Monetary Policy and Inflation in Nigeria Economy


A lot has been written about monetary policy and inflation in Nigerian economy.  Such written materials are in form of articles published in Journals and textbooks published in journals and textbooks by both local and foreign authors.

According to SIB. Falegan (3) his definition of monetary policy is thus“Policy which deals with the discretionary control of money supply by the monetary authorities in order to achieve state or desired economic goals”. Prof. Sam. A. Aluko, (40 an authority in Economics and finance was of the opinion that, “Monetary policy is the attitude of the political authority towards the monetary system of the country.  It embraces such subdivisions as currency and credit management, discount or interest rates, debt management and foreign exchange, prices and incomes polices”.

S.B. Falegan; “Instruments of monetary policy: Their applications and effectiveness in Nigeria” A paper presented at the symposium on “Role of monetary policy in Developing countries”. February 1978 at Banjul, Gambia.

Prof. Sam. A. Aluko, a lecture delivered at the university of Port Harcourt on the 16th day of January 1986. page 2.

He also argued that monetary policy would include measures dealing with rent, physical controls, budgets, expert drives, import restrictions and employment measures in so far is their primary aim is to influence the  volume of money in the economy.

In E.D.C Mgbojikwe’s (5) (Area office manager A.C.B Enugu)view;

“Monetary policy is the management of the expansion and contraction  of the volume of money in circulation for the specific purpose of achieving certain declared national objectives”.

Read More: The impact of monetary policy on Nigeria’s economic growth

He further stated that monetary policy is easily recognizable where the monetary authorities have clearly defined objectives such as domestic price stability, maintenance of healthy balance of payments position and the application   of instrument of monetary and credit control to regulate the quantity of money in order to achieve the desired objectives.

E.D.C. Mgbojikwe, a paper he presented at the seminar.  Page 1 and 2 enunciated  to achieve the following;

  1. To reduce the excess liquidity in the economy so as to moderate price increase thus combating inflation
  2. To cut down on the importation of luxury commodities thereby reducing the pressures on the balance of payments.
  • To encourage more efficient use of money through a more realistic interest rate structure which encouraged the mobilization of savings.

Ojo and Ajayi also added that monetary policy changes according periods.

Monetary policy suffers from some defects.  Uzoaga quoting extensively  from Albert G. Hart submits that:

“Monetary policy as a stabilize suffers from a number of defects.  There is the uncertainty about the exact effectiveness of the monetary authorities, ability to tighten or liberalize credit conditions through, general monetary controls.  This uncertainty  is supported by the availability of close substitutes for money such as highly loahod assets in the form of government securities and savings accounts.  The availability of such close substitutes makes the demand for money more elastic and tends to cushion the impact of a change in the quantity of money.

Ojo and Ajayi: Money and Banking analysis and policy in the Nigerian context page 171 and 172.

There is also the uncertainty about the effect of tightening or loosening credit on aggregate demand”.

Putting all the above together, it can be seen that monetary policy in Nigeria is not static.  Ti is quite dynamic and hence demands of the time determine the direction of monetary operation of pushing it through reference was made to the federal executive council which was the final arbiter.

Also Read: Inflation Control through Out the Use of C.B.N Instrument of Credit Control

However, thereafter, the central Bank of Nigeria was made fully autonomous.

Instruments or tools of monetary policy:

Instruments or tools of monetary policy can be broadly classified into two:

  1. a) Quantitative instruments (traditional and Non- traditional).
  2. b) Quantitative instrument (Rantlettive1977).

Quantitative instrument are the impartial or in personal tools which operate  primarily by inflationary the  costs, volume, and availability of banks reserves.  The  head to the regulation of the supply of credit and cannot be used effectively to regulate the use of credit in particular area of sectors of the credit market.

Quantitative tools are further J.C Anyanwu, emphasis mainly on the issue of monetary   policy is the major economic stabilization weapon which involves measures designed to regulate and control the volume, cost, availability and directions to achieve some specified macro- economic policy objectives.

That is,  it is a deliberate effort by the monetary authorities (the central bank) to control the money supply and credit condition for the purpose of achieving certain broad economic objectives (Wrighman 1976).  Monetary  policy is administered by the central bank in some cases with some degree of political, government interference.  For example; in the united state  the Federal Reserve System administers monetary policy with (relatively) Minimum government interference. In Nigeria, before 1986, the central Bank of Nigeria was empowered to carry out monetary policy formulation and execution in consolation with the federal ministry of finances.  By then where disagreements arose as to either what the contents o the policy were to be or the molders policy.

Monetary policy and inflation has been extensively explored as they effect the Nigerian economy.  There are also as many definitions of the terms ”Monetary policy” and “inflation” as the authors on this topic.  In a nut shell, however, monetary policy refers to all discretionary polices by the government or its agency aimed at controlling the supply of money for the achievement of desired economic goals.

Hence monetary policy changes according to the objectives they are desired to achieve changes.  These monetary policies are therefore easily recognizable when the monetary authorities clearly defined the objectives they are meant to achieve.

Even though monetary policies are very strong tools employed by the government to try to equilibrate the  economy, they suffer from some defects such as the uncertainty that beclouds the authorities, ability to tighten or liberize credit conditions through general monetary controls.

In my literature review, the various writers were of the opinion that each time there is excess money supply without corresponding increase in out put, the Federal Government through the Central Bank uses some of its tools to regulate the economy effectively.  The Federal Government though the  Central Bank should be cautions  in making use of monetary policy because if monetary policy is not used judiciously it can lead to adverse conditions determental to economic development.

Hence it is my intention to study and find out he extent of the relationship between the monetary policies and inflation as well as investigate if there are other variable that effect inflation outside the government monetary polices.

Classified into two, traditional or market weapon and Non- traditional tools or direct control of bank liquidity.

Traditional or market weapons:

These are called market weapon because they rely or market forces to transmit the in effects to the economy specially, these tools include open market operations (OMO).

Discount Rate policy, and Reserve requirements.

Open market Operation (OmO).

These involve sale or purchase of government securities in the open market depending on whether the economy is inflationary or deflationary.

The   effect is that when monetary authorities sell securities to the market banks reserves declone and  when they buy bank reserves increase.  In this way, open market operations reduce or enhance, respectively, the banking system ability to create credit and hence money supply.

Non- traditional instruments or Direct control of bank loquoty. This tools is non- market tools  that strike directly at bank liquidity

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