THE IMPACT OF MONETARY POLICY ON FOREIGN TRADE IN NIGERIA

CHAPTER ONE

                                             INTRODUCTION

1.1              Background to the Study

 The Central Bank of Nigeria (CBN) since it was established in 1959 has been playing its primary role of regulating money for the social and industrial welfare of the country. The achievement of full employment equilibrium, rapid industrial growth, price stability and external balance is anchored on the use of monetary policy. The major objectives which have dominated CBN’s monetary policy focus is based on assumption that, essential tools of achieving industrial stability and the goals are been anchored on two major objectives. Thus, inflation targeting and exchange rate policy.

Monetary policy has is an important tool for the attainment of macroeconomic stability, usually seen as a step to achieving economic growth and economic sustainability. Thus, in the pursuit of macroeconomic stability, the managers of monetary policy have often set targets on intermediate variables which include the short term interest rate, growth of money supply and exchange rate. Among these intermediate variables of monetary, the exchange rate arguably have a huge impact on the economy because of its effect on the value of local currency, domestic inflation, macroeconomic credibility, capital flows and financial stability. Increased exchange rate directly affects the prices of imported commodities and an increase in the price of imported goods and services contributes directly to increase in inflation (CBN, 2008). The central bank is vested with power to manipulate monetary policy; through monetary policy tools, to achieving desired macroeconomic objectives which includes; the achievement of price stability with respect to both domestic and external prices. Many scholars, social scientists and the likes have to a consensus that openness to international trade brings about speedy economic development. In Nigeria, the achievements of these objectives are predicated on the stance of fiscal monetary policies. In ensuring monetary stability, the central bank through the deposit money banks implements policies that guarantee the orderly development of the economy through appropriate change in the level of money supply. The reserves in the banks are affected by the central bank as result of its various tools of monetary policy. These tools include the liquidity ratio, open market operations and primary operations to affect the movement of reserves. 

In Nigeria, the monetary policy measure aim at reducing inflationary pressure, strengthen the naira exchange rate to other currencies improve the balance of payment position and as well help in increasing foreign exchange inflow for the financing of foreign trade (Nwankwo 1998). Prior to the introduction of the structural adjustment programme (SAP) in the second half of the 1980’s the Federal Government adopted a policy of trade liberalization and encouraged massive importation of goods and services. To this end, the monetary policy in operations brought about foreign trade through adequate foreign exchange constraints and the over-valuation of the naira led to the introduction of Structural Adjustment Programme (SAP) which affected foreign trade financing severely. The operations of the domiciliary account scheme was to encourage foreign  exchange inflation, stop subsidized funding of post second-tier foreign exchange market transaction and grant more fiscal concession on exports. So far, there has been persistent pressure on the balance of payment and this call for an investigation into the role of monetary policies in this connection. It is as a result of this that this study is set to examine the impact of monetary policies on foreign trade financing.

1.2       Statement of the Problem

One of the major objectives of monetary policy in Nigeria is price stability. But despite the various monetary regimes that have been adopted by the Central Bank of Nigeria over the years, inflation still remains a major threat to Nigeria’s industrial growth. Nigeria has experienced high inflation rates. Since the 1970’s, there have been four major phases of high inflation, in excess of 30 percent. The growth of money supply is related to the high inflation phases, this was because money growth was often in excess of real industrial growth. However, prior to the growth in money supply, some factors that reflect the structural characteristics of the economy are glaring. Some of these are supply factors that arise from factors like famine, currency devaluation and changes in terms of trade.

1.3       Research Questions

The following are some of the questions which this study intends to answer:

i)                   what the effects of monetary policy on foreign trade in Nigeria?

ii)                 what are the contributions of monetary policy on the economic developments in Nigeria?

iii)               what are the steps taken by the CBN to control monetary policy on foreign trade?

1.4       Objectives of the Study

The main objective of this study is to give investigate the impact of monetary policy on foreign trade in Nigeria. The specific objectives are:

i)                   to identify the effects of monetary policy on foreign trade in Nigeria

ii)                 to establish the contributions of monetary policy on the economic developments in Nigeria

iii)               to determine the steps taken by the CBN to control monetary policy on foreign trade

1.5       Research Hypothesis

The research hypotheses to be tested include:

i)                   there is a significant relationship between monetary policy and foreign trade in Nigeria

ii)                 there is a significant correlation between monetary policy and economic development in Nigeria

iii)               there is a significant difference between the CBN control of monetary policy and foreign trade

1.6       Significance of the Study

Findings from this study will be helpful to the CBN and the federal Government as it will expose them to various monetary policies to be adopted in order to achieve a good or favourable foreign trade. This study will help the general public and the financial institutions to realize the needs to improve on the finance of foreign trade.

1.7       Scope of the Study

This study investigated the impact of monetary policy on foreign trade in Nigeria. This study will be limited to the CBN and its efforts concerning monetary policy right from the year the institution was established (1959) till this present time.

1.8       Limitation of the study

This study faced limitation that need to be taken into consideration. Apart from the obvious time limit and the delicate subject matter, there were issues that arose from the methodological choices applied to the study. Some respondents were not willing to disclose accurate information needed for the validity of the study.

1.9       Definitions of Terms

The following terms were used in the course of this study:

Foreign trade: is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP).

Monetary policy: is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.

 

 

 

 

 

 

 

 

REFERENCES

 

CBN (2008). Central Bank of Nigeria (CBN), Monetary Policy Department Series 1,

2008.CBN/MPD/Series/01/2008. www.cbn

Nwankwo, B. C. “Application of financial regulations for effective fund management.” Paper

read at the Training Workshop for internal auditors and accountants of State Primary Education Boards (SPEB) and Local Government Education Authorities (LGEA) organized by National Primary Education Commission (NPEC), States and Local Government Affairs Office, The Presidency, Abuja and The World Bank, held at Hotel Presidential, Enugu from 1st – 3rd Sept., 1998.

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