. Chapter five dwells on the summary of
findings, conclusion and recommendations.
1.12 DEFINITION OF TERMS
Monetary Policy: This is a deliberate and continuous
management of the money supply of a country to promote selected socio-economic
Treasury Bill: These are debt instrument used by
government to raise fund within a short period of time.
Reserve Ratio: This is a monetary policy instrument that
obliges bank to hold a specified proportion of their deposit liabilities as
cash deposit with the Central Bank.
Liquidity Ratio: This is the rate or percentage of money
that banks have has reserves in form of security that can be easily turn to
Interest Rate: The rate is directly managed by the
monetary authorities through such management is based on expert advice in the
absence of a well-developed financial market. It is the expected returns form
or premium, which must be offered to induce people to hold the wealth in some
form other than money.