A PAPER ON MONETARY POLICY IN NIGERIA BY NDUKAUBA CHIAMAKA INTRODUCTION Over the years, the objectives of monetary policy have remained the attainment of internal and external balance of payments. However, emphasis on techniques/instruments to achieve those objectives have changed over the years. There have been two major phases in the pursuit of monetary policy, namely, before and after 1986. The first phase placed emphasis on direct monetary controls, while the second relies on market mechanisms.
Overall, the socio-economic and political milieu, including the legal framework under which the Central Bank of Nigeria has operated, was found to be the critical factor that influenced the outcome of monetary policy.
Specifically, the existence of fiscal dominance, a persistent liquidity overhang, an oligopolistic banking system and dualistic financial markets are major systemic factors that have undermined the efficacy of monetary policy in Nigeria. Generally, both fiscal and monetary policies seek at achieving relative macroeconomic stability.
Over the year, two issues have been subjects of debate in this regard.
First is the superiority of each of these policies in the achievement of macroeconomic stability. While the Keynesians argued that fiscal policy is more potent than monetary policy, the monetarists led by Milton Friedman on the other hand believed the other way round. MONETARY POLICY Monetary policy is the process by which the central bank or monetary authority of a country controls the supply of money, often targeting a rate of interest.
Monetary policy is usually used to attain a set of objectives oriented towards the growth and stability of the economy. These goals usually include stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. Monetary policy is referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy rapidly, and a contractionary policy decreases the total money supply or increases it only slowly. Expansionary policy is traditionally sed to combat unemployment in a recession by lowering interest rates, while contractionary policy involves raising interest rates to combat inflation. Monetary policy is contrasted with fiscal policy, which refers to government borrowing, spending and taxation. Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment.
Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals). The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard. MONETARY POLICY IN NIGERIA [ 1980- 2008] Monetary Policy before 1986
The economic environment that guided monetary policy before 1986 was characterized by the dominance of the oil sector, the expanding role of the public sector in the economy and over-dependence on the external sector. In order to maintain price stability and a healthy balance of payments position, monetary management depended on the use of direct monetary instruments such as credit ceilings, selective credit controls, administered interest and exchange rates, as well as the prescription of cash reserve requirements and special deposits.
The use of market-based instruments was not feasible at that point because of the underdeveloped nature of the financial markets and the deliberate restraint on interest rates. The most popular instrument of monetary policy was the issuance of credit rationing guidelines, which primarily set the rates of change for the components and aggregate commercial bank loans and advances to the private sector. The sectoral allocation of bank credit in CBN guidelines was to stimulate the productive sectors and thereby stem inflationary pressures.
The fixing of interest rates at relatively low levels was done mainly to promote investment and growth. Occasionally, special deposits were imposed to reduce the amount of free reserves and credit-creating capacity of the banks. Minimum cash ratios were stipulated for the banks in the mid-1970s on the basis of their total deposit liabilities, but since such cash ratios were usually lower than those voluntarily maintained by the banks, they proved less effective as a restraint on their credit operations. From the mid-1970s, it became increasingly difficult to achieve the aims of monetary policy.
Generally, monetary aggregates, government fiscal deficit, GDP growth rate, inflation rate and the balance of payments position moved in undesirable directions. Compliance by banks with credit guidelines was less than satisfactory. The major source of problems in monetary management were the nature of the monetary control framework, the interest rate regime and the non-harmonization of fiscal and monetary policies. The monetary control framework, which relied heavily on credit ceilings and selective credit controls, increasingly failed to achieve the set monetary targets as their implementation became less effective with time.
The rigidly controlled interest rate regime, especially the low levels of the various rates, encouraged monetary expansion without promoting the rapid growth of the money and capital markets. The low interest rates on government debt instruments did not sufficiently attract private sector savers and since the CBN was required by law to absorb the unsubscribed portion of government debt instruments, large amounts of high-powered money were usually injected into the economy.
