In this unit, we will
focus our attention on the effectiveness of monetary policies in changing the
level of real
income. We will
attempt to delineate the conditions that are favorable and those that are unfavorable
for
the successful
operation of the respective policies. We will also resort to the findings of
empirical research to
see the impacts of
the policies.
As we have seen, in
the previous units from our study of financial institutions, the Government
needs to
influence the level
of employment, the rate of inflation or economic growth, or the balance of
payments, it will
implement some kind
of monetary policy. Such a policy is designed to influence both the supply of
money and
its price. If the
volume of money circulating in the economy is increased, the level of Aggregate
Monetary
Demand (AMD) is
likely to rise. If the price is the money, that is the rate of interest payable
for its use, is
reduced, the level of
AMD is again likely to be stimulated.
The onus of
formulating monetary policies in Nigeria rests on the Central Bank of Nigeria.
In this unit,
therefore, we shall
specifically take a look into the techniques and instruments of monetary
policies. We shall
also look at the
procedure for the formulation and administration of monetary policies and how
to minimise
lags in monetary
policy formulation and implementation.
What Is Monetary Policy? – The concept of Monetary policy
Simply put, monetary
policy is a government policy about money. It is a deliberate manipulation of
cost and
availability of money
and credit by the government as a means of achieving the desired level prices,
employment
output and other
economic objectives. The government of each country of the world embarks upon
policies that
increase or reduce the supply of money because of the knowledge that money
supply and the
cost of money affect
every aspect of economy. By affecting the aggregate demand, money supply
affects
the level of prices
and employment. It also affects investment levels, consumption, and the rate of
economic
growth. An increase
or reduction in the cost of money (interest rate) affects all these variables.
Monetary policy is
defined in the Central Banks of Nigeria Brief as “the combination of measures
designed
to regulate the
value, supply and cost of money in an economy, in consonance with the expected
level
of economic
activity.” (CBN) Brief 1996/03.
One idea is central
in this and other definitions given above – that monetary policy focuses on
money
supply as a means of
achieving economic objectives. If the government thinks that economic activity
is very
low, it can stimulate
activities again by increasing the money supply. But when the economy is
becoming so
much that the rate of
inflation is high, it will reduce the supply of money. This will reduce
aggregate demand
in and the general
price level. However, it can also lead to unemployment and stunted economic
growth. As
you will see later,
there is often a conflict between the objectives of monetary policy. It is
difficult to achieve
all the objectives
simultaneously.
Monetary policy is a
major economic Stabilization weapon which involves measures designed to
regulate
and control the
volume, cost of availability and direction of money and credit in an economy to
achieve some
specified
macroeconomic policy objectives.
That is, it is a
deliberate effort by the monetary authorities (the Central Bank) to control the
money supply
and credit conditions
for the purpose of achieving certain broad economic objectives (Wrightsonan,
1976).
Monetary policy is
administered by the Central Bank of Nigeria, in some cases with degree of
political/
Government
Interference. As a watchdog of the economy, the Central Bank has the duty of
ensuring that
policies are set in
motion to ensure that the monetary system is directed towards achieving
national objectives.
Monetary policy is
the control of the supply of money and liquidity by the Central Bank through
“open
market” operations
and changes in the “minimum lending rate” to achieve the government’s
objectives of
general economic
policy.
The control of the
money supply allows the Central Bank to choose between “a tight money” and
“easy
money” policy and
thus in the short to medium-run to affect the fluctuation in output in the
economy.
Monetary policy
could, therefore, generally be defined as follows:
(a) As an attempt to
influence the economy by operating on such monetary variables as the quantity
of
money and the rate of
interest; OR
(b) As a policy which
deals with the discretionary control of money supply by the monetary
authorities in
order to achieve
stated or desires economic goals; OR
(c) As steps taken by
the banking system to accomplish, through the monetary mechanism a specific
purpose believed to
be in the general public interest; OR
(d) The use of
devices to control the supply of money and credit in the economy. It has to do
with the
controls that are
used by the banking system.
Objectives of Monetary Policy
Generally, the
objectives of monetary policy in various countries are the same as the economic
objectives of
the government.
