IMPACT OF MONETARY POLICY ON FINANCIAL PERFORMANCE OF MANUFACTURING FIRMS IN NIGERIA

ABSTRACT

 

 

Monetary policy over decades has been one of the key driving forces behind economic management adopted by governments to shape and enhance the performance of the sectors and the whole economy of a country at large. This study examines the effect of monetary policy on the performance of manufacturing firms in Nigeria. This study adopted the New Keynesian model as the theoretical framework. The study employs a quantitative research design to test the research hypotheses of whether or not monetary policy has an effect on the performance of Nigeria’s manufacturing sector. To ensure a robust data analysis, the Ordinary Least Square method of Regression analysis, the Unit Root test and the Johansen Co-Integration analysis were employed with the aid of EVIEWS 9.0 and the study found Interest and inflation rates  have no significant impact on the performance of Nigeria’s manufacturing firms. With the exclusion of exchange Rate, having a significant impact on the performance of Nigeria’s manufacturing firms. The study therefore recommends that the government should avoid monetary policy summersaults, which obviously has not yielded the desired effect over the Nigerian economy in recent times.

 

Keywords: Exchange rate, Inflation, Interest rate, and Monetary policy

 

CHAPTER I

INTRODUCTION

1.1 Background to the Study

Manufacturing is the sector of an economy which deals with innovating, creating, and producing goods and services that facilitates employment opportunities, wealth creation, and higher rates of consumption, attracts Foreign Direct Investment (FDI), and plays a significant role in the eradication of poverty in the society. According to Bagshaw (2012), the manufacturing sector of the economy is viewed as a catalyst for infrastructural as well as economic development all over the world. As history would have it, some notable examples include some countries in Asia such as Singapore, industrialization in China, India, and Malaysia to name a few. Gichuhi (2016) noted that the manufacturing industries have helped in modernizing agriculture; which forms the backbone of our economy. Apart from this, manufacturing industries also reduce the heavy dependence of people on agricultural income. This becomes possible because of creation of new jobs in secondary and tertiary sectors. Labonte (2011) explained that a vibrant manufacturing base leads to more research and development, innovation, productivity, exports, and middle-class jobs. Manufacturing helps raise living standards more than any other sector. Manufacturing generates more economic activity than other sectors. The importance of the manufacturing sector cannot be emphasized enough as it is crucial in potentially attaining Sustainable Development Goals (SDG). Ogundipe (2016) lays emphasis on the achievement of good paying employment, growth of the economy, industries, innovations, infrastructures and adequate consumption and production which can be driven by the manufacturing sector of the economy.

According to Ezeduru, Olajide and Ango (2018), industrialization is seen as the catalyst responsible for driving the production of commodities, provision of services, increased employment rate, and creation of wealth. Onakoya (2015) opine that one of the leading sectors of the Nigerian economy is the manufacturing sector, as it brings about the room to employ the local human and capital resources, the room for substitution of import, boosting the earning capacity of the FOREX market, which is much needed in Nigeria. However, Ufoeze, Odimgbe, Ezeabalisi and Alajekwu (2018) painfully observed that for a period of 34 years between 1981 and 2015, the manufacturing sector contributed the least to the GDP (Gross Domestic Product) compared to other sectors such as the services industry, trade, agriculture and Oil and Gas. This shows that the manufacturing sector has failed to perform to its potential. The CBN statistical bulletin (2015) provides statistics indicating the amount of contribution of different industries to the GDP, which is stated as follows: Manufacturing (9.54) Services (36.76), Agriculture (23.11), Trade (16.95), Oil and Gas (9.61) in the year 2015. Furthermore, the average of the capacity utilization in manufacturing has diminished way beyond its potential. The new contribution of the manufacturing sector to the GDP was reported at 6.46% and 6.83% in the year 2016 and 2017 respectively. In the first quarter of 2017, the manufacturing sector contributed 9.33% to nominal GDP as published by the National Bureau of Statistics (NBS, 2018). In 2019, the average of the capacity utilization in manufacturing dropped to 9.29 (CBN, 2020).

Monetary policy over decades has been one of the key driving force behind economic management adopted by governments to shape and enhance the performance of the sectors and the whole economy of a country at large. When monetary policy and its effectiveness is measured, monetary policy as discovered by Onakoya (2013) tends to be faster in rectifying economic shocks. Kahn (2010) conducted a study to find out how growth of the private sector is impacted by monetary policy and realized that monetary policy aims are mainly concerned with gaining price stability, increase in employment opportunities, stabilized exchange rates, and longer term interest rates so as to avoid falling into financial meltdown.

Onakoya (2013) asserted that 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 that promotes social welfare. This role has facilitated the emergence of active money market where treasury bills, a financial instrument used for open market operations and raising debt for government has grown in volume and value becoming a prominent earning asset for investors and source of balancing liquidity in the market. Tonuchi

(2015) explained monetary policy as a well-considered procedural effort of the relevant authority (currency board or central bank) of a country with the objective to achieve price stability and/or a general trust in the currency through the control of money supply by targeting a desirable interest or inflation rates. Such policy, as explained by (Okonkwo, 2014), was usually deployed to influence economic activities. The real objective was to accomplish the desired macroeconomic stability by using the variations in the money supply, the direction of credit, the cost of credit, and the size of credit available.

