THE IMPACT OF MONETARY POLICY ON INTERNATIONAL TRADE IN NIGERIA

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THE IMPACT OF MONETARY POLICY ON INTERNATIONAL TRADE IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1     Background to the Study

          Monetary policy is one of the macro-economic instruments with which nations (including Nigeria) do manage the economics. It entails those actions initiated by the monetary authorities which aim at influencing the cost and availability of credits (Wrightsman 1996). It covers gamut of measures or combination of packages intended to influence or regulate the volumes price as well as direction of money in the economy.  Specifically, it permits all the deliberate effort by the monetary authorities to control the money supply and credits conditions for the purpose of achieving deserve macroeconomic objectives, Ajie and Nenbee (2010). Chamberlain and Yueh (2006) adds that the supply or price of money-may exert a powerful influence over the economy. 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 and 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 moreso, 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
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 cash 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 discussion
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 economic system. The imbalance started right from colonial era nurtured by inappropriate policies after independence in 1960, and reinforced by the wind face gains from 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 independence, the exclusive reliance on petroleum turned out to be the most devastating to the economy. The 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.

Available data on the Nigerian economy reveal that money supply and trade openness have  fluctuated actively over the period of 1970 to 2012. Specifically, as seen in figure 1.1, growth rate of money supply fluctuated actively over the period attaining  an all-time high peak point of 91% in 1974. Similarly, trade openness fluctuated actively and attained a peak point of 55% in 2010.

THE IMPACT OF MONETARY POLICY ON INTERNATIONAL TRADE IN NIGERIA

THE IMPACT OF MONETARY POLICY ON INTERNATIONAL TRADE IN NIGERIA