CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
In the critical observation of the recent Nigerian
economic position, there has been a great divergence between the rate at which
money is supplied and the exact impact it has on the general price level, which
results in inflation and deflation on one hand, and the output growth
(productivity) on the other hand. Although, it had occurred to our mind that
Nigerian monetary policy continues to aim at achieving single digit inflation,
a stable Naira, increase in domestic production and a stock of foreign exchange
reserves equivalent of at least six months of current imports, the Central Bank
of Nigeria (CBN) relies on Open Market Operation (OMO), Cash Reserve
Operations, Minimum Liquidity Ratio, Discount Window Operations (OWO) etc, to
control growth in monetary aggregates, changes in minimum re-discount rate
(MRR) to determine interest rates, and a Dutch Unction system to determine the
value of the Naira (See Anyanwu, 2003).
However, the CBN publications have
proved that since 2003, the monetary authority is conducting an Open Market
Operation on a daily basis instead of bi-weekly in order to exert greater
control over the country’s (Nigeria) financial market conditions. Hitherto,
monetary aggregates have tended to overshoot the CBN’s targets due largely to
the expansionary fiscal policies. Then, as a result of this fiscal surplus, in
the first nine months of 2004, annualized growth in broad money supply (M2)
was only 13.2% compared with the expansion of 24% made in 2003 (See CBN Annual
Report and Statement of Accounts, 2003).
In the year 2004, the Federal Government
strengthened the budget process towards an improved expenditure co-ordination
through the introduction of Cash Management Committee (CMC), whose function was
to monitor and reconcile monthly expenditure releases, and determined projects.
But in that same 2004, the annual inflation rate was moderated to an estimated
15.0% in October 2004. The persistence pressure on prices in 2004 was
attributable to the impact of the partial deregulation of the 2003 monetary
expansion. Since the face of the interest rates remain largely stable in 2004,
it was expected that inflation will follow a downward trend in 2005, 2006
and 2007, as the continued improvement
in Agricultural production reduced inflation in food prices, (Source, CBN
Annual Report and Statement of Account, 2003).
Furthermore, from the recent CBN Annual
Statement of Reports under the real sector, it was indicated that the growth in
domestic Product (GDP) measured in 2007 in 1990 basic prices amounted to N634.1
billion thus, representing a growth rate of 6.2% compared with 6.0% in 2006.
However, output growth fell below the projected average of 7.0%, estimated for
the five year period 2003-2007. Growth in 2007 was broad based but driven
mainly by the non-oil sector. Agriculture grew by 7.4% led by crop production
and fishing. Wholesale and retail trade grew by 15.3% and service(s) subsector
by 9.8%. Mining and quarrying as well as manufacturing however, grew even as
electricity consumption declined. The moderation in inflationary pressure that
began in 2005 was sustained in 2007, attributable largely to good Agricultural
harvest and a non-accommodating monetary policy. Thus, the single digit
inflation target had been sustained two years in a row. Further expansion in national
output was however, constrained by poor infrastructures, a mild drought and
flooding experienced in some food producing areas.
Available data from the National Bureau
of Statistics (NBS), indicated that the national unemployment rate in the 1st
quarter of 2007 was 14.6%, compared with 13.7% in 2006. The Urban and Rural
rates were 14.4% and 15.0% respectively compared with 10.2% and 14.8% in 2006.
Meanwhile, the reason behind the
monetary trends above, is to understand the lapses in monetary management, and
having observed the alternations between the rate of inflation and deflation,
it seems as if we had not done enough work, in regulating the supply of money.
Otherwise, we had found the repeated cases in which people seem to have so
little money that they were unable or certainly reluctant to buy everything
that could be produced. As a result, price fell, profits vanished, production
shrank and unemployment spread.
We had also found frequent examples of
the opposite situation, where the inflation spiral in which the quality of
money outruns the supply of goods and people would lose through being
outbid in the market place.
The whole mystery is centered on the
fact that commercial bank credit is a major factor contributing to the
increased quantity of money in circulation in the Nigerian economy. But since
the total stock of money determines the economy level to an optional, the
monetary policy target is to bring the economy back to a desired optimum, but
the extent to which it achieves that, is however another issue. The popular
notion is that most monetary policies had failed in Nigeria due to wrong implementation of the policies or due to the
uncooperative attitude of the banks before the consolidation of banks in
Nigerian economy in January, 2001.
Therefore, in discussing the concept of
money supply and its impacts, two other issues often come to our mind namely,
the state of inflationary pressure and the unemployment rate. According to the
monetarist “inflation is everywhere a monetary phenomenon.” Their view was that
increase in money supply in an economy, causes an increase in the general price
level of commodities (inflation) – (Uzoaga, 1981).
Related to the problem of inflation is
the issue of unemployment. Generally, the primary goal of any economy is to
achieve a high level of employment so as to be able to produce as many goods
and services as possible while maintaining an acceptable level of price
stability. Therefore, the level of output or productivity (real GDP) and
employment on one hand, and the level of prices on the other hand, has a common
determinant which is the level of total spending.
Thus,
we have so far been observing that the control of money supply could control
all the variables that are obstructed from its targets, such that gross
domestic product, employment, aggregate demand etc, could be controlled in
Nigeria simply by controlling the
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