Monetary Policy Formulation Implementation and Monitoring in Nigeria.

ABSTRACT

The paper highlighted monetary policy formulation, implementation and monitoring in Nigeria focusing on the steps involved. The empirical reviews from studies show that interest rate, credit channels and exchange rate are among the channels of monetary policy transmission to the economy. It also highlighted some of the problems that imposed a serious debility to effective transmission in Nigeria. The authors made some suggestions for improvement, among which include: the Central Bank must persevere legally, morally and otherwise to make the economy a cashless one. The low patronage of banking services by many Nigerians is a stumbling block in effective control of money supply which has contributed to incessant inflation in the country; any form of disguise or indirect interference by the government has to be put to an end; and the instruments of monetary policy such as interest rate and exchange that are known to be effective in some sectors should be properly managed and monitored.

INTRODUCTION

Monetary policy is used to set benchmarks for the various monetary and credit aggregates consistent with the desired overall economic activity for given period on a forward-looking timeframe. These benchmarks are set in consonance with the expectation of the performance of all

sector of the economy to ensure the achievement of low and stable inflation as well as sustainable output growth, positive balance of payments position and stable exchange rate.

Historically, monetary policy is believed to have been developed by the classical (monetary) school of thought starting from Adam Smith through David Ricardo, Thomas Malthus, Alfred Marshal, John Stuart Mill and A.C Pigon.

According to the monetarist, money and income are directly correlated and monetary policy change affect the long-run stock of real capital, hence output. In the same vein they believe that there is a direct relationship between money supply and price level which is proportional in the long-run. Consequently, the long – run proper growth rate of money stock is crucial for stable growth rate of money stock and price. According to the monetarist, the long – run is a period when all expectations are realized while the short – run is marked unanticipated changes. The monetarist school of thought believe that in the economy, money matters.

DEFINATION

Monetary Policy: Monetary policy refers to combination of measures designed to regulate the value, supply and cost of money in circulation in an economy. Because an excess supply of money would result in a demand for goods and services which would cause rising prices (Inflation) and a worsening of balance of payments position.

MONETARY POLICY FORMULATION

The Nigerian monetary policy has played significant role in repositioning economy, this is because of the application of various instrument that eventually touch relevant macroeconomic variables. In Nigeria, monetary policy really encompasses the rules and regulations designed by the apex monetary authority.

The Monetary Policy Committee (MPC) is charged with the responsibility for formulating monetary and credit policies. To carry out its function, the committee relies on macroeconomic data in order to make informed decisions. The decisions provided by the committee shows:

How recent growth in money supply is compared with that of the previous years;
The source of growth in money supply;
The roles of the budget and budget implementation play in monetary development;
How the balance of payments (BOP) has affected monetary operation;
Whether growth in credit to private sector has been excessive or has declined;
The behaviour of real interest rate among others

STEPS INVOLVE IN MONETARY POLICY FORMULATION

1. A review of the overall economic performance, in addition to the existing condition and future problems.

2. Projections on gross domestic product (GDP) growth, money supply, rate of inflation and balance of payment position:

a. Forecast exports, imports and other components of the current account on basis of the nominal GDP forecast and other policy measures.

b. Forecast the elements of the capital and financial accounts: Foreign Direct Investment, foreign debt, medium and long – term capital (disbursements and principal repayment), short – term capital.

c. Project the overall balance and it’s financing.

d. Compare key aggregates with objective.

3. Allocation of permissible aggregate domestic credit between the public and the private sectors: in furtherance to the statement it addresses how to distribute or in what ratio the domestic credit would be distributed amongst the public and the private sector of a given country’s economy.

4. Projection of the Fiscal Sector:

a. Project revenues on the basis of the forecasts of nominal GDP and its components, the balance of payments, and relevant revenue policy measures.

b. Project expenditures on the basis of the macroeconomic forecast and relevant measures.

c. Project the overall budget deficit and its financing sources.

d. Ensure that the deficit and its financing are within the acceptable threshold.

