THE IMPACT OF MONETARY POLICY ON FOREIGN TRADE IN NIGERIA

THE IMPACT OF MONETARY POLICY ON FOREIGN TRADE IN NIGERIA

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Abstract  

This study examines the impact of monetary policy foreign trade in Nigeria. In doing this, chi-square statistics is used to analyse data for the study. The result of the analysis shows that monetary policy presented by money supply exerts a positive impact on GDP growth and Balance of Payment but negative impact on rate of inflation. The recommendations are that monetary policy should facilitate a favourable investment climate through appropriate interest rates, exchange rate and liquidity management mechanism and the money market should provide more financial instruments that   satisfy the requirement of the ever-growing sophistication of operator

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Monetary policy has always been seen as a fundamental instrument over the years for the attainment of macroeconomic stability, often viewed as prerequisite to achieving sustainable output growth. 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 is argued to have a greater influence on the economy through its effect on the value of domestic currency, domestic inflation, the external sector, 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 the authority with the mandate of manipulating 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. In the same vein uses inflation rate to track movement in the domestic price while exchange rate policy are used as tool in contribute towards stabilizing the macroeconomic environment of the country.   According to Nnana (2006), generally, macroeconomic policies in developing countries are designed to stabilize the economy, stimulate growth and reduce poverty. The primary goal of monetary policies in Nigeria has been the maintenance of domestic price and exchange rate stability since it is critical for the attainment of sustainable growth and external sector viability (sanusi, 2012).Economists have long been interested in factors which cause different countries to grow at different rates and achieve different levels of wealth. One of such factors is foreign trade. Nigeria is basically an open economy with international transactions constituting a significant proportion of her aggregate output. To a large extent, Nigeria’s economic development depends on the prospects of her export trade with other nations. Foreign trade provides both foreign exchange earnings and market stimulus for accelerated economic growth (Obadan, 2004).Several countries have achieved growth an export-led strategy. Small economies in particular have very little opportunity to achieve productivity and efficiency gains to support growth. Without tapping into large market through external trade, Nigeria’s relatively large domestic market can support growth but alone cannot deliver sustained growth at the rates needed to make a visible impact on poverty reduction. Hence Nigeria has continued to rely on foreign market as well (World Bank, 2002).Many economists generally agree that openness to international trade accelerate development. The more rapid growth may be a transition effect rather than a shift to a different steady states growth rates clearly, the tradition takes a couple of decades or more so, that it is reasonable to speak of foreign trade openness accelerating growth rather than merely leading to a sudden onetime adjustment in net income (Dollar and Kraay, 2001).In Nigeria, the achievement of this objectives are predicated on the stance of fiscal monetary policies. Monetary policy formulation is based on the duo of money supply and credit availability in the economy. 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 of the banks are influenced by the central bank through its various instruments of monetary policy. These instruments include the cast reserve requirement, liquidity ratio, open market operations and primary operations to influence the movement of reserves (Ajir and Nenbee, 2010 and Masha et al, 2004).Sequel to our discussions so far, one could be induced to conclude that the use of monetary policy in Nigeria seems not to attract the desired level of economic stability. This conclusion follows the dismal performance of the economy in recent years. Little wonder Donli (2004) writes that the last two decades witnessed series of reforms armed at the revitalization of the Nigeria economy owing to series of crises that influence the growth of the economy during this period. The problems were seen to be a direct derivative of structural imbalances in our economy system. The imbalance started right from colonial era nurtured by inappropriate policies after independence in 1960, and reinforced by the wind face gains form petroleum in the 1970s.Donli (2004) further contends that these structural defects consisted or undiversified monolithic and monoculture production bases, undue reliance on agricultural products from 1973. The outcome of those events was that the growth process relied heavily on external factors instead on the internal ones. However, of all the independences, the exclusive reliance on petroleum turned out to be the most devastating to the economy.  The dismal economic outlook in Nigeria above dismal economic outlook in Nigeria above desires investigation into whether or not monetary policy as claimed by the monetarists impact on Nigeria’s economic stability and foreign trade.

1.2 STATEMENT OF THE PROBLEM

Monetary policy as a technique of economic management to bring about sustainable economic growth and development through foreign trade has be the pursuit of nations and formal articulation of how money affects economic aggregates dates bank the Adams Smith and water championed by the monetary economists. 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 growth their economies. In Nigeria, monetary policy has been used since central Bank of Nigeria was saddle the responsibility of formulating and implementing monetary policy by Central Bank act of 1958. this role has facilitating 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 valued becoming a prominent earning asset for investors and source of balancing liquidity in the market. These have been various regimes of monetary in Nigeria some times, monetary policy is tight and at other times it is loose mostly use to stabilize price. The economy has also witnessed times of expansion and contraction but evidently, the reported growth in foreign trade has not been a sustainable one as there is evidence of growing poverty among the populaces. The question is, could the period of growth in foreign trade be attributed to appropriate monetary policy? And could the periods of economic down term be blamed on factors on other than monetary policy ineffective? What measures are to be considered if monetary policy would be effective in bringing about sustainable economic growth and development?

1.3 OBJECTIVE OF THE STUDY

The main objective of this study is the impact of monetary policy on foreign trade in Nigeria. But for the successful completion of the study; the researcher intends to achieve the following sub-objectives;

1. To examine the impact of monetary policies on foreign trade.
2. To examine the hindrances to monetary policies operations in Nigeria.
3. To proffer suggestions on how monetary policies can be managed for better contribution to foreign trade and the economy development
4. To evaluate the effect of money supply on manufacturing output, inflation rate, exchange rate, interest rate and economic growth in Nigeria.

