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COMPARATIVE ANALYSIS OF MONETARY AND EXCHANGE RATE POLICY ON NIGERIA ECONOMIC GROWTH

CHAPTER ONE

INTRODUCTION

1.1            Background of the study

However, monetary policy as a technique of economic management to bring about Sustainable economic growth and development has been the pursuit of nations and formal articulation of how money affects economic aggregates dates back the time of Adams Smith and later championed by the monetary economists (Balogun, 2007). Since the expositions of the role of monetary policy in influencing macroeconomic objectives like economic growth, price stability, equilibrium in balance of payments and host of other objectives, monetary authorities are saddled the responsibility of using monetary policy to grow their economies (Bogunjoko, 2011). In Nigeria, monetary policy has been used since the Central bank of Nigeria was saddled the responsibility of formulating and implementing monetary policy by Central bank Act of 1958. 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 (Chimezie, 2012). There have been various regimes of monetary policy in Nigeria some times, monetary policy is tight and at other times it is loose mostly used to stabilize prices. The economy has also witnessed times of expansion and contraction but evidently, the reported growth has not been a sustainable one as there is evidence of growing poverty among the populace (Balogun, 2007).

Moreover, a country foreign exchange policy is derived from the perceived overall economic objectives to be achieved and the expected direction of growth (CBN, 2003).  Consequently, non-conflicting sectoral policies are conceived within the ambit of the overall policy framework such that each sectoral policy reinforces each other.A simplest definition has it that exchange rate is the price of one currency in terms of another. Thus, it measures the worth of a domestic economy in terms of another economics (Adelowokan, 2012).Also, exchange rate is an important economy metric as it reflects underlying strength and competitiveness with world economies (Asinya and Takon, 2014; Akonji, 2013). Whether fixed or floating, exchange rate affects macroeconomic variables such as import, export, output, interest rate, inflation rate etc. Chong and Tan (2008) empirical analysis revealed that the exchange rate is responsible for changes in macroeconomic fundamentals for the developing economies. Mehdi, (2014) state that the effect of exchange rate fluctuations on economic growth varies in different countries asserting that one of the factors determining the way exchange rate fluctuations affect economic growth is the development level of each country's financial markets revealing that new theories emphasize the high correlation between economic growth and innovation.

            Exchange rates regularly quoted between all major currencies mostly that of the trading partners, but frequently one important currency (that is the dollar) is used as a standard in which to express and compare all rates.It is one of the key tools in economic management and in the stabilization and adjusts policies in developing countries. Exchange rate policies play a vital role in determining the position of a country in terms of international competition (Asinya, 2014).

            In autonomous markets, the exchange rate was seen to be volatile, and depreciated at will. This exerted pressure on the official foreign exchange market, and made the monetary policy target of the period to continually unrealistic due to the inflationary financing of government deficit with the deregulation of the economy, a market –based framework for the determination of exchange rate was adopted. It was envisaged that the realization of macroeconomic stability would lead to the elimination of distortions in the external sector and this enhance growths, stimulate non oil exports, increase foreign exchange inflows, moderate demand pressure in the foreign exchange market and generally improve foreign exchange utilization. The attainment of a realistic exchange rate was also expected to eliminate the parallel market premium capital flight and also enhance the inflow of foreign investments (CBN: 2008).

            From the forgoing it becomes clear that the concept of exchange rate policies has the impact so as to show in the one of the macroeconomic variables, it contribute to economic growth of Nigeria. It is therefore necessary that a research work be carried out to this effect so as to provide suggestion that will served as a guide towards the actualization of macroeconomic objectives that will bring about the level of targeted economic growth in Nigeria (Obadan, 2009).

          On the other hand, the exchange rate is perhaps one of the most widely discussed topicsin Nigeria today. This is -economic not surp importance especially in a highly import dependent economy as Nigeria (Olisadebe, 2012). Macroeconomic policy formulation is a process by which the agencies responsible for the conduct of economic policies manipulate a set of instrumental variables in order to achieve some desire objectives. In Nigeria these objectives include achievements of domestic price stability, balance of payment equilibrium, efficiency, equitable distribution of income and economic growth and development (Akonji, 2013).

At the same time, economic growth refers to the continuous increase in a country’s national income or the total volume of goods and services, a goodindicator of economic growth is the increase in Gross National Product (GNP) over a long period of time. Economic development on the overhead implies both structural and functional transformation of all the economic indexes from a low to a high state (Siyan, 2008) one of the macro –economic variables of importance is the exchange rate policy country.

