THE IMPACT OF MONEY SUPPLY ON ECONOMIC GROWTH IN NIGERIA (1970-2007)

ABSTRACT

The study examined the impact of money supply on economic growth in Nigeria. In the model specified, real gross domestic product (real GDP) is the regress while real exchange rate, broad money supply and real interest rate are the regressors. Data was collected from CBN statistical bulletin for the period 1970-2007. The statistical technique used for the analysis is the ordinary least square, with the aid of P.C. give 8.00 software package.

The result indicates that the expansionary credit being supplied in Nigeria within the period under review failed to  influence the real gross domestic product. Real interest rate being the only significant regressor is not one of the target variables of monetary policy. It has been identified that the major problem militating against the poor performance of monetary policy instruments in influencing real GDP in Nigeria is time-lags involved which now makes any policy   employed by the government to take many months to achieve its full effect.

In effect to this, the effectiveness of influencing real GDP in Nigeria maybe promoted by emphasizing on real interest rate instead of on monetary target variables due to the fact that real interest rate is statistically significant.

TABLE OF CONTENT

Title Page                 …………………………………………     i

Approval Page ……………………………………………  ii

Dedication       ……………………………………………  iii

Acknowledgement    ……………………………………    iv

Table of Content      ……………………………………… v

Abstract                   ……………………………………    vi

CHAPTER ONE: INTRODUCTION

1.1   Background of the Study ………………………… 1

1.2   Statement of Problem      ………………………… 7

1.3   Objectives of Study          ………………………… 14

1.4   Research Hypothesis       ………………………… 14

1.5   Significance of the Study ………………………… 15

1.6   Sources of Data and Its Scope …………………  16

CHAPTER TWO: REVIEW OF LITERATURE

2.1   Theoretical Literature       ………………………… 17

2.2   Empirical Literature                 ………………………..  22

2.3   Meaning of Monetary Policy     ……………………28

2.4   Objectives of Monetary Policy ……………………29

2.5   Monetary Policy Formulation in Nigeria ……….       30

2.6   Determinants of Money Supply in Nigeria …… 31

2.7   Nigeria Financial  Institutions …………           35

2.8   Objectives of  Nigerian Financial …………                36

2.9   Significant Developments in the Nigerian financial Institution in recent times…… 38   

2:10 The Impacts of Money Supply in Nigeria Economy39     

2.11 Control of Money Supply in Nigeria …     42

CHAPTER THREE: RESEARCH METHODOLOGY

3.0   Introduction …………………………..          45

3.1   Institutional Consideration …………………       45

3.2   Estimation Procedure………………………. 46

3.3   Model Specification ………………             47

3.4   Method of Evaluation      ………………     48

3.5   Decision Rule ………………………..           50

3.6   Data Required and Sources……………     51

CHAPTER FOUR

4.0   Presentation and Analysis of Result……  53

4.1   Presentations of Results ……………        53

4.2   Analysis Based on Statistical Criteria

 (1^st Order Test)        ………………………..          56

4.3   Econometric Test or 2^nd Order Test ……   59

CHAPTER FIVE

5.0   SUMMARY, CONCLUSION AND  POLICY RECOMMENDATION

5.1   Summary ………………………..                  61

5.2   Conclusion………………………..                        62

5.3   Policy Recommendation   ……………        63            Bibliography

        Appendix  

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND OF THE STUDY

        In the critical observation of the recent Nigerian economic position, there has been a great divergence between the rate at which money is supplied and the exact impact it has on the general price level, which results in inflation and deflation on one hand, and the output growth (productivity) on the other hand. Although, it had occurred to our mind that Nigerian monetary policy continues to aim at achieving single digit inflation, a stable Naira, increase in domestic production and a stock of foreign exchange reserves equivalent of at least six months of current imports, the Central Bank of Nigeria (CBN) relies on Open Market Operation (OMO), Cash Reserve Operations, Minimum Liquidity Ratio, Discount Window Operations (OWO) etc, to control growth in monetary aggregates, changes in minimum re-discount rate (MRR) to determine interest rates, and a Dutch Unction system to determine the value of the Naira (See Anyanwu, 2003).