In Nigeria, the
objectives of monetary policy as explained by the government of Central Bank of
Nigeria
are as follows:
(i) Promotion of
price stability
(ii) Stimulation of
economic growth
(iii) Creation of
employment
(iv) Reduction of
pressures on the external sectors, and
(v) Stabilization of
the Naira exchange rate (ogwuma 1997:3).
These are discussed
briefly in turns:
(i) Promotion of
Price Stability
This involves
avoiding wide fluctuation of prices which are highly upsetting to the economy.
Not only do
such wide prices
gyrations produce windfall profits and losses, but they also introduce
uncertainties
into the market that
make it difficult for business to plan ahead. They therefore, reduced the total
level
of economic activity.
This objective of avoiding inflation is desirable since rising and falling
prices are
both bad, bringing
unnecessary losses to some and necessary undue advantages to others. Prices
stability is also
necessary to maintain international competitiveness.
(ii) Slowly rising prices,
slowly falling prices and constant prices (though the last option is rather
unrealistic
in the world).
(ii) Stimulation of
economic Growth i.e. – Achievement of a High, Rapid and Sustainable Economic
Growth: This mean maximum
sustainable high level of output, that is, the most possible output
with all resources
employed to the greatest possible extent, given the general society and organization
al
structure of the
society at any given time. This highly desirable economic growth implies
raising people’s standard of living. The growth of the economy is the wish of
every government and monetary
authorities.
Therefore, when growth is achieved, it should be sustained.
(iii) Creation of
Employment: Attainment of High rate or Full Employment: This does not mean
Zero
unemployment since
there is always a certain amount of frictional voluntary or seasonal
unemployment
(Acklay, 1978). Thus,
what most policy makers aim is actually minimum unemployment and the percentage
that varies among
countries.
The monetary policy
should always aim at reducing the level of unemployment in the economy.
Unemployment
is a social ill which
should not be allowed to exist in the economy. The effects of unemployment
to individuals as
well as the society as a whole is so enormous that if left unchecked it will
spell
doom for both
individuals and society.
(iv) Reduction of
pressures on the external sectors - i.e. Maintenance of balances of payments
Equilibrium: This
involves keeping international payments of receipts in equilibrium, that is,
avoiding
fundamental or
persistent disequilibrium in the balance of payments positions. Usually,
however, nations
worry about
persistent balance of payments deficits. The pursuit of this objective, arises
from the
realisation that
deficit in the balance of payments will retard the attainment of the other
objective of
other objectives,
especially the objective of rapid economic growth. Deficit balance of payment
is not
healthy and therefore
the monetary authorities should try to achieve healthy balance of payment.
(v) Stabilization of
Naira Exchange Rate – This involves avoiding wide swings (undue and unnecessary
fluctuations) in the
currency exchange rate. This is meant to help in protecting foreign trade.
Instability in the
economy creates an atmosphere of uncertainty for the investors and discourages
them
from investing while
stability encourages investment. Monetary policy will, therefore, endeavour to
achieve
economic stability so
as to encourage both local and foreign investors to invest in the economy.
The above discussed
objectives of monetary policy are achieved through the manipulation of the
monetary
policy tools by the
Central Bank of Nigeria (CBN).
Stance of Monetary Policy
The stance of
monetary policy refers to the position taken by (CBN) – the monetary
authorities about
whether to increase
or reduce the supply of money in the economy during a policy period, usually
one year.
this gives rise to
two types of monetary policies, namely expansionary or a monetary ease policy,
and
contractionary or
stringent or tight monetary policy.
Monetary policy is
said to be an expansionary or a monetary ease policy when the monetary
authorities
decides to increase
the supply of money or reduce the cost of money in the economy so as to
stimulate an
increase in economic
activities. This can be accomplished through the buying of securities in the
open market,
a reduction in
interest and discount rates, a reduction in reserve requirements, and relaxing
of credit controls,
among others. The
overall effect of expansionary monetary policy is to have more money in the
hands of the
public. This will
lead to an increase in aggregate demand, investment, savings, employment,
output and
economic growth,
while at the same time increasing the rate of inflation.
A contractionary
stringent or tight monetary policy does the opposite of an expansionary policy.
