The Central Bank Of Nigeria And Monetary Policy
The Central Bank of Nigeria was set up by the act of 1958 following a lot of economic reports by commission set up to study the economy prior to independence. The broad objective so to say is to provide Nigeria with a safe and flexible banking and monetary system capable of enabling and encouraging the country and her citizens attain greater economic heights.
Like most other central banks in many of the developing and developed countries, a number of operational functions could be dictated from its objective. These include;
- The formulating and administration of monetary policy in order to balance the flow of money and credit against the demand for goods and services and thus through this means foster a non inflationary, fully employed growing economy, and to help maintain balance in the nation’s trade and financial dealings with other countries.
- Regulating and supervising banking to assure a sound and competitive financial system that is responsive to public needs. Bank of last resort and the banker’s bank.
- Serve as the Federal Government fiscal agent in issuing redeeming and paying interest on its securities, handling the government’s principal checking accounts and the financial activities of various Federal agencies, and trading foreign exchange for the bank and the treasury.
- Maintain an adequate flow of coin and paper money to meet the demand of the public and facilities the transfer of funds among banking institutions and their customers.
- Assist foreign monetary institutions in their financial transactions with the country including receiving their deposits, investing in treasury security and holding their gold reserve (if any).
The Nigerian System
In our system with reference to the Nigeria, banks are privately or publicly owned are subject to the authority of the Central Bank of Nigeria. The Central Bank Of Nigeria maintains presence in every state of the Federation through its branch network or currency centres. A board of governors usually appointed by the government and representing varying interest serves it.
It belongs to the Board to formulate the board policies of the bank relative to the economy and to see to the day to day administration and implementation of these policies. The board is advised by a number of specialist departments of bank manned by qualified and experienced economists.
These specialists usually supply reports on current economic and financial developments and an evaluation of the long term outlook and implications, several times a year also these economists deliver detailed economic projections for the following year of two and estimate how they expect the money supply, credit market and interest rates to behave.
A discussion of their presentations is done by the board, each member giving his preliminary indication of the approach to monetary objectives of the nations.
Formulating The Policy Directive
When the board has reviewed all the specialist prepared materials presented to it with the alternative propositions for money supply, and estimates of reserves considered necessary for achieving them, then likely the behavior of interest rates under each scenario is discussed with emphasis on the most critical area that deserve attention. A directive policy in then given, that will guide the domestic trading desk in buying and selling government securities to achieve the same, a faster or a slower expansion of bank reserves. This ultimately affects the amount of money and credit in the economy.
Techniques Of Monetary Control
The techniques of monetary control are those monetary policy instruments that are used by monetary authorities to influence the supply, allocation and cost of credit in an economy. In this section our discussion will be in three parts; the traditional instruments and their limitations, the direct control of bank liquidity and the direct control of bank advances.
Traditional Instruments Of Monetary Policy
We can identity three traditional instruments of monetary policy, open market operations and discount rate policy and reserve requirements. These instruments have a few features in common. First, they belong to the class of instruments that are usually referred to as market weapons. They require the existence of a developed and properly functioning money market to operate.
Secondly, they are usually confined (by the central bank of Nigeria) to the short end of the market, and the central bank of Nigeria relies on the market forces to transit their effects to the long end of the capital market. These similarities notwithstanding, these instruments differ in the way in which they work and in their effects. Hence, it will be necessary to describe them one by one.
Open Market Operation
Open market operations are the sale or purchase of government securities in the open market, often at the initiative of the central bank. they rest, for their effectiveness on the ability of the central bank to influence commercial banks reserves and indirectly, the money supply in an economy. Since bank deposits constitute the base on which credit creating policies of commercial banks are erected, the aim of open market operation is to transfer a desired amount of these deposits to the central bank through the sale of government securities to the commercial banks and the non bank public.
The transfer of such deposits to the Central Banks of Nigeria reduces the ability of commercial banks to create credit and hence money supply. In the opposite case of purchase of government securities, the aim is to increase bank reserve with a view to making credit and hence money supply available.
Open market operation can be a very important weapon of monetary policy, particularly in countries with well-developed money markets. Perhaps their most important characteristic is that they are flexible, the central bank can engage in small or large operations depending on its objectives. In addition, the central can use the policy almost continuously, since it is free from announcement effects that usually accompany policies like the discount rate reserve requirements.
Success of open market operations depends on several factors. First, there should exist a board and active market for government securities, so that the ability of the central bank to engage in open market operation on a large scale does not lead to violent fluctuations in the prices of the securities, secondly commercial banks should be maintaining a fixed ratio between their deposit liabilities and cash reserves.
In other words, they should be lending more generously when their balances rise above this ratio and curtailing lending when they fall below. When this condition amounts to is that for open market operations to be effective, commercial bank must not keep excess reserves. This condition can easily be demonstrated. This means that open market operations have no effect on money supply. Another factor that can limit the effectiveness of open market operations is continuous borrowing from the central bank Nigeria and re-discounting of bills by the commercial banks.
If they do not refrain from such activities, they tend to replenish their cash balances depleted by central bank action. A feature of post Second World War central banking is the growth of the volume of government securities. Now an open market operation that strikes at the reserve position of commercial banks may simply manifest itself, not in the decrease in credit facilities, but in a decline in banks holding of government securities through re-discounting.