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56244-Article Text-95421-1-10-20100707

This paper analyzes the impact of monetary policy on Nigeria's economic development from 1980 to 2006, finding that only two out of six variables significantly influenced economic growth during the pre- and post-deregulation periods. The study highlights inconsistencies in policy formulation and implementation as major barriers to the effectiveness of monetary policy. Recommendations for improving monetary policy effectiveness in Nigeria are provided based on the findings.

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0% found this document useful (0 votes)
9 views13 pages

56244-Article Text-95421-1-10-20100707

This paper analyzes the impact of monetary policy on Nigeria's economic development from 1980 to 2006, finding that only two out of six variables significantly influenced economic growth during the pre- and post-deregulation periods. The study highlights inconsistencies in policy formulation and implementation as major barriers to the effectiveness of monetary policy. Recommendations for improving monetary policy effectiveness in Nigeria are provided based on the findings.

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MONETARY POLICY AND ECONOM IC DEVELOPM ENT: LESSONS FROM

THE DEREGULA TION POLICY IN NIGERIA

Okorafor Ekpe Okay


Department of Financial Management Technology,
Federal University of Technology Owerri.
Abstract
This paper examines the impact of monetary policy instruments on the
economic development in Nigeria during the period 1980-2006.With the aid
of the t-ratio, the study revealed that only two out of the six selected
explanatory variables exert a significant impact on the level of economic
development in Nigeria between the study periods (pre-and-post-
deregulation). The study therefore, concludes that with the insignificant
nature of most of the variables, policy formulation and implementation
inconsistencies appear to hinder the full impact of monetary policy on the
economy and therefore, should be critically watched.

Key words: Monetary Policy, Pre-deregulation, Post-deregulation, Policy Formulation,


Policy Implementation.

Introduction
The monetary policy of any given country no doubt, goes a long way towards
shaping both the direction and volume of credit in the economy. Therefore, the need for a
sound and effective monetary policy can hardly be over emphasized. It will suffice to
observe that various monetary authorities have continued to monitor the performance of
their individual country monetary policy mainly because of the perceived role it plays in
achieving sound economic development.
However, according to Jhingan (2007) as cited in Nwezeaku and Akujuobi (2010),
for a proper monetary policy effect on the economy, the inclusion of some variables should
be of vital importance. Beside this, of even more importance is the selection of such a
variable that cuts across the entire banking industry both as a basis for generalization and
acceptability of results of such a study. The asoning here is that since monetary policies
are mainly transmitted through the banking system, any policy that lacks the necessary
ingredients that affect most, if not all the banks, will most certainly fail to achieve the
desired objectives. This therefore, is one of the pitfalls this paper intends to avoid in the
Nigerian context. In line with the foregoing, this study focuses on the effectiveness of
monetary policy on economic development of Nigeria between the pre-deregulated and
post-deregulated eras. Moreso, the paper intends to draw up policy implications from the
findings with some suggested recommendations.
Following this introduction, the remaining part of the paper is divided into three
parts. While Part 2 covers the theoretical discussions and literature review, In Part 3 the

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International Journal of Development and Management Review (INJODEMAR) Vol. 5. No. 1 June, 2010

impact of monetary policy on economic development is empirically investigated, with


highlights of the findings. The paper ends in Part 4 with recommendations and conclusion.

Theoretical Discussions and Literature Review


Theoretical Discussions
Monetary Policy There are many definitions of monetary policy. Anyanwu (1993) defines
it as measures designed to regulate and control the volume, cost, availability and direction
of money and credit in an economy in order to achieve some specified macroeconomic
policy objectives. Obioma (1998) defined it as "a measure designed to influence the
availability, cost and direction of money and credit in pursuit of specified economic goals".
It therefore basically deals with the control of the money stock in order to influence
macroeconomic variables such as domestic prices, employment, balance of payment
equilibrium and sustainable economic growth (Ogwuma, 1996).
A framework will be helpful for a proper exposition on monetary policy, it will constitute;
its legislation, its objectives, its coordination with other policies, its formulation, its
implementation and its instruments.
Legal Basis of Monetary Policy The authority to formulate and implement monetary
policy is vested in the Central Bank of Nigeria (CBN) as outlined in the CBN Act of 1958
and subsequently amended in CBN decree No. 74 of 1991. These laws enjoin the CBN to
promote monetary stability and a sound financial system in Nigeria under the overall
guidance of the federal government.
The CBN is required to make proposals to the Head of State through the Ministry of
Finance. The Head of State has the power to accept or amend the proposal, once he
approves, the CBN is obligated to accept it through the Ministry of Finance and implement
it (1997 Federal Budget Provisions).
Objectives of Monetary Policy According to Ogwuma (1996) some objectives of
monetary policy are: prompting price stability, reducing pressures on the external sector,
stabilizing the Naira exchange rate and stimulating economic growth. This is not exhaustive
of the objectives of monetary policy. Some others are to moderate inflation rate, inducing
increased financial savings, inducing investment and promoting employment.
Monetary Policy Formulation In formulating monetary policy, the CBN relies on the
technique of financial programming. Its starting point is comprehensive review of the past
current and anticipated economic problems, then projections are made, on money supply,
GDP growth, inflation rates and balance of payment position.
For money supply for example, the economy's absorptive capacity for domestic
credits given the permissible aggregate domestic credit is then allocated between the public
and private sectors.
Monetary Policy Instruments/Tools These are variables that are under the control of the
monetary authorities and have effect on the proximate targets. According to Jimoh (1944)
the proximate targets are: interest rate, narrow money supply, (M1), broad money supply
(M2), domestic credit and high powered money or monetary base. Monetary policy tools

