THE IMPACT OF MONETARY POLICY ON INDUSTRIAL GROWTH IN NIGERIA

CHAPTER ONE

INTRODUCTION

1. BACKGROUND OF THE STUDY

One of the major issues which have occupied the mind of government for years is the impact of monetary policy as a tool for price stability in Nigeria. Despite the lack consensus amongst the economy, there is remarkable strong agreement that monetary policy as an economy-stabilizing measure in Nigeria refers to the persistence rise in the general price level.

Monetary policy is one of the macroeconomic policies available for managing the economy. It is however important today because its effects on economic aggregates such as price, output, interest rates and exchange rates. In most countries, the central bank is saddled with the responsibility of conducting monetary policy. In the case of Nigeria, the responsibility entirely lies with the Central Bank of Nigeria (CBN). The discretionary control of the money stock by the monetary authority involves the expansion and contraction of money, influencing interest

rate to make money cheaper or more expensive depending on the prevailing economic situation.

1.2. STATEMENT OF THE PROBLEM

Industrialization has always constituted a major objective of development strategy and government policy. Through industrialization, developing nations aspire to achieve higher economic growth, and to eventually attain developed nation status. Yet, it remains doubtful whether the approach of industrial policy-making in Nigeria has indeed been successful in transforming the economy. Over the past three decades, the outlook of industrial growth and development in Nigeria has been gloomy and uncertain. Industrial output, measured in terms of aggregate index and its contribution to GDP has fluctuated very widely.

The industrial contribution to GDP which went up from 17.2 percent in 1996 to 18.1 percent in 1998, declined to 16.1 percent in 2002. Existing evidence highlights the main contribution to industrial development in Nigeria to include such diverse problems as poor infrastructure, scarce human capital, and limited access to inputs, high macro-volatility, poor legal and judicial system, small product market and thin financial market (Obitayo, 1991, Asogwa ,2003, Nnanna, 2003).

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 volatility in inflation rates. Since the early 1970’s, there have been four major episodes of high inflation, in excess of 30 percent. The growth of money supply is correlated with the high inflation episodes because money growth was often in excess of real industrial growth. However, preceding the growth in money supply, some factors reflecting the structural characteristics of the economy are observable. Some of these are supply shocks, arising from factors such as famine, currency devaluation and changes in terms of trade.  

1.3     OBJECTIVES OF THE STUDY

The main objective of this study is to assess the impact of the monetary policies on the growth of the Manufacturing sector in Nigeria. Other specific objectives are, thus;

To investigate the impact of the Open Market Operation on the   Nigerian Manufacturing Sector Gross Domestic Product.

To investigate the impact of the Cash Reserve Ratio on the   Nigerian Manufacturing Sector Gross Domestic Product.

To investigate the impact of the Monetary Policy Rate on the   Nigerian Manufacturing Sector Gross Domestic Product.

To investigate the impact of the Exchange Rate on the   Nigerian Manufacturing Sector Gross Domestic Product.

1.4     RESEARCH QUESTIONS

The following research questions are intended to sharpen the focus of the problem and are deduced from the above objectives. Thus;

Does the Open Market Operation (OMO) have an impact on the Nigerian Manufacturing Sector Gross Domestic Product (MGDP)?

Does the Cash Reserve Ratio (CRR) have an impact on the Nigerian Manufacturing Sector Gross Domestic Product (MGDP)?

Does the Monetary Policy Rate (MPR) have an impact on the Nigerian Manufacturing Sector Gross Domestic Product (MGDP)?

Does the Exchange Rate (EXCR) have an impact on the Nigerian Manufacturing Sector Gross Domestic Product (MGDP)?

1. 1. SIGNIFICANCE O THE STUDY

This study is significant in the following ways;

1. It would provide an objective view of the effectiveness of the monetary policy in Nigeria.

1. It would provide an economic basis upon which to examine the effect of monetary policy on the Nigerian economy.

1. It would provide policy recommendations to the policy makers on ways to make the Nigeria economy vibrant through the monetary policy.

1. 1. SCOPE OF THE STUDY / LIMITATION OF THE STUDY

This study will focus on major growth and development components which are vital parts of monetary policy. The study will also empirically examine the effectiveness of monetary policy in the Nigerian economy. Factors that affect smooth execution of the project include inadequate finance and short time.