MONETARY POLICY AND CAPITAL FORMATION IN NIGERIA

MONETARY POLICY AND CAPITAL FORMATION IN NIGERIA

This study is meant to provide a better understanding and appreciate the Nigerian monetary policy and its impact on capital formation through savings and investment in the real sector of the economy.

OTHER RELATED PROJECT TOPICS HERE

CHAPTER ONE: INTRODUCTION

1.1   Background of the Study

Economic development has been the backbone of every societal development. The role of government in an economy cannot be overemphasized thus, the responsibility for achieving the macroeconomic objective of full employment, the stability of exchange rate, economic growth, equilibrium in the balance of payment, price stability, improved standard of living are all rested in the shoulders of government and they can be powerful tools of economic transformation.

The government formulates laws to regulate the value, cost, and supply of money in the country which helps in achieving economic growth and development. In Nigeria, the monetary policy is the microeconomic policy laid down by the central bank of Nigeria which involves the management of money, the supply of money, and interest rate.

However, emphasis on techniques/instruments to achieve the objectives of monetary policy which is the attainment of the internal and external balance of payment have changed over the years, there have been two major phases in the pursuit of monetary policy namely: before 1986 and after 1986.

The first phase emphasizes direct monetary control while the second phase relied on the market mechanism. In 2014 the monetary policy was focused on achieving the objective of price stability. The exchange rate experienced significant pressure especially, during the second half of 2014, due to declining oil prices, depletion of the foreign exchange reserve, and the absence of fiscal buffers. The financial market was generally stable in 2014 although significant inflation was noticed toward the end.

With the view of boosting investors’ confidence and reduce concern in the declining foreign exchange reserve, several instruments were employed to achieve price and financial system stability. They include monetary policy rate, (MPR) and the intervention of some instruments such as open market operation (OMO). Discount window operation, cash reserve ratio (CRR) and foreign exchange net open position (NOP), and prime lending rate and interest rate. These instruments were used to stabilize the economy.

Therefore, if the federal government reduces the monetary policy rate, it encourages savings and investments in the society which can lead to economic growth. That is to say, the reduction in the monetary policy rate and interest rate leads to an increase in the amount of capital ownership and control which leads to savings and investment as well as economic growth. Therefore, capital formation is important to increase the gross domestic product of a country which leads to economic growth.

This study tends to look at the monetary policy adopted by the central bank of Nigeria. The action was taken by the central bank of Nigeria to enhance development in the financial and real sector of the economy to foster economic growth and the actions taken by the central bank of Nigeria to encourage savings and investment

1.2 Statement of Problems

The major objective of monetary policy in Nigeria is price stability. However, despite the various monetary policies/measures adopted by the central bank of Nigeria (CBN) over the years, inflation remains high and remains a major threat to Nigerian economic development.

Nigeria’s economy is characterized by a large budget deficit, high level of unemployment, import dependence, reliance on a single commodity (oil) weak industrial base, low level of agricultural production, lack of skilled entrepreneur, backwardness in technology, and high external overhang.

Therefore, this study looks at the measures taken by CBN of Nigeria to salvage the following issues: what are the monetary policy adopted by the central bank?, what are the actions were taken by the central bank to enhance the development of the financial and real sector of the economy to foster economic growth?, what are the measures taken by the CBN to encourage savings and investment in the economy?. Specifically, the study is structured to empirically examine the effect of basic monetary policy instruments such as Liquidity ratio, Prime lending rate, and Cash reserve ratio on the total physical investment in Nigeria.

1.3 Purpose of the Study

This study is meant to provide a better understanding and appreciate the Nigerian monetary policy and its impact on capital formation through savings and investment in the real sector of the economy. The following sub-objectives shall be adopted for this study.

1. To examine the relationship existing between the cash reserve ratio and gross fixed capital formation in Nigeria.
2. To examine the relationship existing between liquidity ratio and gross fixed capital formation in Nigeria.
3. To examine the relationship existing between the monetary policy rate and gross fixed capital formation in Nigeria.
4. To examine the relationship existing between the prime lending rate and gross fixed capital formation in Nigeria.
5. To examine the relationship existing between open market operation and gross fixed capital formation in Nigeria.