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Okoroafor, E. O. – Monetary Policy and Economic Development: Lessons from the Deregulation Policy in Nigeria

could be direct or indirect. The direct tools include: special deposits, aggregate, credit
ceilings, deposit ceilings, exchange controls, restriction on the placement of public deposits
and stabilization securities.
On the other hand, indirect tools include open market operations; cash reserve
requirement, liquidity ratio, minimum rediscount rate, parity charges and selective credit
policies.
A Review of Current Monetary and Credit Policy
The introduction of the Structural Adjustment Programme (SAP) in July 1986 has
continued to shift line with the policy on deregulation. These include deregulation of
interest rate and sectoral allocation of credits and the adoption of indirect approach to
monetary control in the management of liquidity. Ibeabuchi (1992:27) as cited in Nwezeaku
and Akujuobi (2010) has observed that the ultimate objective of these measures is the
promotion of a free market-oriented economy in which available resources would be
efficiently utilized for greater economy performance.
Following the period of Structural Adjustment Programme (1986-1988) Nigeria's
economic policies have been characterized with series of changes, inconsistencies and
reversals. These changes induced largely by the severity of the economic situation and
political factors. According to Ojo (1996:18) the economy's performance declined
progressively between 1990 and 1994 as a result of the policy actions and picked up in
1995 and has the prospects to do better in this democratic environment.
Under the SAP, interest rate was allowed to be market- determined. However in
1993, banks were to observe a maximum spread of five percentage points between their
average cost of funds and their lending rate (CBN circular No. 27, 1993:7). In 1994, fixing
of interest rates became operational being reintroduced in the 1994 budget. This had the
effect of reversing the persistent increase in the rates in order to boost domestic investment.
The CBN circular No.29 (1995:7) identified some of the causes of the high interest rates,
which prevailed in 1993 and these include: - (i) The banking system's financing of the
huge fiscal deficit resulting in the “crowding out" of the private sector in credit allocation,
(ii) High rate of domestic inflation requiring compensating high normal interest rate, (iii)
Technical insolvency of some banks resulting in distress borrowing and pervasive
default in the money market and, (iv) Excessive borrowing for speculative purchases of
foreign exchange.
However in 1999 interest rate policy was deregulated and the use of market-based
techniques of monetary management was introduced. Stabilization securities were
introduced in August 1990 and actively used until March 1993 for stabilizing the excess
reserves in the banking system.
The issuance of stabilization securities discontinued on the introduction of open
market operation (OMO) on 30th June, 1993 while the stock outstanding was retained
mainly to serve as a fall back position for liquidity control. However in January 1995 new
issues were allocated as a pre-emptive measure preparatory to take off of the Autonomous
Foreign Exchange Market (AFEM) consistent with the transition to the use of market based
instruments of monetary policy, the use of stabilization securities was phased out in 1996.

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International Journal of Development and Management Review (INJODEMAR) Vol. 5. No. 1 June, 2010

Open market operation is still been used as the major instrument for achieving monetary
policy objective as well as supporting the attainment of macroeconomic stability including
GDP growth and the sustenance of balance of payments viability.
Mandatory sectoral credit allocation was introduced in 1979 to ensure availability of
credit to the productive sectors of the economy. During this period agriculture,
manufacturing and more recently export and solid minerals were treated preferentially, with
the percentage credit allocation to the first two sectors raised progressively. According to
CBN circular No 30; (1996: 13) the policy seemed to have made some impact; its
prolonged use has engendered distortions and inefficiencies and is not consistent with the
principle of deregulating the financial sector. But still, it has not caused the phasing out of
the system.

