THE EFFECT OF MONETARY POLICY ON ECONOMIC GROWTH IN NIGERIA.

THE EFFECT OF MONETARY POLICY ON ECONOMIC GROWTH IN NIGERIA.

ABSTRACT

This study examined the impact of monetary policy on economic growth in Nigeria. Methodologically, time-series data (Cash Reserve Ratio, Statutory Liquidity Ratio, Monetary Policy Rate and Real Gross Domestic Product) were sourced from the CBN Statistical Bulletin from 1981 to 2019. An econometric methodology of data analyses was employed. Specifically, stationarity test (unit-root using ADF), Johansen Co-integration test and (long-run) analyses, correlation as well as the granger causality test were the standard econometric analyses performed. Statistically, time-series normality test results revealed that all the variables (GDP, CRR, SLR and MPR) have their p-values less than 5%, thus, confirming their normality. Also, the unit-root test results revealed that all the variables have uniform order of integration, thus, Johansen co-integration test was performed leading to the conduct of long-run regression analyses. The long-run results show that MPR and SLR have insignificant negative effect on the RGDP, while the CRR has significant positive effect on the RGDP. Evidence from the causality test show that there is no causal relationship between monetary policy and economic growth in Nigeria within the period observed. Thus, it was recommended that monetary policy instruments (CRR, MPR and SLR) should be fixed based on economic realities. 

 

 

 

Keywords: monetary policy, economic growth, cash reserve ratio, statutory liquidity ratio, Johansen Cointegration, Ordinary Least Square, Granger causality, Nigeria.

CHAPTER ONE

INTRODUCTION

• Background of the Study

Worldwide, researchers and practitioners agreed that monetary policy is an economic management technique that is useful in engineering sustainable economic growth. Economies across various strata (developed economies, developing economies and undeveloped economies) have all demonstrated seriousness with the management of their monetary policy to stimulate economic stability and engendered long-lasting economic development. The establishment of the Central Bank of Nigeria (CBN) in 1959, the apex monetary authority, has come with the mandate of economic management mechanism; one of which is the monetary policy.

Monetary policy represents all the action taken by the apex monetary authority (CBN) to affect monetary and other financial conditions through influencing the availability and cost of credit in  of payments position (Miftahu, 2019; Origin & Nneka, 2020). Dare and Okeya (2020) noted that monetary policy objectives in most economies include price stability, maintenance of external balance, reduction of unemployment, growth in output, and sustainable development. These are long-run economic growth measures that are necessary for the attainment of internal and external balance. Since CBN establishment, the control of money supply, credit supply, external debts, price index, inflation and credit rates have been its traditional role Onwuteaka Okoy and Molokwu (2019). The performance of these roles is anchored on effective utilization of monetary policy.

According to Ufoeze et al. (2018), two broad monetary policy regimes (direct pre-1986; and indirect, post-1986) were in existence in Nigeria. The direct monetary policy (through the use special deposits, cash reserve requirements, exchange rates, selective credit controls and credit ceilings) was used prior to 1986 to achieve price stability by combating inflation; while the indirect monetary policy started from 1986 till date with focus on market-based mechanisms. The failure of the direct monetary control framework to achieve predetermined monetary goals led to the emergence of the indirect monetary policy regime which started after the 1986 market liberalization, (Ufoee, et al., 2018; Onwuteaka, et al., 2019). Thus, there was a paradigm-shift to market-oriented framework principally for effective savings mobilization and efficient resource distribution with emphasis open market operation. Adeniyi (2020) noted that, recently, medium-term perspective framework is the focus of monetary policy in Nigeria. The shift was necessitated to liberate the implementation of monetary policy frameworks from perennial temporary shocks.

However, despite over four decades of different monetary policy frameworks application by the CBN, empirical controversy has continued to trail its economic significance; for instance, while studies (Amassoma & Olaiya, 2011, Udude, 2014; Igharo et al., 2020) could not establish significant relationship between monetary policy and economic growth), contrarily, studies by Adigwe et al. (2015), Abdulazeez (2016) and Wahab and Okrinya (2019) established significant relationship. However, a qualitative study undertaken by Twinoburyo and Odhiambo (2017) shows that monetary-growth relationship in developing economies (with structural weaknesses, immature financial markets and weak global markets integration) is weaker but weak in financially developed economies with semi-autonomous apex monetary body. Although wide range of works have been documented in Nigeria on monetary-growth relationship, nonetheless, they remain inconclusive. Also, considering fresh finding made by Twinoburyo and Odhiambo (2017) based on broad assessment of theoretic evolution of the relationship premised on respective recent empirical findings, this study is poised at re-examining monetary-growth relation in Nigeria.