In the oil boom era, the rapid monetization of foreign exchange earnings resulted in large increases in government expenditure which substantially contributed to monetary instability. In the early 1980s, oil receipts were not adequate to meet increasing levels of demands and since expenditures were not rationalised, government resorted to borrowing from the Central Bank to finance huge deficits. This had adverse implications for monetary management. Monetary Policy Decisions – 1986
Analysis of the institutional growth and structure indicates that the financial system grew rapidly in the mid 1980s to 1990s. The number of commercial banks rose from 29 in 1986 to 64 in 1995 and declined to 51 in 1998, while the number of merchant banks rose from only 12 in 1986 to 54 in 1991 and subsequently declined to 38 in 1998. In terms of branch network, the combined commercial and merchant bank branches rose from 1,323 in 1985 to 2,549 in 1996. There was also substantial growth in the number of non-bank financial institutions, especially insurance companies.
Monetary Policy Since 1986 The Structural Adjustment Programme (SAP) was adopted in July, 1986 following the crash in the international oil market and the resultant deteriorating economic conditions in the country. It was designed to achieve fiscal balance and balance of payments viability by altering and restructuring the production and consumption patterns of the economy. These would be achieved by eliminating price distortions, reducing heavy dependence on crude oil exports and consumer goods imports, enhancing the non-oil export base and achieving sustainable growth.
Other aims were to rationalise the role of the public sector and accelerate the growth potentials of the private sector. The main strategies of the programme were the deregulation of external trade and payments arrangements, the adoption of a market-determined exchange rate for the Naira, substantial reduction in complex price and administrative controls and more reliance on market forces as a major determinant of economic activity. The objectives of monetary policy since 1986 remained the same as in the earlier period, namely: the stimulation of output and employment, and the promotion of domestic and external stability.
In line with the general philosophy of economic management under SAP, monetary policy was aimed at inducing the emergence of a market-oriented financial system for effective mobilization of financial savings and efficient resource allocation. The main instrument of the market-based framework is the open market operations. This is complemented by reserve requirements and discount window operations. The adoption of a market-based framework such as OMO in an economy that had been under direct control for long, required substantial improvement in the macroeconomic, legal and regulatory environment.
In order to improve macroeconomic stability, efforts were directed at the management of excess liquidity; thus a number of measures were introduced to reduce liquity in the system. These included the reduction in the maximum ceiling on credit growth allowed for banks; the recall of the special deposits requirements against outstanding external payment arrears to CBN from banks, abolition of the use of foreign guarantees/currency deposits as collaterals for Naira loans and the withdrawal of public sector deposits from banks to the CBN.
Also effective August, 1990, the use of stabilization securities for purposes of reducing the bulging size of excess liquidity in banks was re-introduced. Commercial banks’ cash reserve requirements were increased in 1989, 1990, 1992, 1996 and 1999. The rising level of fiscal deficits was identified as a major source of macroeconomic instability. Consequently, government agreed not only to reduce the size of its deficits but also to synchronize fiscal and monetary policies.
By way of inducing efficiency and encouraging a good measure of flexibility in banks’ credit operations, the regulatory environment has improved. Consequently, the sector-specific credit allocation targets were compressed into four sectors in 1986, and to only two in 1987. From October, 1996, all mandatory credit allocation mechanisms were abolished. The commercial and merchant banks were subjected to equal treatment since their operations were found to produce similar effects on the monetary process.
Areas of perceived disadvantages to merchant banks were harmonized in line with the need to create a conducive environment for their operations. The liquidity effect of large deficits financed mainly by the Bank led to an acceleration of monetary and credit aggregate in 1998, relative to stipulated targets and the performance in the preceding year. Outflow of funds through the CBN weekly foreign exchange transaction at the Autonomous Foreign Exchange Market (AFEM) and, to a lesser extent, at Open Market Operation (OMO) exerted some moderating effect.
