CHAPTER ONE
INTRODUCTION
- 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.
- 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?
- 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;
- To examine the impact of monetary policies on foreign trade.
- To examine the hindrances to monetary policies operations in Nigeria.
- To proffer suggestions on how monetary policies can be managed for better contribution to foreign trade and the economy development
- To evaluate the effect of money supply on manufacturing output, inflation rate, exchange rate, interest rate and economic growth in Nigeria.
- 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
- 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.
- 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;
- a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
- 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.
- c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities
1.7 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 entrepot.