1.2       Statement of the Problem

The CBN has continuously pursued contractionary monetary policy over the recent two decades despite the economic recession that is becoming a regular feature of the Nigeria’s economy since half a decade now. Initially known as the Minimum Rediscount Rates (MRR) between 1981 to 2005) before it now became known as the Minimum Policy Rate (MPR) in 2006 till date. From 1981 to 1990, CBN pursued a contractionary monetary policy by increasing MRR from 6% to 26% in 1993. However, the monetary authority changed the gear from contractionary to expansionary monetary policy by reducing MRR from 26% to from 13.5% which was uniform for five consecutive years but from 1999 to 2001, mixed monetary policy regimes was used. Again from 2002 to 2010, the CBN reversed to expansionary monetary policy by decreasing MRR from 16.5% to 6.25% in 2010 but since 2011 till date (2019), CBN again reversed to contractionary policy by increasing MPR from 12% to 14%. Also, the Cash Reserve Ratio (CRR) which was 1.3% in 2009 stood at 22.5% in 2019. Furthermore, the Liquidity Ratio (LR) which was 30.7% in 2009 stood at 103.9% in 2019. Clearly, these monetary policy tools (MPR, CRR and LR) are being tightening. The purpose of which is to decrease excess stock of money-in-circulation. However, the Gross Domestic Policy (GDP) rate that was 8.04% in 2009 is now 2.21% as at 2019. Ironically, while CBN tightens its monetary policy tools, the economic performance has continued to drop, leaving one to wonder whether monetary policy is truly an economic management technique for economic stabilization, growth and development in Nigeria. This situation therefore necessitates this study to empirically reexamine the monetary-growth relationship in Nigeria.

1.3       Research Questions

This study seeks to answer the following questions:

1. What effect does monetary policy have on economic growth in Nigeria?
2. What effect does cash reserve ratio have on economic growth in Nigeria?

1.4       Objectives of the Study

The main objective of this study is to examine the effect of monetary policy on economic growth in Nigeria. The specific objectives are as follows:

1. To examine the effect of monetary policy on economic growth in Nigeria.
2. To examine the causal relationship between monetary policy and economic growth in Nigeria.

1.5       Research Hypotheses

This study seeks to test the following hypotheses:

H_O1: Monetary policy has no effect on economic growth in Nigeria.

H_O2: There is no causal relationship between monetary policy and economic growth in Nigeria.

1.6       Significance of the Study

The findings and suggestions of this study will be useful for:

1. This study would enable the government to better understand the significance of the prominent quantitative monetary policy package including the economic significance of the current CBN monetary policy stance.
2. Also, policy-makers would be better informed on the necessity or otherwise of their contractionary monetary policy measure. Therefore, subsequent economic policy would take cognizance of monetary policy on economic growth in Nigeria.

• Analysts and researchers will benefit from this study increasing and expanding the existing studies, thereby improving the body of knowledge, while it will serve as reference-point for researchers and analysts in their various capacity, it will also enable them understand the current monetary policy stance vis-à-vis predefined targets.

1. Finally, the general (interested member of the) public will find this study outcomes to be highly epistemically beneficial.

1.7       Scope of the Study

This study specifically examines the impact of monetary policy on economic growth in Nigeria. The study spans from 1980 to 2019. The choice of this time-period is because it characterizes both the contractionary and expansionary monetary policy eras of the CBN amid mixed economic growth rate. Covering these periods (expansionary and contractionary) is expected to provide broad and deep insight into the monetary policy performance vis-à-vis economic growth. Thus, while the monetary policy will be examined in the light of CRR, MPR and LR, economic growth will be examined in the light of the GDP growth rate.

1.8       Definition of Terms

Cash Reserve Ratio: This connotes the minimum share of bank’s total deposits that is mandated by the CBN to be held as reserves; either as reserves or deposits.

Credit Instruments: These refer to tools used by the CBN in controlling the rate of inflation. They can be best described as the monetary policy tools.

GDP Growth Rate: This measures the percentage change (year-on-year) in a nation’s GDP.

Liquidity Ratio: This refers to the statutory percentage of deposits that CBN compels the banks to keep with the apex bank in form of liquid cash before providing credits to their customers.

Monetary Policy Rate: This connotes the interest rate sets by CBN principally to control evolution of major monetary variables (such as consumer prices).

Monetary Policy: This is the summation of the economic actions taken by regulatory authorities in-charge of regulating or managing the dynamic economic variables that affect changes in the prices of goods and services and hence the value of money.

Monetary Targeting: This involves the use of direct or market-based instruments.

THE EFFECT OF MONETARY POLICY ON ECONOMIC GROWTH IN NIGERIA.

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