The reintroduction of the Dutch Auction system (DAS) of foreign exchange management in July, 2002 engendered relative stability, and stemmed further depletion of reserves during the second half of 2002. However, the financial system was typically marked by rapid expansion in monetary aggregates, particularly during the second half of 2000, influenced by the monetization of enhanced oil receipts. Consequently, monetary growth accelerated significantly, exceeding policy targets by substantial margins.
Savings rate and the inter-bank call rates fell generally due to the liquidity surfeit in the banking system though the spread between deposit and lending rates remained wide. Monetary Policy Decisions  MPC Meeting of August, 2003 1. Reduction of Minimum Rediscount Rate (MRR) by 150 basis points to 15. 0 per cent with effect from August 17, 2003; 2. Changed the frequency of MPC Meetings from fortnightly to monthly; MPC Meeting of June, 2003 1. While a change in the stance of monetary policy was not considered as desirable, the need for greater fiscal prudence was emphasized.
MPC Meeting of April, 2003 1. No additional policy action was introduced during the month. MPC Meeting of March, 2003 No new monetary policy action was introduced during the month. Monetary Policy Decisions  MPC Meeting of December, 2004 1. There was no new monetary policy action introduced at the meeting. MPC Meeting of June, 2004 1. Withdrawal of public sector deposits amounting to N74. 5 billion (75. 6 per cent of such deposits) from the deposit money banks to the CBN with effect from July 21, 2004; 2. Phased recall of public sector funds with the deposit money banks to be sustained.
MPC Meeting of February, 2004 1. Approval of a selective withdrawal of public sector funds from the banking system, targeting a total of N40 billion; Monetary Policy Decisions  MPC Meeting of November 1, 2005 1. The MPC mandated the review of the rules and procedures guiding the forex market with a view to simplifying and improving upon them; 2. Observed that the fiscal authorities must make adequate provisions in the 2006 budget for Treasury Instruments for appropriate liquidity management in 2006; 3.
Reiterated the commitment of the CBN to meet its target growth of money supply for 2005 (that is, 15 per cent). Consequently, the MPC resolved to take the following additional measures to bring money supply in line with the target: * Complete the sale of N60 billion of CBN instrument, and sell more if need be; * Sale of Treasury Bills which will be sterilized for liquidity management; * Sale of additional foreign exchange to mop up liquidity; * Move all NNPC deposits with commercial banks to the CBN and sterilize much of it with effect from October 31, 2005.
All banks that collect revenues on behalf of the NNPC are expected to remit all such funds to the CBN within 48 hours of the collection. Failure to remit such funds will attract a penal interest charge of MRR plus 5. Any MD of a bank who misreports NNPC deposits with it or falsifies any returns to the CBN will be suspended for three months in the first instance; * To ensure effective monitoring and implementation of liquidity management programme, the MPC set up a Monetary Policy Implementation Committee which shall meet every two days to review developments and take necessary actions.
MPC Meeting of June 15, 2005 1. The withdrawal of N60 billion public sector deposit from the banks to the CBN, which should be concluded within a period of 2 months; 2. The maintenance of the prevailing minimum rediscount rate (MRR) of 13 per cent. This action would help sustain the prevailing policy measure in encouraging credit to the growth sectors of the economy; 3. The upward revision of the cash reserve requirement (CRR) by 50 basis points from 9. 5 to 10 per cent in order to further mop up excess liquidity in the system.
The Committee further agreed that, henceforth, the debiting of banks accounts with CBN to meet the stipulated CRR should be effected immediately after the monthly FAAC meetings. This is based on the observation by the Committee that the FAAC related liquidity, is the major source of excess liquidity in the economy. 4. The revision of the definition of Liquid Assets to include 3-year bonds; 5. That, until the Pension Funds Administrators are appointed, funds realised from the Pension Fund should not be invested in the Nigerian Treasury Bills instead they should be invested in long-term securities or sterilized; 6.