5. Projection of the Monetary Sector:

a. Forecast broad money (M2) using real GDP growth rate and inflation.

b. Estimate the reserve money (RM)

c. Forecast net foreign assets (NFA) using the accretion to external reserve in the BOP as well as the DMB’s foreign assets.

d. Forecast net domestic credit to the economy.

e. Use the fiscal projection of required net credit to government to calculate net credit to the private (non – government) sector.

MONETARY POLICY IMPLEMENTATION IN NIGERIA

Monetary policy implementation is the day - to-day actions of the monetary authorities to ensure that the overall goal of monetary policy is achieved. In Nigeria the framework for monetary policy implementation follows as “hierarchical order” The CBN Act, 2007 provides for the constitution of a monetary policy committee (M.P.C) the committee comprises 12 members the Governor as the chairman, four deputy governors, two members of board of directors of the bank, three members appointed by the president and two members appointed by the governor. To carry out this effectively, the monetary authorities through various measures compare outcomes to targets on daily, weekly, monthly, quarterly and annual bases. At any point when the outcome or forecast deviates from the benchmark, the monetary authorities take actions to bring the deviation within tolerable limits.

The relevant issues are usually clearly stated in the form of a monetary policy circular for the purpose of implementation by banks and all other finance stake holders.

MONETARY POLICY MONITORING IN NIGERIA

In monitoring the monetary policy in Nigeria, the monitoring of activities of the financial operators is undertaken by CBN which carries out periodic review of the books of all regular basis. In addition the licensed banks are expected on a regular basis to returns in their activities and operations to the CBN. This process enables the CBN to evaluate the degree of compliance with the monetary policy circular as well as the general effect of the policy on the economy and consequently evaluate the situation to note if there is any need to revise the policy or otherwise.

The CBN can seek to control the supply of money and manipulation. the money supply is often but not solemnly attempted using the policies to influence the supply of high powered of money, the reserve is based on the credit creating power of the system depend in Nigeria.

CONCLUSION

The Central Bank of Nigeria employs the monetary programme framework in the formulation and implementation of monetary policy. The adoption of the framework is based on the monetary targeting approach, while its theoretical basis is rooted in the quantity theory of money as well as the Polak‘s model and the two gap analysis. Essentially, monetary programme is used to project monetary aggregates that are consistent with the desired macroeconomic objectives, which include real GDP growth, low inflation and exchange rate stability.

The CBN monetary programme is based on the interrelationship among the four sector macroeconomic accounts, namely; real sector, external sector, government sector and monetary sector. Generally, the monetary programme is produced under two scenarios; baseline and programme scenarios. The programme scenario is further sub-divided into three, namely; optimistic, realistic and pessimistic scenarios. The difference among the various programme scenarios lies in the underlying assumptions about the performance of the economy during the period.

The programme has been quite useful in the conduct of monetary policy in Nigeria in a number of ways. Precisely, it is used to set targets on various macroeconomic indicators; it ensures consistency among the four sector macroeconomic accounts; It provides information to all stakeholders; It safeguards against economic shocks. It has contributed immensely to the formulation and implementation of monetary policy in Nigeria. Despite the advantages of monetary programme, its preparation and implementation have not been without some challenges. Some of the major challenges include: poor quality of data; considerable lag in data generation; constant revision of Federal Government Budget; lack of effective coordination between the fiscal and monetary authorities; late approval of Federal Government Budget and extra budgetary spending.

REFERENCES:

Adeyeye EA, Fakiyesi, T.O (1980) Productivity Prices and Incomes Board and Anti Inflation Policy in Nigeria.

Adebiyi, M.A (2006) Inflation Targeting: can we establish a stable and predictable policy instrument between inflation and monetary policy instruments in Nigeria and Ghana.

Aigbonkhan, B.E (1996) The naira exchange rate depreciation and domestic inflation.

Akinlo, A.E (2001) the stability of money demand in Nigeria: An Autoregressive distributed lag approach. J Policy Modeling. 28: 445 – 452.

Abdullahi, H. (1995), “Poverty in Nigeria: An Analytical Study of Islamic Remedies” , An unpublished MSc Dissertation submitted to the Department of Economic, Usmanu Danfodiyo University, Sokoto. Nigeria, July.

Dr. Hussainatu Abdullahi (Mrs.), History & Structure of the Nigerian Economy