        However, the CBN publications have proved that since 2003, the monetary authority is conducting an Open Market Operation on a daily basis instead of bi-weekly in order to exert greater control over the country’s (Nigeria) financial market conditions. Hitherto, monetary aggregates have tended to overshoot the CBN’s targets due largely to the expansionary fiscal policies. Then, as a result of this fiscal surplus, in the first nine months of 2004, annualized growth in broad money supply (M₂) was only 13.2% compared with the expansion of 24% made in 2003 (See CBN Annual Report and Statement of Accounts, 2003).

        In the year 2004, the Federal Government strengthened the budget process towards an improved expenditure co-ordination through the introduction of Cash Management Committee (CMC), whose function was to monitor and reconcile monthly expenditure releases, and determined projects. But in that same 2004, the annual inflation rate was moderated to an estimated 15.0% in October 2004. The persistence pressure on prices in 2004 was attributable to the impact of the partial deregulation of the 2003 monetary expansion. Since the face of the interest rates remain largely stable in 2004, it was expected that inflation will follow a downward trend in 2005, 2006 and  2007, as the continued improvement in Agricultural production reduced inflation in food prices, (Source, CBN Annual Report and Statement of Account, 2003).

        Furthermore, from the recent CBN Annual Statement of Reports under the real sector, it was indicated that the growth in domestic Product (GDP) measured in 2007 in 1990 basic prices amounted to N634.1 billion thus, representing a growth rate of 6.2% compared with 6.0% in 2006. However, output growth fell below the projected average of 7.0%, estimated for the five year period 2003-2007. Growth in 2007 was broad based but driven mainly by the non-oil sector. Agriculture grew by 7.4% led by crop production and fishing. Wholesale and retail trade grew by 15.3% and service(s) subsector by 9.8%. Mining and quarrying as well as manufacturing however, grew even as electricity consumption declined. The moderation in inflationary pressure that began in 2005 was sustained in 2007, attributable largely to good Agricultural harvest and a non-accommodating monetary policy. Thus, the single digit inflation target had been sustained two years in a row. Further expansion in national output was however, constrained by poor infrastructures, a mild drought and flooding experienced in some food producing areas.

        Available data from the National Bureau of Statistics (NBS), indicated that the national unemployment rate in the 1^st quarter of 2007 was 14.6%, compared with 13.7% in 2006. The Urban and Rural rates were 14.4% and 15.0% respectively compared with 10.2% and 14.8% in 2006.

        Meanwhile, the reason behind the monetary trends above, is to understand the lapses in monetary management, and having observed the alternations between the rate of inflation and deflation, it seems as if we had not done enough work, in regulating the supply of money. Otherwise, we had found the repeated cases in which people seem to have so little money that they were unable or certainly reluctant to buy everything that could be produced. As a result, price fell, profits vanished, production shrank and   unemployment spread.

        We had also found frequent examples of the opposite situation, where the inflation spiral in which the quality of money outruns the supply of goods and people would lose through being outbid   in the market place.

        The whole mystery is centered on the fact that commercial bank credit is a major factor contributing to the increased quantity of money in circulation in the Nigerian economy. But since the total stock of money determines the economy level to an optional, the monetary policy target is to bring the economy back to a desired optimum, but the extent to which it achieves that, is however another issue. The popular notion is that most monetary policies had failed in Nigeria due to wrong   implementation of the policies or due to the uncooperative attitude of the banks before the consolidation of banks in Nigerian economy in January, 2001.

        Therefore, in discussing the concept of money supply and its impacts, two other issues often come to our mind namely, the state of inflationary pressure and the unemployment rate. According to the monetarist “inflation is everywhere a monetary phenomenon.” Their view was that increase in money supply in an economy, causes an increase in the general price level of commodities (inflation) – (Uzoaga, 1981).

        Related to the problem of inflation is the issue of unemployment. Generally, the primary goal of any economy is to achieve a high level of employment so as to be able to produce as many goods and services as possible while maintaining an acceptable level of price stability. Therefore, the level of output or productivity (real GDP) and employment on one hand, and the level of prices on the other hand, has a common determinant which is the level of total spending.

        Thus, we have so far been observing that the control of money supply could control all the variables that are obstructed from its targets, such that gross domestic product, employment, aggregate demand etc, could be controlled in Nigeria simply by controlling the money supply. This research work therefore, would review the technicalities involved in the control of money supply in Nigeria economy.

1.2   STATEMENT OF PROBLEM

        A study of this nature is always necessitated by the existence of certain problems. The major problem that triggered off this work is the reoccurrence of general price instability and persistent inflationary pressures in the economy, in spite of the plethora of monetary policy tools adopted and applied over the years.