The sustenance of the exchange rate band of ± 3 per cent. MPC Meeting of January 24 & 25th, 2005 1. Reduction of the MRR by 200 basis points, in order to reduce the cost of private sector borrowing for productive investment; 2. Adoption of two weeks maintenance period for the CRR; and 3. Adoption of an exchange rate band of plus/minus 3. 0 per cent, to sustain exchange rate stability, anchor expectations and minimize transaction costs. Monetary Policy Performance in 2006 In 2006, the New Monetary Policy Framework for monetary policy implementation was introduced.
The ultimate goal of the new framework was to achieve a stable value of the domestic currency through stability in short- term interest rates around an Operating Target the CBN Monetary Policy Rate (MPR). The MPR serves as an indicative rate for transactions in the inter-bank money market as well as other interest rates in the money market transactions. The MPR which replaced the MRR was set at 10 per cent with spread of 600 basis points around the rate, i. e. 300 basis points above and 300 basis points below.
This translates into an upper limit of 13 per cent and a lower limit of 7 per cent. The Whole Sale Dutch Auction System (WDAS) replaced the Dutch Auction System (DAS) in the first quarter of the year under review. In pursuant of further liberalization of the foreign exchange market the bureaux de change was admitted into the WDAS window during the second quarter of 2006 . The admittance of the BDC’s to the WDAS window led to the unification of the exchange rate between official and parallel market.
The objective of monetary policy in 2006 was sustaining price stability and non inflationary growth, as enunciated in the National Economic Empowerment and Development Strategy (NEEDS). The target for single digit inflation was, however, achieved as at December 2006 the inflation stood at 8. 5 per cent. The GDP growth rate for 2006 declined to 5. 63 per cent compared with what obtained in 2005 when it stood at 6. 51 per cent, but the external reserves rose rapidly from US$28. 3 billion to US$41. 9 billion, representing an increase of US$ 13. billion. At the end of 2006, the overall performance indicated that the broad money supply (M2) target was overshot as it grew by 30. 6 per cent compared with the target of 27. 8 per cent. The Reserve money target for December 2006 was missed. The actual Reserve money (RM) at end December stood at N974. 9 billion, compared with the target of N 820 Billion. The non attainment of RM target at end December was largely due to the rapid growth in currency in circulation. Monetary Policy Decisions 195th MPC Meeting of 28th November, 2006 1.
Adoption of a new monetary policy framework to be effective from Monday December 11 th 2006 2. The new monetary policy framework would be launched on Monday December 4,2006 3. The new Monetary policy framework would introduce a new Monetary Policy Rate ( MPR ) to replace the Minimum Rediscount Rate ( MRR ) 4. The MPR would be the main instrument of the new monetary policy framework and will determine the lower and upper band of the CBN standing facility and is expected to have the capability of acting as the nominal anchor for other rates 5.
Discontinue outright rediscounting of bills in the CBN to encourage trading among the market operators 6. Ensure the full deployment of Information Technology (IT) infrastructure (RTGS, T24, and eFASS) for the effective implementation of the new monetary policy framework; and 7. Convene meeting of the MPC every other month to review developments in the economy. Reasons * Challenges arising from the new policy framework Gave consideration to the policy setting rules such as the monetary policy response function, the frequency of changes in the MPR , significance of inflation considerations in determining the MPR , the problem of price, credit and operational risks, sensitization of operators and other stakeholders, training, etc MPC Meeting of August 9, 2006 1. Maintained the MRR at 14% with a proviso to review the MRR should the threat to monetary policy continue; 2. Approved a new framework for monetary policy implementation. The IT and other logistics requirements are to be sorted out between now and October, 2006.