Monetary and Credit Policy Measures


After an appreciable economic performance in the early 1970's, the Nigerian
economy experienced serious economic problems from late 1970's to mid 1980's. The
country's balance of payments came under severe pressure and was in persistent deficit
during the period. The government’s current expenditure expanded without an appreciable
increase in revenue leading to widening fiscal deficits, which were largely, financed with
bank credit with adverse consequences on the general price level. According to Ibeabuchi
(1992; 29) the inflation pressure was further aggravated by high demand for imports of both
intermediate and consumer goods due to over- valuation of the Naira which made imports
relatively cheaper than locally manufactured goods. Furthermore, the government’s
continued involvement in the economy through subsidized interest rates, exchange and
price controls seriously distorted and weakened the economy and this reduced the capacity
of the economy in responding promptly and positively to external shocks.
In addressing the crisis, a number of policy measures were embarked upon by the
government. In April 1982, the federal government introduced the economic stabilization
measures, which dealt extensively on import restrictions as well as monetary and credit
policies. Efforts were also made in successive years to reduce the public sector deficit
through a reduction of recurrent expenditures and increase revenue. Also, existing exchange
control measures were reinforced and made increasingly more stringent. From 1984, all
imports were placed under specific import licensing. In October 1985, the government
declared a fifteen-month economic emergency period during which specified proportion of
workers salaries and companies' profits were to be compulsorily deducted and paid to
government. However, the effectiveness of the measures were constrained by the continued
decline in foreign exchange earnings, the over valuation of the Naira and other distortions
and rigidities in the economy.
It was against this bleak and adverse economic background that the government
adopted a comprehensive economic reform programme - the Structural Adjustment
Programme (SAP) in July 1986 to restore domestic and external economic growth.
The banking system therefore has been an integral part of the structural reforms.
Thus, over the years, with successive monetary policy measures, the government of the

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Okoroafor, E. O. – Monetary Policy and Economic Development: Lessons from the Deregulation Policy in Nigeria

newly independent Nigeria nation, anxious to promote accelerated economic development,


viewed the CBN as an instrument for mobilizing development-oriented finance.

Empirical Analysis of the Impact of Deregulated Monetary Policy on Economic


Development in Nigeria
Data Presentation
The data for analysis are therefore presented below in Table1.
Table1: Pre-Deregulation Era Data for Money Supply Aggregate and the Money Market
Instruments Consisting of Treasury Bills, Treasury Certificates, Certificate of Deposits,
Commercial Papers and Bankers Acceptances, all in millions of Naira, 1986-1994.
Money Treasury Treasury Cert of Comm. Banker
Supply (Y) Bills Cert Deposits Papers Acceptances
X1 X2 X3 X4 X5
1986 36,820 16,976 6,655 261.9 259.0 18
1987 46,926 25,226.0 6,664.1 1328.3 496 9
1988 57,326 35,476 6,795 38.4 1,861 669
1989 49,259 24,126 5,945 11.6 1,309.8 737.2
1990 57,675 25,476 34,215 3.6 1,743 953.4
1991 83,824 56,728.3 34,215 0 1,107 1,032
1992 15,970.3 103,327 35,241.4 537 1,575 127
1993 118,753.4 103,327 36,584.3 91 3372 1,858.2
1994 169,391.5 103,327 37,343 15.2 5253 4,660.2
Source: CBN Statistical Bulletin, CBN Annual Report and Accounts.

Table 2: Post-deregulation Era data for money supply aggregate and the money market
instruments consisting of Treasury Bills, Treasury Certificates, Certificate of Deposits,
Commercial Papers and Bankers Acceptances, all in millions of Naira, 1995-2006.
(Y) X1 X2 X3 X4 X5
1995 201,414.5 103,324 23,596 48 10,035 8102
1996 227,464.4 103,327 0 105 8,023.7 12,199.9
1997 268,622.9 221,800.5 0 0 13,595.3 11,956.4
1998 318,576.0 221,801.5 0 0 72,522 17,473.9
1999 393,078.8 361,758.4 0 0 20,476.4 11,972
2000 637,731.1 465,535.8 0 0 19,003.0 31,775
2001 816,707.6 465,535.8 0 0 35,377.2 36,501.2
2002 946,253.4 584,535.8 0 0 37,144 42,622.1
2003 1,225,559.3 825,050.0 0 0 37,300 32,900
2004 1,330,657.8 871,577.0 0 0 88,830 41,620
2005 6,017,824.4 3,469,605 0 0 679,965 192,704
2006 5,939,066.9 3,631,978.4 0 0 742,925 268,801
Source: CBN Statistical Bulletin, various issues
CBN, Annual Report and Accounts, various years.