Monetary
policy is said to be
contractionary, stringent, or tight when the monetary authorities embark on
policies that
will reduce the
supply of money or increase the cost of money in economy, in other to generate
a contraction
in economic activities.
The effect of contractionary policies is to reduce the general price level and
curb
inflation. However,
it will equally lead to a reduction in the level of investment, employment,
output and
economic growth.
The government
switches from contractionary to expansionary policies as the need arises
depending on
the economic
objectives, which she is giving priority. In Nigeria, the stance of monetary
policy adopted has
been varying from one
regime to another.
.
Monetary Policy Instruments/Weapons/Tools
Instruments of
monetary policy are many and varied. Their respective effects on the economy
also vary in
terms of where they
start and transmission route. Sometimes, some tools are not compatible with
others i.e.
in which case, the
adoption of one set instruments will negate or be at cross purposes with the
effects of
others. That is why
monetary authorities usually consider the operational efficiency, the technical
features,
the lags and other
effects of any given instruments before it can be used.
Apart from minor
variations based on level of economic development of each country, the tools
used to
attain the monetary
objectives of various countries of the world are virtually the same. In
discharging its
obligations, the
Central Bank of Nigeria has at its disposal a number of control mechanism
usually referred to
also as tools of
monetary policy.
Instruments or tools
of monetary policy can be classified into two:-
(a) Quantitative
Instruments (Traditional and Non-Traditional).
(b) Qualitative
Instruments (Ranlett, 1977).
A. Qualitative Instruments
These are “impartial
or impersonal” tools which operate primarily by influencing the cost, volume,
and
availability of bank
reserves. They lead to the regulation of the supply of credit and cannot be
used
effectively to
regulate the use of credit in particular areas or sectors of the credit market.
Quantitative tools
are further classified into traditional or market weapons and nontraditional
tools or
credit direct control
of bank liquidity.
1 . Traditional or
market weapons.
This are called
market weapon because they rely on market forces to transmit their effects to
the
economy.
Specifically, these tools include Open Market Operations (OMO), Discount Rate
Policy and
Reserve Requirements.
(i) Open Market
Operations
This is the buying
and selling of securities by the monetary authorities in the open market.
Securities
are sold to reduce
money supply and bought to increase money supply.
(ii) Discount Rate
Policy or the Rediscount Rate Policy or Bank Rate
Discount rates are
interest rates paid in advance based on the amount of credit extended by
increasing the
rediscount rates that Central banks charges from borrowing for the Central Bank
and makes banks to
increase their own discount rates and interest rates. This discourages banks
lending and reduces
money supply. A reduction in rediscount rates increases the supply of money.
Interest rates is the
cost of borrowed money. An increase in interest rates discourages people
from borrowing from
banks. This reduces money supply. A reduction in interest rate does the
opposite.
(iii) Reserve
Requirements/ Required Reserve Ratios
The monetary
authorities set a minimum level of reserves that will be maintained by banks.
In
Nigeria, banks
maintain two types of reserve – Cash Ratio, and Liquidity Ratio. An increase in
bank reserves reduces
money supply by reducing bank loanable funds, while a decrease in reserves
increases the supply
of money.
(a) Non-traditional Instruments or Direct
Control of Bank Liquidity: These tools are non- market
tools that strike
directly at bank’s Liquidity. They include supplementary reserve requirements
and
variable Liquidity
ratios.
(b) Supplementary
reserve requirements or special deposits: The Central Bank here requires
banks to hold over
and above the legal minimum cash reserves, a specified percentage of their
deposits in
government securities such as Stabilization securities issued by the Central
Bank,
hence it is also
called special deposits policy. The main objective is to influence banks’
lending by
freezing a certain
percentage of their assets.
Stabilization
securities which the Central Bank of Nigeria is authorised by law to issue and
sell to banks
compulsorily at any
rate they may fix and redeem them at any time they may fix. It is used to mop
up excess
liquidity to reduce
money supply.