Pilot implementation is expected to commence on or before November 1st, 2006 3. Sustained the CBN’s zero tolerance to lending to government; 4. Reaffirmed that there is no control on interest rate or pegging of lending rate to the MRR; 5. Approved operational guidelines on the CBN Discount Window; 6. Approved guidelines for discount window operations in FGN bonds; 7. Sustained the on-going liberalization of the forex market. MPC Meeting of June 8, 2006 * Raised the MRR from 13% to 14%, to take effect from 12th June, 2006; * Maintained the CRR at 5%; Resolved to sustain the on-going liberalization of the forex market as well as effectively monitor the market to maintain stability of the naira; * The Monetary Policy Implementation Committee (MPIC) would continue to keep daily surveillance on monetary operations; * With the deployment of the electronic Financial Analysis Surveillance System (eFASS), the Bank will leverage on that to ensure the proactive implementation of monetary policy; * The OMO shall continue to be the major instrument of monetary policy; * The Committee, further assured that it would respond to changes in economic prospects as needed to support the attainment of its objectives. MPC Meeting of February 14, 2006 * Resolved to work towards maintaining single digit (core) inflation; * The Bank will work towards zero ways and means. However, where it becomes absolutely necessary, ways and means will not be more than 5% of last year’s revenue; and such lending will attract the prevailing MRR + 1 per cent rate of interest. CBN will continue with regular OMO operations and issuance of new bills, both TBs and CBN bills; * MRR will be maintained at 13% in line with the anti-inflation stance of the MPC; * As a measure of tight monetary stance, M2 will be kept within the range of 15 to 17% target; * CRR is to be maintained at 5%, while the liquidity ratio will be retained at 40%; * Wholesale-DAS will commence on 20th February, 2006 to foster exchange rate convergence between the DAS and the inter-bank market rates. Monetary Policy Performance in 2007 The framework for monetary policy management in 2007 remained that of monetary targeting. The Central Bank of Nigeria (CBN) adopted various policy measures aimed at containing the growth of monetary aggregates in order to achieve monetary and price stability.
Open Market Operations (OMO) remained the major tool of liquidity management. Other policy measures included increased issuance of treasury securities in the primary market to mop-up excess liquidity; use of deposit and lending facility to encourage inter-bank transactions as well as special sales of foreign exchange, including swap arrangements. NTBs of various tenors (91-, 182- and 364-day were auctioned during the period. The liquidity management efforts of the CBN yielded the expected results as the single-digit inflation rate was sustained during the year. In addition, the exit reserve money target under the Policy Support Instrument (PSI) was achieved in June 2007.
Over the end-December 2006 level, provisional data indicate that broad money supply (M2) grew by 11. 03 per cent in June 2007 and further by 21. 3 and 25. 31 per cent in September and October, 2007 respectively. When annualized, the M2 grew by 28. 44 and 30. 25 per cent, in September and October, 2007 respectively, compared with 33. 3 and 39. 6 per cent in the corresponding months of 2006. The growth of M2 was driven by the increase in foreign assets (net) of the banking system as well as the rapid rise in credit to the private sector since the end of the second quarter. With the CBN’s drive to contain excess liquidity in the banking system, both M2 and reserve money may be within targets by the end of 2007.
At the end of the second quarter, aggregate domestic credit (net) to the economy declined by 56. 11 per cent, but increased by 98. 99 per cent in October 2007. Also, credit to government (net) declined by 51. 9 per cent in September compared to a decline of 56 per cent at the end of the second quarter. But credit to the private sector, which had maintained an upward trend in most of 2007, rose to 34. 37 and 62. 0 per cent in June and September, respectively. As at November 2007, the economy has achieved a commendable level of external reserves of about US$50. 0 billion that is capable of supporting approximately 23 months of current foreign exchange disbursements.