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International Journal of Development and Management Review (INJODEMAR) Vol. 5. No. 1 June, 2010

Test of Hypotheses
Hypotheses Testing Using Difference Between Two Means, T-test
As the study covers the period, 1986-2006, while adopting the t-test to test the
difference between the two means of the pre- and post- deregulation periods as the
statistical tool of analysis for this section. Hence, because of the nature of our report and
central objective, the study period, 1986-2006, is divided into two sub-periods, from 1986-
1994 and 1995-2006, as the Pre-deregulation and Post-deregulation periods respectively.

Model Specification
The variables for the study are hereunder denoted as follows:
PRE-MS = Level of Pre-deregulation money supply in year t;
POST-MS = Level of Post- deregulation money supply in year t;
PRET-TB = Level of Pre-deregulation treasury bill in year t;
POST-TB = Level of Post-deregulation treasury bill in year t;
PRE-TC = Level of Pre-deregulation treasury certificate in year t;
POST-TC = Level of Post-deregulation treasury certificate in year t;
PRE-CD = Level of Pre-deregulation certificate of deposit in year t;
POST-CD = Level of Post-deregulation certificate of deposit in year t;
PRE-CP = Level of Pre-deregulation commercial papers in year t;
POST-CP = Level of Post-deregulation commercial papers in year t;
PRE-BA = Level of Pre--deregulation bankers’ acceptances in year t;
PRE-BA = Level of Post-deregulation bankers’ acceptances in year t;
The difference between two means is the tool utilized to estimate the degree of difference in
levels of the selected variables in the pre-deregulation and post-deregulation periods.

MeanA – MeanB
T – Ratio =
Standard error of the difference between meanA and meanB
meanA and meanB
Where,
(nA+nB – 2) = the degrees of freedom of the test
XA = means of group A
XB = mean of group B
S2A = variance of group A
S2B = variance of group B
nA = number of observations (Pre-Deregulation)
nB = number of observation (Post-Deregulation)
This hypothesis states as follows:
Ho1: UA = UB = O: The introduction of deregulation has not significantly affected
the level of performance of monetary policy instruments on
economic development during the pre- and post-deregulation
periods in Nigeria.
Ha1: UA ¹ UB¹ o: The introduction of deregulation has significantly affected the
level of performance of monetary policy instruments on

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Okoroafor, E. O. – Monetary Policy and Economic Development: Lessons from the Deregulation Policy in Nigeria

economic development during the pre- and post-deregulation


periods in Nigeria.

TABLE 3: SUMMARY OF RESULTS OF THE INFLUENCE OF MONETARY


POLICY INSTRUMENTS ON Economic Development During The Pre- And Post-
X1 X2 X2 X3 X4 X5
VARIABLE MONEY TREASURY TREASURY CERTIFICATE COMMERCIAL BANKERS’
SUPPLY, BILL, CERTIFICATE, OF DEPO SIT, PAPER S, ACCEPTANCE,
MS TB TC CD CP BA

T-statistic 2.05 2.13 4.18 1.91 1.63 2.09


calculated
T-statistic 2.861 2.861 2.861 2.861 2.861 2.861
Tabulated 1%
T-statistic 2.093 2.093 2.093 2.093 2.093 2.093
Tabulated 5% ** *** NS NS NS
DECISION Not Significant Significant Not Not Not
Significant Significant Significant Significant
Level of
significance NS 5% 1% NS NS NS
Deregulation Periods In Nigeria.
NB: ***=Significant at 1%; ** =Significant at 5% ; NS= Not significant

Decision Rule
Since t-cal (4.18, 2.13) > t-tab (2.093) at 5% level of probability, we reject Ho and
accept Ha to conclude that a significant difference exists in the level of performance of
money market instruments both in terms of treasury certificates and treasury bills during
the pre-and post-deregulation periods.
The results of Table 3 have been quite revealing with only the treasury bill and
treasury certificate as monetary instruments proved significant .It then follows therefore
that a significant difference exists in the performance of money instruments just in terms of
only the treasury bills and treasury certificates between the two periods. However, while the
highest contribution came through the treasury certificates, the least contribution come from
the commercial papers.
The order of contribution is depicted as;
TC > TB > BA > MS > CD > CP
(4.18) (2.13) (2.09) (2.05) (1.91) (1.63)