Whereas, exchange rate policy involves choosing where foreign transaction will take place (Obadan, 2009). Exchange rate policy is therefore a component of macroeconomic management policies the monetary authorities in any given economy uses to achieve internal balance in medium run. Specifically internal balances mean the level of economic activity that is consistent with the satisfactory control of inflation. On the contrary, external or sustainable current account deficit financed on lasting basis expected capital inflow.

1.2 STATEMENT OF THE PROBLEM

The exchange rate of the naira was relatively stable between 1973 and 1979 during the oil boom er (regulatory require). This was also the situation prior to 1990 when agricultural products accounted for more than 70% of the nation’s gross domestic products (GDP) (Ewa, 2011).

However, as a result of the development in the petroleum oil sector, in 1970’s the share of agriculture in total exports declined significantly while that of oil increased. However, from 1981 the world oil market started to deteriorate and with its economic crises emerged in Nigeria because of the country’s dependence on oil sales for her export earnings. To underline the importance of oil export to Nigerian economy, the gross national product (GNP) fell from $76 billion in 1980 to $40 billion in 1996, a number of economic growthbecame negative as result of the adoption of structural adjustment programme (SAP).This major problem which this study is designed to solve is whether the exchange rate has any bearing on Nigerians economic growth an d development. While some Economist dispute the ability of change in the real exchange rate to improve the trade balance of developing countries (Johansen, 2013) because of elasticity of their low export, others believe that structural policies could however change the long-term trends in the terms of trade and the prospects for export led growth. Instabilities of the foreign exchange rate is also a problem to the economy.

1.3 OBJECTIVE OF THE STUDY

The main objective of the study is to showcomparative analysis of monetary and exchange rate policy on Nigeria economic growth.Identifying the impacts of the unstable exchange rate of the naira on these major macro-economic variables would however, depend on the conditions prevailing in the economy at a given time.

The specific objectives of the study are:

(1) To investigate the effects of foreign exchange rate and policies on the economic growth of Nigeria

(2) To see how exchange rate in Nigeria interact with a macroeconomic variable to bring about economic growth.

(3) To ascertain the effect of policy recommendations on both exchange rate and economic growth using macro-economic variables.

(4) To have a realistic exchange rate this will remove the existing distortions and distortions and disequilibrium in the external sector of the economy.

(5) To have a stable and realistic exchange rate that is in consonance with other macro-economic fundamentals.

1.4 RESEARCH HYPOTHESIS

Based on the objectives of the study, the following hypothesis was formulated.

Ho: Exchange rate policy has no significant impact on Nigeria economic growth and development.

Hi: Exchange rate policy has a significant impact on Nigerians economic growth and development.

1.5 SIGNIFICANCE OF THE STUDY.

The significance of this research work lies in the fact that if the cause of the unstable exchange rate of the naira is identified and corrected, the economy will rapidly grow and develop into an advance one. This is so because if the unstable exchange rate of naira is proved to be affecting the macro- economy major variables badly, including Realexchange rate, Real interest rate, inflation rate, gross domestic product and trade openness of the country, attempts should be made to stabilize the exchange rate. This is because these variables are gauge for the measurement of growth and development of any economy. Importantly, this study would help the government and the central bank of Nigeria (CBN) to identify the strength and weakness of each foreign exchange system and hence adopt the policy that suits the economy best. This will definitely enhance growth and development of the economy, the study will also serve as a guide to future researchers on this subject.In general, the research is of immense benefit to the following:- Importer who make payments in foreign currencies, policy makers of the central bank of Nigeria who issues the guideline government international trade practice, bank-especially the commercial banks and merchant banks and the general public who has a right to contribute and be informed of the activities our banking institutions.

1.6 LIMITATIONS OF THE STUDY

The study is structured to evaluate the Nigeria exchange rate as the pilot of economy growth and development. The study is therefore limited to the core economic growth in Nigeria and not the socio- political factors of the foreign exchange rate.

1.7 THE SCOPE OF THE STUDY

This project focuses on the effect of exchange rate regimes on the economic growth of Nigeria as necessitated by the inflationary pressure generated by recent global economic crisis through the exchange rate sensitivity.

In addition, the scope consist of the regulatory and deregulatory exchange rate period i.e. the fixed exchange rate and the floating exchange rate period. The study is based on core macro- economic performance of Nigeria.

1.8 DEFINITION OF TERMS

Exchange rate: This iscurrencythein pricetermsof another.

Foreign exchange: Foreign exchange is a means of payment for international transaction; it is made up of currencies of other countries that are freely acceptable in settling international transactions.

Monetary: This is pertaining to money which helps in executing budgets and improving the nation economic through rightful policy implementations

Policy: This refers to guiding principal, rule, course of action etc. necessary and expressed by authoritative body or government in order to achieve growth and stability.

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