This represented an increase of 18. 06 per cent when compared with the level of US$42. 42 billion recorded in the corresponding period of 2006. With the implementation of the new Monetary Policy Rate (MPR) and the adoption of the CBN standing facilities, volatility in inter-bank rates remained subdued with rates hovering within the MPR. The MPR was reviewed thrice during the year. The first was in June 2007 when it was reviewed downward by 200 basis points, from 10. 0 per cent to 8. 0 per cent, with the width of the interest rate corridor reduced from +/- 300 to +/- 250 basis points. The second was in October 2007 when the MPR was raised by 100 basis points, from 8. 0 to 9. per cent, with the interest rate corridor removed, in response to anticipated changes in economic and financial conditions. The MPR was then made to serve as the overnight (repo) rate. The last was in December 2007 when the MPR was increased by 50 basis points, from 9. 0 to 9. 5 per cent. Monetary Policy Decisions 200th MPC Meeting of Tuesday, 4th December, 2007 1. The MPC decided to raise the MPR by 50 basis points (i. e. from 9. 0 per cent to 9. 5 per cent) to signal a tightening of policy stance 2. Issue new primary instruments to mop up a significant portion of the anticipated excess liquidity in the system 3. Continue with the regular open market operations (OMO) Reasons The MPC anticipated imminent fiscal surge and continuing increased capital inflows * Desire to drive down core inflation to single digit level * Sustain inflation along its present path 199th MPC Meeting of Wednesday, 3rd October, 2007 Background to MPC Decisions As at September 17, 2007 , reserve money was N919. 7 billion compared with the target of N880. 0 billion for end-September, 2007. The major driver of the growth in reserve money in the third quarter was currency in circulation, which increased from N719. 2 billion at end -August, 2007 to N735. 4 billion on September, 17, 2007 1. The MPC decided to raise the MPR by 100 basis points (i. e. from 8. 0 per cent to 9. 0 per cent).
The new MPR rate would also double as the repo rate-the rate at which the CBN would lend to banks 2. Continue the sale of foreign exchange for purposes of liquidity management 3. Embark on active open market operations 4. DMB deposits with the CBN would seize to earn interest . Reasons The MPC explained that its actions were designed to amongst others, deepen inter-bank trading and encourage banks to free resources to enlarge the credit market 198th MPC Meeting of Wednesday, 1st August, 2007 1. The MPC decided to leave the MPR unchanged at 8. 0 per cent 2. Approve increased sale of financial securities to mitigate the impact of increased liquidity arising from anticipated fiscal injections Reasons MPC anticipated continuing rise in headline inflation in the third quarter of the year * Challenges arising from increased capital inflows and an appreciating naira exchange rate * Other important sources of pressure/risk to low inflation include: * virement of the capital vote to finance recurrent expenditure * distribution of part of the excess crude oil account * Forecast growth path of M2 was expected to be within anticipated limits to end year if monetary policy remained on course 197th MPC Meeting of Tuesday, 5th June, 2007 Background to MPC Decisions The Bank sustained its market driven approach to ensure that the reserve money targets under the Policy Support Instrument ( PSI ) program were achieved in the first half of 2007. Reserve money rose from N841. 5 billion in March, 2007, to N902. 40 billion in May 2007, showing an increase of N61. 15 billion and excess liquidity of N42. 40 billion. However, at end-June, 2007, reserve money was N858. 20 billion compared with the target of N860 billion. The attainment of the program target in the second quarter reflected the effect of the intensive liquidity mop-up operations through the use of both the money market and foreign exchange instruments. 1. The MPC decided to reduce the MPR by 200 basis points (i. e. from 10. 0 per cent to 8. 0 per cent) 2. Introduce tenured repo at MPR 3. Reduce the width of the interest rate corridor from +/-300 to +/- 250 basis points.
The combined implication of (1) and (2) is that the deposit facility now stands at 6. 5 per cent while the lending facility is 10. 5 per cent, both down from 7. 0 and 13. 0 per cent, respectively. 4. Both the lending and deposit facilities are expected to be used as a last resort. Consequently, the frequent usage of these facilities will attract a penalty. 5. Increase the issuance of primary market instruments to mop up about N100. 0 billion from the system 6. Authorise the inclusion of inter-bank placements as part of deposits in the computation of banks’ liquidity ratio; and 7. Approved the continuation of Open Market Operations (OMO) for purposes of liquidity management. Reasons Although inflation had moderated significantly, the downside risks remained * Challenges in achieving the exist PSI reserve money target by June, 2007 * Rising autonomous foreign exchange inflows * Risk of over appreciation of the naira/dollar exchange rate * Strong upside risks such as continued stability of the exchange rate and external reserves * Robust economic outlook in the medium term 196th MPC Meeting of Wednesday, 7th February, 2007 1. The MPC decided to leave the MPR unchanged at 10 per cent 2. Release the 8 per cent special Cash Reserve Requirement ( CRR ) invested on behalf of the banks by the CBN to the Deposit Money Banks (DMBs) on maturity to enable the DMBs utilize the amount of reserve money released for regular operations 3. Keep the CRR unchanged at 3 per Central Bank of Nigeria 4.
