Project Materials

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 an economic management technique to achieve long-term economic growth and development has been pursued by nations, and formal articulation of how money affects economic aggregates dates back to Adams Smith and was later championed by monetary economists (Balogun, 2007).

Since the expositions of the role of monetary policy in influencing macroeconomic objectives such as economic growth, price stability, balance-of-payments equilibrium, and a host of other objectives, monetary authorities have been tasked with using monetary policy to grow their economies (Bogunjoko, 2011).

Monetary policy has been utilised in Nigeria since 1958, when the Central Bank of Nigeria was tasked with developing and executing monetary policy under the Central Bank Act.

This role has facilitated the emergence of an active money market, in which treasury bills, a financial instrument used for open market operations and debt financing for the government, have grown in volume and value, becoming a prominent earning asset for investors and a source of market balancing liquidity (Chimezie, 2012).

There have been many monetary policy regimes in Nigeria, some of which are strict and others which are loose, with the latter being primarily employed to stabilise prices.

The economy has also had periods of increase and decline, although the stated growth has not been sustainable, as evidenced by rising poverty rates among the population (Balogun, 2007).

Furthermore, a country’s foreign exchange policy is based on its perceived overall economic objectives and predicted growth path (CBN, 2003). As a result, non-conflicting sectoral policies are designed to work within the entire policy framework, with one sectoral policy reinforcing the others.

The simplest definition is that the exchange rate is the price of one currency in relation to another. Thus, it assesses the value of a home economy in terms of another economic system (Adelowokan, 2012).

Furthermore, the currency rate is a significant economic statistic since it represents underlying strength and competitiveness with global economies (Asinya and Takon, 2014, Akonji, 2013).

The exchange rate, whether fixed or floating, influences macroeconomic variables such as imports, exports, output, interest rates, and inflation rates, among others.

Chong and Tan’s (2008) empirical investigation demonstrated that the exchange rate is responsible for changes in macroeconomic fundamentals in developing nations.

According to Mehdi (2014), the effect of exchange rate fluctuations on economic growth varies across countries, with one of the factors determining how exchange rate fluctuations affect economic growth being the development level of each country’s financial markets. This reveals that new theories emphasise the high correlation between economic growth and innovation.

Exchange rates are often reported between all major currencies, most notably those of trading partners, but one important currency (the dollar) is frequently used as a reference for expressing and comparing rates.

It is an important tool for economic management, as well as policy stabilisation and adjustment in developing countries. Exchange rate policies have a significant impact on a country’s standing in international competition.

In independent markets, the currency rate was believed to be erratic, depreciating at will. This put pressure on the official foreign exchange market, making the period’s monetary policy target increasingly unrealistic due to the inflationary financing of the government deficit.

With the deregulation of the economy, a market-based framework for determining exchange rates was adopted. It was expected that achieving macroeconomic stability would result in the elimination of external sector distortions, which would boost growth, stimulate non-oil exports, increase foreign exchange inflows, moderate demand pressure in the foreign exchange market, and improve overall foreign exchange utilisation.

Achieving a fair exchange rate was also predicted to minimise parallel market premium capital flight while increasing foreign investment inflows (CBN: 2008).