policy deals with the discretionary control of money supply by the monetary
authorities in order to achieve the desired economic goals. It cold be seen
that money policy comprises of those government actions which are designed in
attempt to change the influence the behaviour of the monetary sector of an
economy. However, there are two views on the efficiency or monetary policy,
monetarist and Keynesian view. The Keynesian view is that monetary policy
should be direct towards interest rates rather than money supply and that the
monetary policy should be subsidiary to fiscal policy. The monetarist
recommends that the control of money supply should be the main concern of the
money authorities. But it should be noted that money policy has a central role
in macro economic management primarily because of the close relationship
between the monetary aggregate and economic activity.
is true irrespective of whether one is considering the monetarist or Keynesian
framework. Although it may be desirable to introduce some monetary instruments
the environment for their effective application may not be suitable. This fact
should be borne in minds as we considered the application of various instrument
of controlling money supply in the Nigerian economy. The Nigeria monetary
system is part of the wider financial sector and its major operators are the
monetary authorities, the banks merchant and commercial banks) as we as
discount houses recently permitted to operate within the system.
monetary authorities design and implement monetary policy and consist of the
presidency, apex bank and federal ministry consist of these, the apex bank is
the agency which is primarily responsible for designing monetary policy
proposal for presidential approval and ensuring implementation of the monetary
policy measures accepted by the federal government.
goals of monetary policy remain the same irrespective of the package of
instruments in use. The monetary policy attempts at maintain a balance as
possible between the supply and demand for the monetary assets of the economy
in order to achieve adequate economic growth. This broad purpose may be transmitted
or rather translated into several specific objectives such as price stability,
high level of employment or an acceptance
growth rate of the real gross domestic product (GDP), as well as balance
of payment equilibrium.
management could take the form of direct or indirect control instruments
comprising of interest rate registration, credit ceilings and sectorial
allocation of credit. An indirect control instrument is mostly adopted by
market based economy. It has the
advantage of the relationship between money supply and the monetary base and
the ability of the monetary authorities to induce appropriate change in the
monetary base. Banks reserves constitute an important component of the monetary
base usually targeted by the monetary authorities to control the money supply
in the Nigerian economic through the manipulation of the discount rate and
reverse ratio. In Nigeria, the application of credit ceilings was designed to
ensure that domestic credit expansion and the monetary implications of the
balances of payment targets the expected increase in total demand for liquidity
in the economy. But Nigerian have decided to move away from indirect and direct
monetary instruments under credit ceiling for instance, the apex bank found it
increasingly difficult to achieve the stated monetary targets. The techniques
of indirect monetary control basically involves the control of the money stock
through the manipulation of the sources of the monetary base by the application
Open Market Operation (OMO), reserve requirement and rate.
is conducted mainly in the secondary market for government securities through
the buying and selling of government securities, the apex bank directly changes
the level of the bank reserves and indirectly induces changes in the level of
interest rates, terms and availability of credit and ultimately the money
BACKGROUND OF THE STUDY
adoption of a market-base framework such as Open Market Operation in an economy
that had been under direct control for long required substantial improvement in
the macro-economic stability, effort were directed to the management of excess
liquidity. Thus a number of measures were introduced to reduced liquidity in
the system. These includes the reduction in the maximum ceiling on credit
growth allowed for banks; the recall to Central Bank of Nigerian (CBN) from
banks of the special deposits as requirements against outstanding external
payment arrears; abolition of the use of foreign guarantees or currency
deposits as collateral for naira loans and the withdrawal of public sector
deposits fro banks to the CBN. The use of stabilization securities for purpose
of reducing the bulging size of excess liquidity in banks was introduced in
banks cash reserve requirement were increased in 1989, 1990 and 1992; the
rising level of fiscal deficits was identified as a major source of macro
economic but also to synchronize fiscal and monetary policies. In the legal
aspect, the federal government promulgated the CBN decree (BOFID) No. 1969, the
CBN decree enhanced the banks powers and discretion in the design and conduct
of monetary policy, while the BOFID addressed the problem of policy leakages in
the monetary management by bringing the non-bank financial intermediaries,
which hitherto, were entirely outside the control of the CBN under the control
and supervision of the bank.