Maintain the liquidity ratio at 40 per Central Bank of Nigeria Allow the collaterized placements among deposit money banks to count as liquid assets, for purposes of liquidity ratio computations; and 5. Exclusion of domiciliary deposit accounts from the definition of broad money (M2) and the computation of banks’ CRR . Reasons * High downside risks to low inflation during fiscal 2007 * Rising autonomous private inflows which is expected to lead to persistent excess liquidity in the system * Anticipated high election spending * Falling prices of crude oil * Impact of these adverse developments were expected to unwind after the elections * Robust economic outlook expected in the medium term
Monetary Policy Decisions  206th MPC Meeting of 11th December, 2008 The Monetary Policy Committee of the Central Bank of Nigeria met on December 11, 2008. The Committee reviewed the major domestic and international macroeconomic developments since the beginning of the year 2008. It noted that despite the stability in the economy during the period, there were challenges in respect of developments in the international oil market involving slack demand from advanced economies and declining oil prices that could weaken Nigeria’s fiscal and external payments positions in 2009. The Committee, thus, decided to: 1. Leave the MPR unchanged at 9. 5 percent; 2. Reduce banks’ foreign exchange net open position from 20. 0 to 10. 0 percent of shareholders funds with effect from Monday December 15, 2008; and 3. CBN to participate actively in the daily inter-bank foreign exchange market by buying and selling through the 2-way quotes. 205th MPC Meeting of 18th September, 2008 The Monetary Policy Committee of the Central Bank of Nigeria met on September 18, 2008. The Committee reviewed the major domestic and international macroeconomic developments in the first eight months of the year. It noted that Nigeria’s economic fundamentals remained strong despite the global financial turmoil.
In order to ensure the smooth functioning of the financial markets and the economy in general, the Committee decided to lubricate the system. The Committee, thus, decided to: 1. reduce the MPR from 10. 25 per cent to 9. 75 per cent; 2. reduce CRR from 4 per cent to 2 per cent with immediate effect; 3. reduce the liquidity ratio from 40 per cent to 30 per cent; 4. allow repo transactions against eligible securities for 90 days, 180 days and 360 days; and 5. the CBN will now buy and sell securities through the two-way quotes. 204th MPC Meeting of 5th August, 2008 The Monetary Policy Committee of the Central Bank of Nigeria met on August 5, 2008. The Committee reviewed the major domestic and international macroeconomic developments in the first seven months of 2008.
It observed that despite the stability in the exchange rate of the naira, the macroeconomic outcomes were mixed as the key interest rates and inflation maintained an upward trend. The Committee decided as follows: 1. The MPR will remain unchanged at 10. 25 per cent since the core inflation is expected to remain at a relatively moderate level. 2. After reviewing developments in the financial market and the misplaced perceptions that the interest rate trends are linked to the requirement of a common year-end, the MPC decided that the common year-end for banks would no longer be a requirement and therefore left to the decision to the discretion of the banks. 3.
In order to ensure a transparent pricing regime in the money market and thereby foster healthier competition, banks are required to fully disclose to the public their deposit rates as well as their base lending rates and other charges for all the sectors of the economy. These should be published on their respective websites and updated daily. The banks are required to report these rates to the CBN to enable the Bank to publish a summary of the rates for each deposit money bank every month. 203rd MPC Meeting of 2nd June, 2008 The Monetary Policy Committee of the Central Bank of Nigeria met on June 2, 2008. The Committee reviewed the major domestic and international macroeconomic developments in the first five months of the year.