With the foregoing, the effectiveness of monetary policy has been of particular interest to many scholars recently. Ahmed (2015) noted that positive and negative changes in lending rates lead to variations in the demand for goods in the country mostly by varying costs of borrowing, availability of long and short term loans and stable exchange rates. Bamidele, Musa, Bala-Keffi, Owolabi and Imam (2015) also holds the opinion that low interest rates and a stable economy prompt an increase in lenders willingness and ability to lend to businesses hence increasing a country‘s GDP in the long-term. With regard to the effect of monetary policy on the performance of the manufacturing sector, Kimanja (2011) finds that monetary policy has a large impact on sectoral growth in a country as high interest rates lead to less money circulation in an economy resulting in diminished purchasing power of individuals. However, Gichuhi (2016) found out that high interest rates lead to less money circulating in the economy resulting in low inflation rates which is positive for a country. Uruakpa (2019) lamented on the unstable exchange rate within the Nigerian market as the fluctuations place adverse effect on the business sector.

1.2 Statement of the Problem

Nigeria has experienced different forms of manufacturing distress and drawbacks such as high rates of inflation, high interest and exchange rates for the past thirty years all predetermined by monetary policy set to regulate and ensure stability of prices in the country. Between 2015 till date, Nigeria has been experiencing the worst economic performance with the rate of inflation increasing abnormally, hence, abnormally increasing the rates on exchange and interests. For this reason, the researcher noted that despite efforts made towards achieving the desired macroeconomics objectives through monetary policy, the results have not been sustained over time. These efforts as noted by Ufoeze, Odimgbe, Ezeabalisi and Alajekwu (2018) include the direct monetary control used in achieving price stability in Nigeria before 1986, while the emphasis shifted to market mechanisms after the 1986 market liberalization. Prior to 1986, Ufoeze, Odimgbe, Ezeabalisi and Alajekwu (2018) explained that direct monetary instruments such as selective credit controls, administered interest and exchange rates, credit ceilings, cash reserve requirements and special deposits to combat inflation and maintain price stability were employed.

With relatively high rate of inflation, exchange and interests as clear evidence as captured in

CBN Statistical Bulletin (2020), most notably in the manufacturing sector, resulting in a lackluster performance by the sector. The foregoing implies that there is need for a closer look at

Nigeria‘s monetary policies and how it particularly affects the manufacturing sector which is the second largest contributor towards Nigerian GDP.

1.3       Objectives of the Study

This study examines the effect of monetary policy on the performance of manufacturing firms in Nigeria. Other relevant objectives include:

1. i) Examining the impact of Interest rate on the performance of Nigeria‘s manufacturing firms. ii) Examining the impact of Inflation on the performance of Nigeria‘s manufacturing firms

iii)       Examining the impact of Exchange rate on the performance of Nigeria‘s manufacturing firms

 

1.4        Research Questions

In order to respond to the objectives stated above, these research questions were raised:

1. i) Does Interest rate have any significant impact on the performance of Nigeria‘s

manufacturing firms? ii) Does Inflation have any significant impact on the performance of Nigeria‘s manufacturing firms? iii) Does Exchange rate have any significant impact on the performance of Nigeria‘s manufacturing firms?

 

1.5        Research Hypotheses

In responding to the research questions stated above, these hypotheses were raised and tested:

: Interest Rate has no significant impact on the performance of Nigeria‘s manufacturing firms.

: Inflation Rate has no significant impact on the performance of Nigeria‘s manufacturing firms.

: Exchange Rate has no significant impact on the performance of Nigeria‘s manufacturing firms.

1.6       Scope of the Study

The scope of this study is limited to the effect of monetary policy and performance of manufacturing firms in Nigeria, from 1987-2019 a period of 32 years. The choice of this period is predicated on the particular contributions of manufacturing firms to the economy since the nation dependence on crude oil is no more sustainable. More so, the exclusion of year 2020 is based on the unavailability of data for the said year by the CBN Statistical Bulletin.

 

 

 

 

 

1.7 Significance of the Study

The significance is to inform academicians and researchers on how monetary policy can affect a country‘s manufacturing sector and economic growth on a sectoral basis and also to contribute to the existing literature on the effects of monetary policy when it comes to growth of a country‘s economy. This contribution is achieved by focusing on how interest rates, inflation, and exchange rates affect a particular sector in a sector of the county‘s GDP. This study is therefore significant as it could inform the CBN on the significance of controlling money supply by targeting a rate of inflation, interest rate and exchange rate that would eventually lead to improvement of the manufacturing firms in Nigeria. The study may also prove significant to foreign investors as they make decisions on whether or not to invest in our manufacturing sector or other sectors less affected by our monetary policies especially Interest rates. Scholars will find this study relevant as it will add to the existing body of knowledge and useful as reference materials.

IMPACT OF MONETARY POLICY ON FINANCIAL PERFORMANCE OF MANUFACTURING FIRMS IN NIGERIA

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