inflation CONTROL THROUGH THE APPLICATION OF CENTRAL BANK OF NIGERIA
INFLATION CONTROL THROUGH THE APPLICATION OF CENTRAL BANK OF NIGERIA
ABSTRACT OF INFLATION CONTROL THROUGH THE CENTRAL BANK OF NIGERIA'S APPLICATION
This study looked at how the central bank of Nigeria (CBN) used credit tools to control inflation.
The study aims to uncover the variables causing high inflation rates in order to give recommendations on the best methods that may be useful for effective inflation control policies. The study used a questionnaire instrument to generate the primary data needed, using the survey research approach.
The generated data was then put through the Chi-square inferential statistical test. The test revealed that credit control methods devised by the Central Bank of Nigeria (CBN) had no substantial impact on price stability,
and the Central Bank of Nigeria (CBN) has had no meaningful impact on checking excessive inflation in Nigeria. The study suggests that monetary authorities implement policy actions that will have a long-term impact on pricing.
1.1 BACKGROUND OF THE STUDY
Inflation has been a global issue for many years, and no country has been immune. Although some countries' economies have been hit worse than others, every country in the globe has suffered inflation at some point.
In the 1960s, inflation became more prominent in developing countries' economies. This gave rise to the numerous economic initiatives implemented by various developing countries in order to revitalise their economies.
In Nigeria, inflationary pressures have become a major source of worry since the implementation of the structural adjustment programme (SAP) in 1986, which resulted in a more liberalised economic environment.
As a result, three criteria were employed to calculate inflation: the Gross National Product (GNP), the Consumer Price Index (CPI), and the Wholesale Price Index (WPI).
In Nigeria, inflation rates are primarily assessed using the Consumers Price Index (CPI), for which monthly, quarterly, and annual data are available. High inflation episodes did not occur until the early 1970s, when inflation soared significantly from a low of 3.5 percent between 1960 and 1970.
Post-independence industrial policies, increased government spending to finance the civil war, low levels of production throughout the conflict, post-war reconstruction, and the Adebo/Udoji wage hike following the oil boom.
During the early 1980s oil market collapse, inflation soared from a low level of 16 percent in 1980 to a peak of 38 percent by mid-1984. The economy's inflation rate was nearly 40% (39.6 percent to be precise).
This was due to the government' prohibition on the importation of food and other agricultural products, which was prompted by multiple balance of payment pressures.
The next year, the rate of inflation was 5.5 percent, indicating a decrease. The result was the government's measure at the time. In 1987, the inflation rate increased slightly to 10.2 percent.
This was owing to the fact that Nigeria implemented the structural Adjustment Programme (SAP), which resulted in a more liberalised economic environment. The balance of payments difficulties that prompted the adjustment programme, however, remained.
The situation deteriorated further, with increased idle industrial capacity, plant closures, worker retrenchment, and so on. Shortages rose steadily throughout the years, reaching an all-time high of 40.9 percent in 1989.
It then fell sharply to 7.5 percent in 1990 and 13.0 percent in 1991, then ascended to 44.5 percent in 1992, 57.2 percent in 1993, 57.0 percent in 1994, 72.8 percent in 1995, and 29.3 percent in 1996 in order to improve price stability,
efforts were directed towards managing excess liquidity, so a number of were introduced to reduce liquidity in the system, this is done by increasing the commercial bank reserve requirement in 1999, which reduced the inflation rate to 6.6 percent, 6.9 percent in 2000, and The inflation rate grew to 14.0 percent in 2003, 15.0 percent the next year, and 17.9 percent in 2005.
The new monetary policy framework for monetary policy execution was implemented in 2006, with the goal of attaining price stability and non-inflationary growth, as stated in the national economic empowerment and development strategy (NEEDS).
However, the aim for single inflation was met in 2006, with inflation standing at 8.2%. The inflation rate fell to 5.4 percent in 2007 before rising to 11.5 percent in 2008.
1.2 STATEMENT OF THE PROBLEM
One major challenge confronting most central banks, including Nigeria's, is the creation and implementation of monetary policy. This is due to the fact that any error in formulation or implementation will have a negative multiplier effect on every aspect of the economy.
When a goal is set, the ultimate goal is to achieve that goal. Any departure in monetary policy causes the monetary authorities great concern.
Despite the fact that the CBN has been designing and implementing sound monetary policies, the rate of inflation in Nigeria has been rising, affecting both creditors and debtors in different ways.