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International Journal of Development and Management Review (INJODEMAR) Vol. 5. No. 1 June, 2010

Conclusion
This study investigated the impact of money market instruments on economic development
in Nigeria under two marked periods of pre-deregulation and the post-deregulation eras to
reveal the following findings;
1. That both treasury certificates and treasury bills exert significant effect on economic
development during the pre-deregulation and post-deregulation eras in Nigeria.
2. The bankers’ acceptances, money supply, Certificate of deposit and commercial
papers exerted non-significant effect on economic development during the pre-
deregulation and post-deregulation eras in Nigeria.
The findings above, have therefore informed the conclusion that
monetary policy instruments have contributed marginally to economic development during
the pre-deregulation and post-deregulation eras in Nigeria.

Recommendations
On the basis of these findings and conclusions this study therefore, offers the following
recommendations;
1. For a better manipulation of the aggregate money supply, more attention should be
focused on the use of treasury certificates and treasury bills to achieve desired
policy targets, followed by bankers’ acceptances and certificates of deposit, in that
order.
2. Also, with the perceived weak performance of both the commercial papers and
certificates of deposit under the pre-and post-deregulation eras, there is need for the
monetary authorities to watch closely the implementation of such instruments. This
implementation lapses as suggested by this study obviously need to be monitored
and bridged for a more vibrant monetary policy formulation in Nigeria.

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Okoroafor, E. O. – Monetary Policy and Economic Development: Lessons from the Deregulation Policy in Nigeria

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CBN, (1997) Major Supervision and Examination in Nigeria CBN- Briefs. Series No 97/08

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Okoroafor, E. O. – Monetary Policy and Economic Development: Lessons from the Deregulation Policy in Nigeria

APPENDIX - COMPsUTER RESULT PRINT-OUTS

Hypothesis Test: Independent Groups

PRE-MS POST-MS
70,660.57778 1,526,913.09167 mean
std.
47,087.67797 2,114,267.21328 dev.
9 12 n

19 df
-1,456,252.51389 difference (PRE-MS - POST-MS)
2,588,901,175,568.87000 pooled variance
709,505.07454 standard error of difference
0.00000 hypothesized difference

-2.05 t
p-value (one-
.0271 tailed)

Hypothesis Test: Independent Groups

PRE-TB POST-TB
54,887.70000 943,819.10000 mean
std.
37,992.99769 1,243,382.04799 dev.
9 12 n

19 df
difference (PRE-TB -
-888,931.40000 POST-TB)
895,659,780,680.63700 pooled variance
417,320.10312 standard error of difference
0.00000 hypothesized difference

-2.13 t
p-value (one-
.0232 tailed)

Hypothesis Test: Independent Groups

PRE-TC POST-TC

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International Journal of Development and Management Review (INJODEMAR) Vol. 5. No. 1 June, 2010

22,628.64444 1,966.333 mean


std.
15,321.20156 6,811.578 dev.
9 12 n

19 df
difference (PRE-TC -
20,662.31111 POST-TC)
125,699,334.38889 pooled variance
4,943.83831 standard error of difference
0.00000 hypothesized difference

4.18 t
p-value (one-
.0003 tailed)

Hypothesis Test: Independent Groups

PRE-CD POST-CD
254.1111 12.750 mean
std.
440.2164 32.162 dev.
9 12 n

19 df
difference (PRE-CD -
241.3611 POST-CD)
82,194.8294 pooled variance
126.4212 standard error of difference
0.0000 hypothesized difference

1.91 t
p-value (one-
.0357 tailed)

Hypothesis Test: Independent Groups

PRE-CP POST-CP
1,886.20000 147,099.71667 mean
std.
1,548.41678 265,078.55948 dev.
9 12 n

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Okoroafor, E. O. – Monetary Policy and Economic Development: Lessons from the Deregulation Policy in Nigeria

19 df
difference (PRE-CP -
-145,213.51667 POST-CP)
40,681,697,390.51040 pooled variance
88,940.03625 standard error of difference
0.00000 hypothesized difference

-1.63 t
p-value (one-
.0595 tailed)

Hypothesis Test: Independent Groups

PRE-BA POST-BA
1,118.22222 59,052.29167 mean
std.
1,453.36408 82,749.40201 dev.
9 12 n

19 df
difference (PRE-BA -
-57,934.06944 POST-BA)
3,965,210,368.74972 pooled variance
27,767.12314 standard error of difference
0.00000 hypothesized difference

-2.09 t
p-value (one-
.0253 tailed)

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