1.4 Research Questions

1. To what extent has the cash reserve ratio affected gross fixed capital formation in Nigeria?
2. To what extent has liquidity ratio affected gross fixed capital formation in Nigeria?
3. What extent has monetary policy rate (MPR) affected gross fixed capital formation in Nigeria?
4. To what extent has the Prime lending rate affected gross fixed capital formation in Nigeria?
5. To examine the relationship existing between Open Market Operation and gross fixed capital formation in Nigeria?

1.5  Research Hypotheses

H0_1:  There is no significant relationship between the cash reserve ratio and gross fixed capital formation in Nigeria?

H0_2:  There is no significant relationship between liquidity ratio and gross fixed capital formation in Nigeria?

H0_3:  There is no significant relationship between the monetary policy rate and gross fixed capital formation in Nigeria?

H04:  There is no significant relationship between the prime lending rate and gross fixed capital formation in Nigeria?

1.6  Significant of the study

Concerning the inevitable role the private sector plays in an economy, it is therefore imperative for the government to ensure a favorable and conducive business, political, legal, and economic environment through the various monetary policies made by the Central Bank of Nigeria. This study will also serve as a yardstick to the government ministries and agencies as well as policymakers to devise appropriate and consistency economic policies (appropriate tax collection mechanisms, tax holidays cases, favorable cash reserve ratio, reduced interest, and lending rate, etc.) that will boost and encourage both foreign and domestic investors. This will in turn reduce unemployment, increase the Gross Domestic Product of Nigeria and also help solve some basic economic challenges facing the country.

Specifically, the study shall be of immense benefit to;

Students:  This study will help the student to know what monetary policy is all about, its tools, and its mechanisms. It also serves as a reference base for future research purposes.

Financial institutions: Through this study, financial institutions will know the rate in which the will lend to individuals or entrepreneurs to improve the economy.

1.7 Scope of the Study

The scope of this study includes the content scope, the time scope, and the geographical scope.

Content scope: This scope is designed to determine the monetary policy and capital formation in Nigeria

Time scope: The study made use of time series data covering 32 years (1986-2018).

Geographical scope: Geographically, the study will concentrate mainly on monetary policy in Nigeria.

1.8 Limitation of study

One of the fundamental limitations which researchers face in management sciences is the human factor in generating data for analysis which could have a certain percentage of error. Hence, I stand liable for any scientific error that could be found in this work.

This study was specifically challenged with the following;

• This research work is limited to secondary data while the empirical finding will be confined to data sourced whose reliability and validity are not known to the researcher.
• This study is limited to monetary policy in Nigeria and its impacts on capital formation in Nigeria.

1.9 Definition of terms

Monetary Policy: This is the combination of measures designed to regulate the value, supply, and cost of money in an economy that is solely under the supervision of the Central Bank of Nigeria (CBN).

Net Investment/Capital formation (Savings): This refers to savings from household and business sectors, directly through investment and indirectly through bank deposits which are loaned out to firms for investment purposes only. It can also be referred to as an increase in the stock of real investment/capital in the economy during an accounting period.

Prime lending interest rate:  it is considered to be the interest rate charged to a bank’s most creditworthy corporate customer for short term loans.

Cash Reserve Ratio: This refers to the percentage of the deposit liabilities (savings and time deposits) which must be kept by financial institutions (Deposit money banks DMB_S) in the form of cash in hand or till money.

Liquidity Ratio: This refers to the percentage of the total bank deposit of Deposit Money Banks (DMBs) customers which are allowed by the Central Bank of Nigeria (CBN) to be given out as loan which prompts the total volume of money in circulation in the economy.

1.10   Organization of the Study                                           

This research work will be organized in five chapters, i.e. chapters one, two, three, four, and five. Each chapter presents related information on the topic which would help for easy understanding.

Chapter one: This includes sub-topics that are directly related to the main topic under study such as the background to the study, statement of the problem, the objective of the study, the research questions, and research hypotheses, the significance of the study, the scope of the study, limitations of the study and definition of terms.

Chapter two: This deals with a review of related literature. This will show previous works or studies done on this topic or related topics by consulting articles of some authors, journals, textbooks, and information from the internet as so on.

Chapter three: This will focus on the research methodology and this will include research design, sampling procedure, and sample size, method of data collection, operational measures of variables, model specification, and data analysis technique.

Chapter four: This provides the data presentation, data analysis, and interpretation of results.

Chapter five: This contains the summary, conclusion, and recommendations of this work. The bibliography and other appendixes will be presented immediately after chapter five.