It noted that despite the stability in the economy during the period, there were many uncertainties that could threaten the Central Bank’s objective of low and single digit inflation. The Committee decided as follows: 1. strengthen the use of instruments such as open market operations and special sale of foreign exchange; 2. raise the MPR by 25 basis points from 10. 0 per cent to 10. 25 per cent; 3. increase the CRR by 100 basis points from 3. 0 per cent to 4. 0 per cent with effect from June 09, 2008; and 4. set up a technical committee to work out other intervention securities to further strengthen the effectiveness of liquidity management.
The reasons for the decisions included the upward oil and food price movements, the fiscal expansion, and the international financial market conditions. 202nd MPC Meeting of 1st April, 2008 The Monetary Policy Committee of the Central Bank of Nigeria met on April 1, 2008. The Committee reviewed the major domestic and international macroeconomic developments in the first quarter of the year. It noted that despite the stability in the economy during the quarter, there were many uncertainties that could threaten the single digit inflation objectives of the Bank. The Committee decided as follows to: 1. raise the MPR by 50 basis points from 9. 5 per cent to 10 per cent; 2. issue treasury bills for liquidity management; and 3. increase the sale foreign exchange as the need arises.
The reasons for the decisions included the current rate of inflation; the impact of that growth of monetary aggregates in 2007 on the first quarter of 2008; the impact of the continued inflow of foreign private capital into the economy and the actual and potential effect of the recent sharing of the naira equivalent of the excess crude oil revenue as well as the scheduled distribution of the second round in June, 2008. The proposed budget also contained significant increases in expenditure which would lead to fiscal deficits in the next two quarters. 201st MPC Meeting of February 2008 The Monetary Policy Committee of the Central Bank of Nigeria met on 5th February 2008 to review the major domestic and international macroeconomic developments and observed that the outlook for 2008 while being positive has many elements of uncertainty. The Committee, therefore, decided: 1. To leave the Monetary Policy Rate (MPR) unchanged at 9. 5 per cent 2.
To continue the use of open market operations (OMO) for liquidity management and appropriate exchange rate policies CONCLUSION. Since its establishment in 1959 the Central Bank of Nigeria (CBN) has continued to play the traditional role expected of a central bank, which is the regulation of the stock of money in such a way as to promote the social welfare (Ajayi, 1999). This role is anchored on the use of monetary policy that is usually targeted towards the achievement of full-employment equilibrium, rapid economic growth, price stability, and external balance. Over the years, the major goals of monetary policy have often been the two later objectives.
Thus, inflation targeting and exchange rate policy have dominated CBN’s monetary policy focus based on assumption that these are essential tools of achieving macroeconomic stability. Monetary policy in Nigeria has been carried out through the portfolio behaviour of the CBN in terms of the control of its credit and management of reserves. Credit control is being used to check movement in domestic price level, while the exchange rate policy serves as measure for determining the competitiveness and current account performance as well foreign reserves REFERENCES * Monetary Policy and Macroeconomic Instability in Nigeria : A Rational Expectation Approach [Abiodun Oluwole Folawewo and Tokunbo Simbowale Osinubi] * MONETARY POLICY FRAMEWORK IN AFRICA: THE NIGERIAN EXPERIENCE [DR O. J. Nnanna] * “B. M.
Friedman, “Monetary Policy,” Abstract. “. International Encyclopaedia of the Social & Behavioural Sciences. 2001. pp. 9976–9984. * Rogoff, Kenneth, 1985. “The Optimal Commitment to an Intermediate Monetary Target”, Quarterly Journal of Economics 100, pp. 1169–1189 * Forder, James (December 2004). “”Credibility” in Context: Do Central Bankers and Economists Interpret the Term Differently? ” (pdf). Econ Journals Watch. http://www. econjournalwatch. org/pdf/ForderComment1December2004. pdf. * “Bank of England founded 1694”. BBC. March 31, 2006. http://www. bbc. co. uk/history/timelines/britain/stu_eng_bank. shtml. * www. cenbank. org/monetarypolicy
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