It is important to
understand how this works. Assuming that the Central Bank wants to reduce the
money
supply in the
economy, it may impose a special deposit of say 5% on banks and this will force
the banks to
deposit 5% of their
total deposits liquidity with the Central Bank on a special account. The
special deposit is
mainly used when
other instrument fail to achieve their objectives or targets. This is,
therefore, regarded as
instrument of the
last resort.
(2) Variable Liquid
Assets Ratio
Here, Banks are
required to diversify their portfolio of liquid assets holding.
These means that
banks are required to redefine the composition of their Liquid assets
portfolios at
different times to
reduce or increase their credit base.
B . Qualitative or Selective Controls or Instruments
These confer on the
monetary authorities the power to regulate the terms on which credit is granted
in
specific sectors.
These powers or control seek typically to regulate the demand for credit for
specific
uses by determining
minimum down payments and regulating the period of time over which the loan is
to be repaid. In
other words, they involve official interference with the volume and direction
of credit
into those sectors of
the economy which planners believe are a crucial importance to economic
development.
These tools include
moral suasion and selective credit controls or guidelines.
(1) Moral Suasion
Moral suasion is an
appeal of persuasion from the Central Bank to other banks to take certain
actions in line
with government
economic objectives. Unlike directives, no penalty is attached to
non-compliance to moral
suasion. Banks have
the freedom not to comply, but they often comply so as to have a good
relationship with
the Central Bank.
This involves the
employment of persuasions or friendly persuasive statements, public
pronouncements or
outright appeal on
the part of monetary authorities to the banks requesting them to operate in a
particular
direction for the
realisation of specified government objectives. For example, the Central Bank
or the government may appeal to the banks to exercise restraint in credit
expansion by explaining to them how excess
expansion of credit
might involve serious consequences for both the banking system and the economy
as a
whole. Moral suasion
is supposed to work, through appeal and voluntary action rather than the
regulation and
authority.
(2) Selective Credit
Controls and Guideline
These are specific
instructions given by the Central Bank to other banks which they must comply
with. Such
directives come in
the form of credit ceilings, special deposits and sectoral allocations of
credits, among
others. This can be
used to increase or reduce money supply.
Selective credit
controls or guidelines involve administrative orders whereby the Central Bank,
using
guidelines, instructs
banks on the cost and volume of credit to specified sectors depending on the
degree of
priority of each
sectors. Thus, selective credit controls are examples of the use of monetary
policy to
influence directly
the allocation of resources indicating a lack of faith in the working of the
free market.
Apart from the
quantitative control which regulates the amount of money in circulation, the
Central Bank
can monitor the
economy by giving directives to banks in all areas of operation. The selective
control or
directives can be in
form of:
(a) Credit Ceiling: Every year the
Central Bank dictates the rate of credit expansion in the economy.
(b) Sectorial
Allocation of Credit: The Central Bank divided economic activities in the country into
sectoral allocations.
The divisions are agriculture, forestry, fishing, mining, quarrying,
manufacturing
and real estate.
(c) Interest Rate
Ceiling: The interest rate may be controlled to favor particular sectors.
(d) Loans to Rural
Borrower: This is aimed at improving investment in the rural areas.
(e) Grace Period on
Loans: Longer period may be granted to some important sector like
agriculture.
(f) Refinancing
Facilities
(g) Indigenisation of
Credit
Phases of Monetary Policy in Nigeria
The Central Bank of
Nigeria from its inception had various instruments of monetary control at its
disposal.
However, the extent
to which each of the monetary policy instruments has been changing from time to
time.
In this regard, it
has become usual to classify monetary policy in Nigeria into two phases based
on the typed
instruments been
emphasised by the bank, during each phase. They are the era of direct monetary
control
(1958 to 1986) and
the era of indirect or market-based monetary control.
During the first
phase covering 1958 to 1985, the emphasis of the Central Bank was on the use of
those
tools which directly
affect the price of money and the flow of bank credit such as interest rates
policy,
directives or direct
controls, moral suasion, and Stabilization securities. The Central Bank had
direct control
on the maximum amount
of credit to be allocated by each bank and the sector to which the credit would
go.
Apart from giving
specific directives, although the use of indirect tools like reserve
requirements, Open
Market Operation, and
Discount Rates were attempted during this period, the emphasis on their use was
not
much.