In an inflationary period, creditors lose because they receive money whose purchasing power has decreased, resulting in fewer commodities purchased, but debtors gain.
There is therefore a need to maintain price stability, which will be beneficial to creditors, debtors, and other players in the Nigerian market economy. This study aims to assess the function of the Central Bank of Nigeria (CBN) in this regard by utilising credit control measures.
1.3 OBJECTIVES OF THE STUDY
In accordance with the problems described above, the following objectives were selected for this study.
i. Examines strategies adopted by Nigeria's central bank (CBN) to maintain price stability in Nigeria.
ii. Determine the extent to which the Central Bank of Nigeria (CBN) has succeeded in containing Nigeria's high inflation.
iii. To assess the potential impact of inflation on the Nigerian economy.
iv. To identify the variables causing high inflation rates in order to give recommendations on the best strategies that may be useful for effective inflation control policy.
1.4 RESEARCH QUESTIONS
To guide the researcher, the following questions were asked in accordance with the study's objectives:
i. To what extent have the CBN's credit control policies impacted Nigerian price stability?
ii. How successful has the Central Bank of Nigeria been in containing high inflation in Nigeria?
iii. What are the implications of inflation on Nigeria's overall economy?
iv. What factors contribute to Nigeria's high inflation rate?
1.5 RESEARCH THEORIES
The following two null hypotheses are created to rule the investigation based on the study's aims and research questions:
H01 Credit control mechanisms devised by the Central Bank of Nigeria have no substantial impact on Nigerian price stability.
H02 The Central Bank of Nigeria has had little impact on reducing Nigeria's excessive inflation.
1.6 SCOPE OF THE STUDY
The scope of this study is based on the Nigerian economy, but for a thorough examination, references will be made to other economies where they provide a substantial base.
The study therefor discusses the many instruments that the Federal Government of Nigeria has established through the central bank to limit the amount of credit in the economy.
1.7 THE SIGNIFICANCE OF THE STUDY
The study will be critical for policymakers, particularly the Central Bank of Nigeria and the Federal Government, who will learn how the instruments of credit control issued by the Central Bank of Nigeria to banks and other financial institutions can be used to combat inflation in the country and then effectively used to keep the rate at an acceptable level in the economy.
The Central Bank of Nigeria (CBN) and the Federal Government would know possible avenues for improvement, sectors that require more credit, and sectors that require less credit, with the help of the identified difficulties.
Furthermore, the banking industry will benefit greatly. It would be crucial to the sector because it will disclose how well the sector has fared while also supporting various CBN credit control devices that limit their profit-making possibilities.
1.8 LIMITATIONS OF THE STUDY
They are bound to be limits in some form in every setting, and this study work is no exception. One of the stresses experienced by the researcher is financial. A full research task is not easy to afford for a student; the expense of transit, photocopying, and library admission fees has increased nearly tenfold from what it used to be.
Another obstacle is time; time is not on the researcher's side because of the stress and delay in leaving school, according to the Central Bank of Nigeria (CBN) time policy, and mixing it with final examination reading.
Another issue in this research effort is meeting with suitable bank officials for project information, and when they are accessible, they claim to be too busy. Despite these obstacles, the investigation was completed successfully.
1.9 DEFINITION OF THE TERM
Credit Control Instruments: The Central Bank of Nigeria use these instruments to manage the amount of credit given to various sectors of the economy by commercial and merchant banks.
The Consumer Price Index (CPI) is a single statistic that represents the average of the prices of a selected number of consumer items in comparison to some base year.
Money Supply: The total amount of money in circulation, which includes currency (notes and coins) and demand deposits with commercial banks, is denoted by M1 and M2. M1 refers to money that only recognises items that can be used immediately and without loss of value as money.
As a result, M1 is defined as currency in circulation plus demand deposits held by the private sector in banks (C+DD). M2 measures total liquidity in the economy, which includes M1 plus savings and time deposits.
(C + DD + SD + DT). The CBN's monetary base, also known as high powered money or reserve money, includes currency notes stored both outside and inside banks.
Fiscal Deficit: The excess of government expenditure over government revenues. It is often measured in terms of its size in relation to nominal Gross Domestic Product (GDP).
Other Financial Institution: Any individual, body, association, or group of persons, whether incorporated, other than banks licenced under the Banks and Financial Institutions act (Bofid) under Section 51 of the Banks and Financial Institutions Act (Bofid) of 1991, which carries on the business of a discount bank.
Bank: Commercial and community banks, as well as profit and savings banks that have yet to begin operations.