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 stabilisation 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.
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.
The first stage in the administrative process is the preparation of policy proposals. This stage is coor-
dinated by the Research Department of the bank, which collect inputs from the various policy depart- ments 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 memo- randum usually captioned “Monetary, Credit, Foreign Trade Exchange Policy Proposals” for a particu- lar year and forwarded to the committee of Governors.
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.
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.
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:
Students Assessment Exercise
Analyse the formulation of Monetary policy in Nigeria.
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 recognise 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 depres- sion. 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.
Write a short notes on
(i) Objectives of monetary policy;
(ii) Monetary policy Lags.
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 stabilisation 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.
Tools of Monetary Policies 57
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 in- volves 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.Preparation of Proposal Memorandum
The first stage in the administrative process is the preparation of policy proposals. This stage is coor-
dinated by the Research Department of the bank, which collect inputs from the various policy depart- ments 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 memo- randum usually captioned “Monetary, Credit, Foreign Trade Exchange Policy Proposals” for a particu- lar year and forwarded to the committee of Governors.
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 theCentral 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.
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.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.
Publication of policy by CBN Governor
This is the final approved copy of the memorandum that is published by the Governor of the CentralBank 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
Students Assessment Exercise
Analyse the formulation of Monetary policy in Nigeria.
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 recognise 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 depres- sion. 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.
Students Assessment Exercise
Write a short notes on
(i) Objectives of monetary policy;
(ii) Monetary policy Lags.
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