The second phase of
the administration of monetary policy in Nigeria began in 1986 when the
Babangida
administration began
a gradual deregulation of the economy under the Structural Adjustment Programme
(SAP) introduced in
that year. This phase placed much emphasis on the use of market oriented
instruments
to achieve monetary
policy objectives. The determination of interest rates which is the price of
money the
ceiling on banks
credits and its allocation to the various sectors of the economy were left to
be determined by
the market mechanism.
Rather than fixing rates and the flow of bank credit, the Central Bank
controlled the
monetary base or its
components which are intermediate variables and left the market forces of
demand and
supply to determine
interest rates, credit ceilings and credit allocations.
Formulation and Administration of Monetary Policy in Nigeria
The monetary policy
for each fiscal year is contained in a circular currently titled the monetary,
credit, foreign
trade and exchange
policy for a given year. This circular which is released by the Central Bank of
Nigeria at
the beginning of each
year comes after the annual Presidential Budget speech and its break down have
been
announced.
Although this
circular is a publication of the Central Bank of Nigeria, inputs are made into
it by various
sectors of the
economy through a comprehensive administrative process. This administrative
process involves
five stages:
preparation of policy disposals, review by the committee of Governors approval
by the
Board of Directors,
review and approval by the government, and publication by the Central Bank
Governor.
(a) Preparation of
Proposal Memorandum
The first stage in
the administrative process is the preparation of policy proposals. This stage
is coordinated
by the Research
Department of the bank, which collect inputs from the various policy
departments
of the bank and tries
to reflect the views of the financial and non-financial sectors of the economy
about the prevailing
economic conditions. These inputs along with suggestions are complied as a
memorandum
usually captioned
“Monetary, Credit, Foreign Trade Exchange Policy Proposals” for a particular
year and forwarded to
the committee of Governors.
(b) Review of
Proposals by Governors Committee
The next stage is the
review and amendment of the policy proposals by the committee of Governors.
The committee is the
highest management body responsible for the day-to-day administration of the
Central Bank of
Nigeria. The committee made up of the Central Bank Governors and the five
Deputy
Governors discuss the
proposals and make amendments and new inputs where necessary. The amended
copy of the
memorandum is then forwarded to the board of Governors for approval.
(c) Approval of
Proposals by Board of Governors
The third stage is
the approval of the policy proposals by the Board of Governors. This board
which is
chairmaned by the
Governor is the body directly responsible for the formulation of monetary
banking
and exchange rate
policies. The Board discusses the memorandum extensively if they are satisfied
with it, they add
their approval to it. Despite the approval of the board of Governors, the
memorandum
remains the proposal
until it receives the approval of government.
(d) Securing the
Government Approval
The next thing
required after approval by the Board of Governors is, therefore, government
approval.
To get this approval,
the memorandum is forwarded to the President (Head of State) for consideration.
According to the
Governor of the Central Bank of Nigeria, this is “for all government economic
policies
to be co-ordinated
and harmonised for internal consistency” (Ogwuma, 1997.6) the policy proposals
are usually referred
to various committees and councils of the government before final approval by
the
senate and signed by
the Head of State.
(e) Publication of
policy by CBN Governor
This is the final
approved copy of the memorandum that is published by the Governor of the
Central
Bank of Nigeria as
the Monetary, Credit, Foreign Trade and Exchange Rate Policy of the Central
Bank
for the particular
year. Apart from publishing the circular, the Central Bank sees to the
monitoring and
implementation of the
policies contained therein (CBN Briefs 1996. vol 3).
Specifically, the
issues covered in the formulating of monetary policy and published in the
circular are as
follows:
- Review of Macro
economic Problem
- Setting of
Objectives
- Monetary and Credit
Policy Measures
- General guidelines
on banking practices
- Foreign Trade and
Exchange Policy Measures
- Guidelines for
other Financial Institutions
3.6 Lags in Monetary Policy
Monetary policy
affects the economy in two major ways – the magnitudinal (size) dimension and
the time
dimension. Here we
are concerned with the time dimension which measures the lag in the effect of
monetary
policy. (Friedman
1961, Cultertson, 1960, 1961; Ando et al, 1963, Ranlet 1977 and Willes,
1968).