1.4 RESEARCH QUESTIONS

1. Can the financial market and institutions create a high degree of confidence with the help and achievement of price stability?
2. Has the financial infrastructure of the Nigerian industry been able to meet the requirements of market participants?
3. Is monetary policy rate (MPR) sufficient enough to bring about stability in inflation, interest & exchange rates?
4. How do interest rate, exchange rate and inflation respond to shocks in monetary policy rates (MPR)?

1.5 RESEARCH HYPOTHESES

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H₀:  A monetary policies have no significant impact of foreign trade in Nigeria

H₁: A monetary policies has significant impact on foreign trade in Nigeria

H₀²: there is no significant relationship between monetary policy and foreign trade in Nigeria

H₂: there is a significant relationship between monetary policy and foreign trade in Nigeria

1.6 SIGNIFICANCE OF THE STUDY

It is believed that at the completion of the study, the findings will be of benefit financial institution and government of Nigeria. This study will act as a source of information on various ways of adopting monetary policy and its instruments for stabilizing the economy. It will guide the policy makers towards policy initiation. .The study will also be of great benefit to the researchers who intends to embark on research on similar topics as it will serve as a guide. Finally, the study will be of great importance to academia’s, lecturers, teachers, students and the general public.

1.7 SCOPE AND LIMITATION OF THE STUDY

Scope of this study covers the impact of monetary policy on foreign trade in Nigeria. In the course of the study, the researcher encounters some constrain which limited the scope of the study;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
3. c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities

1.8 DEFINITION OF TERMS

IMPACT: The action of one object coming forcibly into contact with another.

MONETARY POLICY: Monetary policy is the process by which the monetary authority of a country, like the central bank or currency board, controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

FOREIGN TRADE: Foreign trade is nothing but trade between the different countries of the world. It is also called as International trade, External trade or Inter-Regional trade. It consists of imports, exports and entry point.

1.9 JUSTIFICATION FOR THE STUDY

Inflation would not have been the attraction of this research if it has no reasonable influence on the standard of livings of Nigerians; more so, if policy measures so far adopted by Central Bank of Nigeria (CBN), from its inception in 1958 to date, have yielded the optimum result. Undoubtedly, inflation has not only continued to exist but remain a costly menace; it arbitrarily benefits debtors and hurts creditors by decreasing the real value of the outstanding debt; it is harmful to the general economy. It discourages savings and investment by creating uncertainty about future prices. It distorts relative prices and undermines the efficiency of the market pricing mechanism. Moreover, Exchange rate would not have attracted attention in this research if it does not determine the relative prices of both domestic and foreign goods, the strength of the external sector, the demand for export and by extension the social welfare of Nigerians. The failure of Monetary Authorities to initiate and implement monetary policy that will stabilize exchange rate in favour of Nigeria and Nigerians is another justification for this study. Furthermore, interest rate would have been neglected if not for its popular usage as an instrument for achieving stability in the two aforementioned rates. More importantly, interest rate would not have been an issue if it does not affect peoples’ decision or behaviour with regards to consumption, savings and investment as well as profits that keep bourgeoisies in business and above all determine the direction of funds (i.e. to where they can earn the highest return, or where loans can do the most for the economy). Above all, the need for the study would have been null and void, if CBN is able to produce (through its monetary policy) an interest rate that tells the truth about the availability of resources for meeting the present and future consumer demands, allowing production plans to be kept in line with the preferred patterns of consumption. In an attempt to make contributions and possibly fill most or all of the vacuums identified above, various researches have been conducted. These researches in turn are equally not perfect; hence the gaps and/or deficiencies inherent in them necessitated this study. First and foremost, a research titled “An assessment of the effect of money supply in Nigerian inflationary trend (1970-1993)”, by one Omofa Moses Niyigbenga, a student of this department, can be considered narrow and deficient; it only succeeded in relating monetary policy with inflation holding the effects of interest and exchange rates constant. Consequently, by overlooking the role of interest rate as well as exchange rate on inflation and the monetary policy itself, the research in question needs to be improved and upgraded. The reason is that the two rates are so important to be easily overlooked when considering the influence of monetary policy. There is equally the need to update such a research to accommodate the effects of global financial meltdown, Euro-zone crises, Iranian and Libyan oil saga, and partial removal of oil subsidy, development in monetary base as well as the monetary policy in general. This includes shift from direct to indirect monetary control and the change of nominal anchor from minimum rediscount rate (MRR) to monetary policy rate (MPR) just to mention but a few. Similarly, another research on monetary policy and macroeconomic instability (1980-2000) by Emeka Nkoro is also inadequate because of non-inclusion of the same interest and exchange rates in his definition of macroeconomic instability in Nigeria. Thereby, making his conclusion tight and constricted. Though a research captioned “Monetary policy and Macroeconomic instability; A rational expectation approach (1980Q1-2000Q4)” was more comprehensive, for defining macroeconomic instability to include fluctuations in both the inflation and interest rates, it is still weak and underprovided for neglecting interest rate. Hence the need to include interest rate in the model, so we can see if the conclusions obtained in the prevailing studies will still stand.

1.9.1 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows :Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study.

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