decree streamline and simplified procedures for licensing bank and established
procedures for licensing and controlling of other financial institutions
including discount houses and financial companies. Three discount houses have
been fully licensed to undertake secondary market dealership in treasury
security. By way of inducing efficiency and encouraging a good measure of
flexibility in banks, credit operations, the regulatory environment was also
improved. Consequently, the sectors specific credit distribution targets were
compressed into four (4) sectors in 1986 and to only two (2) in 1987. The
commercial and merchant banks were subjected to equal treatment since their
operations were found to produce similar effect on the monetary process. Hence,
merchant banks, hitherto excluded from cash reserve requirement, were subjected
to the same cash ration with commercial banks. Also liquidity ration of
merchant banks was raised to the level applicable to commercial banks. In
August 1987, all controls n interest rates were removed. However, in 1991, bank
maximum lending rates were pegged at 21% while a minimum of 13.5% was
stipulated for saving deposits. From 1992
the markets was feed of interest rate controls. However, controls measures were
re-introduced in 1994 and later deregulated in 1997.
In recognition of the fact
that well capitalized banks would strengthen the banking system for effective
monetary management, the monetary authority increase the minimum paid capital
of commercial bank and merchant banks in February 1990 from
N40 million and N50 million and from N12
million to N20 million respectively.
This was later increased to N500
million for both banks in 1997. Also in
1990, the apex bank brought into force the risk weighted measure of capital
adequacy recommended by the BALSE committee of the bank for international
settlements for licensed banks, which were complementary to both the prudential
guidelines for licensed banks, which were complementary to both the capital
adequacy requirements and Statement of Accounting Standard (SAS). The
prudential guidelines among others, spelt out the criteria to be employed by
banks for classifying non-performance loans. The CBN and NDIC continue
to monitor and examine banks in order to promote stable banking system.
In an effort to improve the operation of the money
market an auction – based market for treasury securities was introduced in 1989
and these treasury instruments were made bearer bills so as to enhance
transferability and promote secondary trading. The importance of timely data
for the success of indirect monetary management, especially through OMO was
realized by the CBN such that efforts have been made to improve the quality and
timeliness of financial data. To this end, remarkable progress have been made
in the computerization effort to the CBN and banks thereby creating a more
conducive atmosphere for quick processing of relevant data. From 30th
June 1993, the CBN commenced OMO in treasury securities with banks through
discount houses. The OMO is coordinated with discount window and reserve
requirement policies to ensure the attainment of the monetary policy objectives
and targets. In particular OMO has been conducted every week monitoring the
growth in the monetary base, which consists of currency in the hands of the
non-bank public total bank reserves.
OMO is based on the
discretionary of CBN to buy and sell eligible securities in the money market
from the private sector, depending on the objectives of the policy. Thus, if
there is need to reduce bank credit and hence money stock in an inflationary
economy, the appropriate response of CBN is to sell traded securities, hoping
that the private sector (bank and non bank public) would purchase them. When
purchases are made by bank on behalf of their customers, the banking system,
money stock is still constrained through reduction in the system’s reserve and
hence ability to expand credit. However, if the purchase security off the
private is financed through currency outside the banking system, the
constraining effect on money supply is direct. When the stance of the policy is
monetary ease, the apex bank reserves it strategy of the banking system is
expanded. This enable the bank expand credit which influence money stock, where
funds sis realize from the sale of securities by non – bank public are kept
outside the banking system, OMO expand money supply directly. Though, the
effect of OMO is more flexible and better suited for ay to day adjustment of
the reserves in the desired direction.