Lags occur because of
the time lapse before changes in Monetary variables have effect on the economy.
The need to formulate
monetary policy arises as a result of existing economic problems. It is only
when
the monetary
authorities recognize the existing
problems and the need to take action about it that they will
adopt appropriate
monetary policy measures. This may take some time even after they have taken
action, it
may take another
period of time before the effect of their action is felt in the economy. The
time that elapses
between when the
economic problems arose and when the effect of the action of the monetary
authorities is
felt in the economy
is the monetary policy.
Lags in the Monetary
Policy affect its effectiveness. In Nigeria, for instance, the Central Bank
Monetary
Policy circular is
released at the beginning of each year. Assuming an inflationary pressure
arises in the
economy in August,
1998, if it took six months for the Central Bank to notice the problems, they
will only
become aware of it in
February, 1990 after the monetary policy for 1999 has already been released.
The
monetary authorities
may then include anti-inflationary measures to be felt in their monetary policy
circular
for the year 2000. By
then, 14 months have elapsed. It may take another 6 months for the impact of
that
anti-inflationary
measures to be felt in the economy. This gives a total lag of 20 months.
It is possible that
during the 20 months lag, the level of inflation may have been reduced already
by market
forces. The
anti-inflationary measures may end up pushing the economy to deflation and
economic depression.
Even if the
inflationary pressure is still present and unreduced, the lag of 20 months
means that the
effect of the policy
is 20 months late. Thus, the shorter the lag the more effective and appropriate
the
monetary policy would
be.
Conflicts in Achievements of Monetary Policies Objectives
A look at the
objectives of monetary policy shows that these multiple objectives are not
compatible at all. In
some cases, they are
not achieved simultaneously but rather the achievement of one objective may
take the
economy further away
from the other objective. This actually means that the attainment of one
objective
may preclude the
attainment of another or even in other word there is existence of trade-offs in
the attainment
of objectives.
Authorities have identified two types of conflicts in the attainment of
monetary objectives.
These are necessary
conflict and policy conflict.
The relevant
questions here are:
(1) Are the multiple
objectives of monetary policy compatible?
(2) Can they be
achieved simultaneously?
(3) Or thus the
pursuit of one objective lead us further away from another?
Two types of
conflicts in the attainment of policy objectives exist.
(i) Necessary
Conflict
The necessary
conflicts exist whenever the attainment of one objective precludes the
attainment of the other.
In other words, this
is a situation where the said objectives are inherently incompatible with each
other. In
fact, a good example
will make the understanding of this clearer. Let us look at the twin objectives
of
attaining full
employment and price stability. The full employment in this context means
unemployment rate
of between 3% and 5%
or employment rate of between 95% and 97%.
Experience has shown
that the pursuance of the objectives of full employment normally works against
price stability. Full
employment situation means that almost anybody who wants to work is able to
find job at
the existing wage
rate. The fact that almost everybody is working makes individuals to have high
purchasing
power and the
economic activities will be high indeed. This situation will induce inflation
which will eliminate
price stability in
the economy.
Philip’s curve is
used to demonstrate the trade off that exists between unemployment and
inflation or the
relationship between
them. It shows that whenever unemployment rate is very low, inflation rate will
be
very high and
vice-versal. This means that there is a trade off between unemployment and
inflation.
(ii) Policy Conflict
The policy conflict
exists when government takes a measure that would jeopardise the simultaneous
achievement of two
objectives. In other words, policy conflict exist when monetary policy has
difficulty
in pursuing or
achieving both monetary and fiscal policy objectives simultaneously. Take for
example,
during an
inflationary period, a tight monetary policy may be embarked upon to fight
inflation. This
policy may reduce the
rate of investment and affect growth adversely. On the other hand, an easy
monetary policy
designed to stimulate economic growth will definitely lower the rate of
interest and this
will generate higher
rate of inflation.
Limitations of Monetary Policy in Nigeria
When monetary policy
is used to influence the level of income, its potential effect is lessened
because of the
lack of consumer and
investor responses to interest rates changes. Other things may occur to dampen
the
effect of monetary
policy on the level of income and keep spending from rising or falling when the
Central
Bank engages in
activities such as open market purchases.