        There is also this problem of general feeling that a continuous annual rate of money increase will adversely increase the rate of price level which will directly lead to inflation, thus, requiring a   policy response. Recently, this inflationary  pressures had succeeded in erecting a devaluation in Nigeria’s currency value as a result of expansionary measures of money supply.

        From the above problems, this research work is  meant  to investigate on these questions viz;

a.     Why has the expansionary and contractionary measures  of money supply adopted by the CBN failed to correct the problems of high rate of inflation and real Gross Domestic Growth (GDP) in Nigerian economy?

b.     Are the monetary policy measures adequate in controlling the rate of economic depression in Nigerian economy?

c.     If measures been adopted were ineffective and inefficient, what should be the   rightful measures to be taken in order to promote real GDP Growth in Nigerian Economy? 

        Here, the problem can be traced using tables and chart values of broad money supply (m₂), Real Domestic Growth (Yg) and Fiscal Deficit (FD) in Nigerian economy from past years.

Table 1.0 (Values of MS₂, Yg  & FD from 1970-1980)

Figure 1.0: Bar Charts representing the values of  Broad Money Supply (M₂), Real Gross Domestic Product (Yg) and Fiscal Deficit (FD) from 1970-1980.

From fig.1.0 above, you can observe that the bar charts are irregular as a result of some fluctuations. In the broad money supply (MS₂), it is observed that given the reduction in economic activities as result of reduced aggregate demand, the government through expansionary measures of money control supplied excessively to the growth of the economy. Hence, the continuous rise in money supply in each successive year.

        Likewise, there was  successive increase in the real Gross Domestic growth given the relative increase in money supply as illustrated in figure 1.0.

        The government in order to generate more revenue (money supply) for economic progress, borrowed constantly from external countries, and given their dead-weight assets (i.e unproductive capital assets), they now accumulated  huge deficits thus, the negative results of the fiscal deficit values given in fig 1.0

Table 1.1 Values of MS₂, Yg and FD (from 1990- 2005)

Figure 1.1: Bar Charts representing the values of  Broad Money Supply (M₂), Real Gross Domestic Product (Yg) and Fiscal Deficit (FD) from 1990-2005.

From fig 1.1 above, broad Money Supply (MS₂) was increasing at an increasing rate given drastic reduction in aggregate demand and economic activities.

        Real Gross Domestic Product values were equally increasing given the increase in monetary expansion by the government.

        There were huge deficits accumulated as a result of the government borrowing excessively from external sources. Also, the invested assets were not productive hence, the negative fluctuations in the fiscal deficit values.

1.3   OBJECTIVES OF STUDY

        As a result of the problems stated above, the researcher desires to achieve the following objectives;

(1)    To determine the impact of money supply on economic growth in Nigeria.

2.     To trace the transmission of structural shocks among money supply and its determinants.

3.     Recommending ways in which money supply could be used more effectively in achieving economic growth in Nigeria.

1.4   RESEARCH HYPOTHESIS

        Based on the available data, this work is interested in testing out the hypothesis below;

H₀:   The impact of money supply on economic growth in Nigeria over the years is not significant.

H₁:   The impact of money supply on economic growth in Nigeria over the years is significant.

1.5   SIGNIFICANCE OF THE STUDY

        This research work will help us to investigate into the beneficial efforts on the control of money supply and its impacts in relation with the level of economic growth in Nigeria. It will also add to the existing knowledge about the relationship between monetary policy and inflation in Nigeria.

        It will equally help students, government, policy makers and corporate bodies in areas relating to monetary policy, the volume of credit to be supplied and economic growth stabilization. The implications of this is not far- fetched  as research done in this field could lead to a proper and more  focused policy formulation, which would yield much better results.

1.6   SOURCES OF DATA AND ITS SCOPE

        We rely on the secondary data for this study of which the sources are the CBN publications and Annual Report and Statement of Account, Federal Office of Statistics, publications, newspapers and students’ research works.

        The research work centers in the impact of money supply on economic growth in Nigeria from 1970  -  2007. It is expected in course of this study that the researcher will examine and appraise the stock of money supply and its impacts  with regards to attaining real Gross Domestic Growth in Nigeria, and the possible means measures of reforming and controlling these impacts.