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
(1st Order Test) ……………………….. 56
4.3 Econometric Test or 2nd 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 1st
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)
Year
|
Money
Supply N = Million) MS2
|
Real
Gross Domestic Growth N Million) Yg
|
(Fiscal
Deficit) FD
|
1970
|
978.2
|
4219.0
|
- 455.1
|
1971
|
1.041.8
|
4715.5
|
171.6
|
1972
|
1,214.9
|
4802.8
|
-58.6
|
1973
|
1,522.5
|
5310.0
|
166.1
|
1974
|
2,352.3
|
15,919.7
|
1796.4
|
1975
|
4,241.2
|
27.172.0
|
-427.9
|
1976
|
5,905.1
|
29,146.5
|
-1090.8
|
1977
|
7,898.8
|
31,520.3
|
-781.4
|
1978
|
7,985.4
|
29,212.4
|
-2821.9
|
1979
|
10,224.6
|
29,948.0
|
1461.7
|
1980
|
15,100.0
|
31,546.8
|
-1975.2
|
![](file:///C:/Users/THINSE~1/AppData/Local/Temp/msohtmlclip1/01/clip_image002.gif)
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)
Year
|
Money Supply MS2 (N = M)
|
Yg (Real Gross) Domestic Growth) N =
M
|
Fiscal Deficit (FD)
|
1990
|
68,662.5
|
267,550.00
|
-22116.1
|
1991
|
87,499.8
|
265,379.1
|
-35755.2
|
1992
|
129,085.5
|
271,365.5
|
-39532.5
|
1993
|
198,479.2
|
274,833.3
|
-107735.3
|
1994
|
266,944.9
|
275,450.6
|
-70270.6
|
1995
|
318,763.5
|
281,407.4
|
1000.0
|
1996
|
370,333.5
|
293,745.4
|
32049.4
|
1997
|
429,731.3
|
302,022.5
|
-5000.0
|
1998
|
525,637.8
|
310,890.1
|
-133389.3
|
1999
|
699,733.7
|
312,183.5
|
0285104.7
|
2000
|
1,036,079.5
|
329,178.7
|
-103777.3
|
2001
|
1,315,869.1
|
356,994.3
|
0221048.9
|
2002
|
1,599,494.6
|
433,203.5
|
-301401.6
|
2003
|
1,985,191.8
|
477,533.0
|
-202724.7
|
2004
|
2,263,587.9
|
237,576.0
|
-172601.3
|
2005
|
2,814,866.1
|
561,931.4
|
-161406.3
|
![](file:///C:/Users/THINSE~1/AppData/Local/Temp/msohtmlclip1/01/clip_image004.gif)
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.
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