Most economists are
of the view that monetary policy plays a limited role in a developing economy
like
Nigeria’s as a result
of the following reasons:
(a) There is the existence of a largely
non-monetised sectors which hinders the success of monetary
policy. Most of the
people live in the rural areas where there is absence of financial institutions
and knowledge. Thus,
monetary policy fails to effect the lives and activities of this bulk of the
people of these
economies.
(b) The money and capital markets are both
inadequate and undeveloped. These markets lack in
securities (shares,
stocks, and bonds and bills which limit the success of monetary policy.)
(c) Most of the banks in the banking system
possess high liquidity so that they are not affected by the
credit and hence
monetary policies of the monetary authorities.
(d) There is the large-scale operation of
non-bank financial intermediaries, most of which are not
under the control of
the Central Banks.
Commercial banks are
just only one of many types of financial intermediaries that exist in
money using
economies. In Nigeria today, there are many savings and loans Associations,
Insurance
Companies and Finance
Companies that handle huge sum of money. The activities of these
non-bank financial
intermediaries if not checked may render Central Bank’s expansionary or
contractionary
policies ineffective.
(e) In addition, bank money or demand deposits
comprise a small proportion of the total money supply
in these countries,
rendering the monetary authorities ineffective in monetary control.
(f) monetary policy
is hindered by time lags (recognition, administrative and result lags).
(g) It conflicts with government policies.
(h) Monetary policy
is influenced by politics and hence it is an attempt to fulfill political
ambitions of
parties in office.
(i) There is the
problem of inability to predict how people will react to any monetary policy
measure.
It is unable to deal
with the business cycle.
Conclusion
In general, monetary
policy refers to the combination of measures designd to regulate the value,
supply and
cost of money in an
economy in consonance with the level of economic activity.
In a nutshell, the
objectives or aims of monetary policy are basically to control inflation,
maintain a healthy balance of payments position for the country in order to
safeguard the external value of the national currency
and promote an
adequate and sustainable level of economic growth and development.
However, monetary
authorities are not free to deal with these objectives separately but are
required to
pursue them
simultaneously. This makes their tasks very difficult because of the
constraints to manipulate a
set of policies to
achieve sometimes incompatible objectives.
One of the principal
functions of the Central Bank of Nigeria (CBN) is to formulate and execute
monetary
policy to promote
monetary stability and sound financial system in Nigeria. the CBN carries out
this responsibility
on behalf of the
Federal Government of Nigeria through a process outlined in the Central Bank of
Nigeria Decree 24,
1991 and the Banks and other Financial Institutions Decree 25, 1991. In
formulating and
executing monetary
policy, the Governor of Central Bank of Nigeria is required to make proposals
to the
resident of the
Federal Republic of Nigeria who has power to accept or amend such proposals.
Thereafter,
the CBN is obliged to
implement the monetary policy approved by the President. The CBN is also
empowered
to direct the banks
and other financial institutions to carry out certain duties in pursuit of the
approved
monetary policy.
Usually, the monetary policy to be pursued is detailed out in the form of
guidelines to all
banks and other
financial institutions. The guidelines generally operate within a fiscal year.
Penalties are
normally prescribed
for operators that fail to comply with specific provisions of the guidelines.
The
techniques/tools/instruments by which the monetary authority tries to achieve
the objectives of monetary
policy can be
classified into two categories – the direct control approach and indirect
market approach.
The
indirect/portfolio control instruments place restrictions on a particular group
of institutions, especially
deposit banks by
limiting their freedom to acquire assets and liabilities. Examples of such
instruments for
indirect control are
quantitative ceilings on bank credit, selective credit controls and
administered interest and
exchange rate.
The indirect method
of control relies on the power of the monetary authority as a dealer in the
financial
markets to influence
the availability and the rate of return on financial assets, thus affecting
both the desire of
the public to hold
money balances and the willingness of financial agents to accept deposits and
lend them to
users. Examples of
such instruments are reserve requirements discount rate and open market
operations.
Summary
This unit enlightens
the reader/student on monetary management in Nigeria with specific focus on the
concept,
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