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.
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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.
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