The type of securities used for
OMO varies from country to county but generally they consists of both
government and non-governments with issues ranging from very short to long term
maturities. The essentials is that the securities trade should be those which
the CBN can use easily to influence the level of reserves, credit and money and
money stock thereby inducing favourably changes in order relevant variables for
economic growth. Depending on the sophistication of the financial market the
operation vary from outright sales and purchases to temporary trading
securities. Temporary trading could be reports in which case securities are
sold with an agreement to purchase in future before maturity; or reverse
response in which securities are purchased with an agreement to resell later
before maturity. Other techniques of OMO include forward sales sand purchase as
well as swaps.
Recruitment of participations of
OMO depends largely on the structure of the financial system. Where there are
discount houses, it is common for the apex bank to channel transaction primary
through discount houses, in their absence the CBN relies on the selected from
the foregoing that the main purpose of OMO is to influences banks liquidity
with a view of influencing monetary growth. However, the expansion or
contraction in money stock is not desired for its own sake but rather to
achieve monetary growth, that is consistent with short term to long term
objectives of the economy especially with regards to exchange rates, interest
rate, investment and low or non-inflationary growth in goods and services.
OF GENERAL PROBLEM
The fundamental problem of any
government is it economic or otherwise its implementation. a number of
government monetary policy instrument have been designed and applied in Nigeria
in the hope of achieving the desired result of stable price level, low level of
unemployment, efficient banking system etc. but the application of direct
monetary instrument have not bring forth the desired objectives stated above
hence, left the government with no any other alternative than to turn to the
direct monetary instrument. Therefore, the problem under study is the
application of OMO as an instrument of monetary policy in Nigeria.
OF THE STUDY
The main purpose of this
research work is to evaluate the monetary policy in Nigeria. The research also
is at reviewing the evolution and performance of monetary police in Nigeria, so
also present a clear picture of the effort of to introduce the instruments.
The objective of this study will
be pursued vigorously by in directing analytical tools towards putting into
imperial test, the following are the major hypothesis.
HA: Alternative Hypothesis
The CBN monetary policies have
been properly ruled out to activate our depressed economy.
Ho: Null Hypothesis:
The monetary is not properly out
to activate our depressed economy.
HA: - Alternative hypothesis.
The CBN monetary policies is a
bit too stringent for the banks in the country and will therefore hamper an
effective operations of banks sin the economy.
Ho: Null hypothesis:
The CBN monetary policies are
not too stringent for the bank in the country, it will enhance productivity.
OF THE STUDY
Obviously, every research work
may be faced with some difficulties which limit the extend of the research. Therefore,
this research work is limited to financial, data collection is not sufficient.
it is most adequate and has been put to the maximum utilization.
Policy: The discretionary control of money supply by the
monetary authorities in order to achieve the desired economic goal.
Base: The sum total of bank reserve and currency in the hands
of non-banks public “vault cash and balance with apex bank”.
a medium of exchange, a store and measure of value which economic agents
preserve, and units of account which form the basis of comparing prices and
evaluating relative values, generally, anything that is acceptable as an
instrument of settlement can be term as money for the settlement of legal
payments, it is conferred as status of “legal tender”.
supply: Represent the measure of money and include currency in
circulation (with non-bank, public) and demand deposit at the commercial bank –
MI. The broad measured of money include MI and savings and time deposits, also
called quasi – money (QM) at the commercial and merchant banks and represents
Rate: the cost of or price charged for using someone’s money
which is normally expressed as a percentage of the amount borrowed.
House: A financial institution devoted to trading in
government secondary market instrument treasury bills certificates and other
Offer: Willingness to sell securities. i.e.
willingness on the part of government through apex banks to sell securities
(treasury bill) to the public.
Tenor: Maturity period that a security takes to
mature for the payment of principal amount interest attached.
Willingness to buy or purchase i.e. willingness on the part of the public
through banks commercial and merchants banks to buy or purchase securities
offered by the government.
Money market instruments created by government for financing short term fiscal
operation. There are two(2) types of securities in Nigeria and are in use,
these are treasury bill and certificates.