Review of Monetary and Fiscal Policies in the Nigeria Economy

Review of Monetary and Fiscal Policies in the Nigeria Economy

The Central bank of Nigeria (CBN) started with effect from 2002 fiscal year, adopt a medium term perspective monetary policy framework. Unlike earlier program which where designed for one year, the new programmes is for a two year period beginning January 2002 to December 2003. the shift is in recognition of the fact that monetary policy actions affect the ultimate objectives of policy with a substantial lag. Thus, the current shift will free monetary policy implementation from the problem of time inconsistency and minimize over reaction due to temporary shock.

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This circular outlines the monetary, credit, foreign trade and exchange policy guideline applicable to bank and others financial institution in Nigeria in 2002/2003. in particular, monetary and credit policy will be implemented within the framework of the medium term programme. The guidelines will be subjected to fine turning in the light of development in monetary and financial market conditions, as well as the performance of the economy, which could be conveyed to the relevant institutions in supplementary circulars as necessary. The circular contains four major sections and four appendices following the in production, which is section 1, section 2 review the development in the economy and policy environment in 201 and thus 2002/2003. section 3 outlines the monetary and credit policy financial institutions in fiscal 2002, while the foreign trade and exchange policy measures are highlighted in section 4. the appendices contain prudential guidelines for licensed banks and reporting format.


          Macro economic developments major economic inclines indicated mixed macro economic performance in 2001 the environment for the continued expansionary fiscal operations of the three tiers of government, as a result of the magnetization  of the excess crude oil, receipt and proceeds from the GSM license later in the year, as well as monetary financial of fiscal deficit. This resulted in large injections of liquidity into the economy, which undirected rapid monetary growth and intensified inflationary pressure interest rates were influenced by the state of bank liquidity as well as policy actions aimed at addressing the problems of liquidity over having. The average naira exchange rate at the fiscal market however remained relatively stable for most of the period, while relative implement was observed in agricultural and industrial production. The outcome of external sector development remains favorable up to the third quarter of the year. The fourth quarter, however witnessed a slide in the report price of crude petroleum with negative implications for export earning and government revenue.

Growth in real gross domestic product (GDP) was estimated at 3.8 percent during the first half of 2001 compared with the 5.0 percent targeted in 2001. the growth in output reflected the inv=crease in both agricultural and industrial production. Aggregate manufacturing capacity utilization rose marginal by 0.3 percent point over its level in the first half of 2000 the preceding half year. The upward pressure in inflation trend observed since July 2000 continued in the fourth quarter of 2001, with the inflation rate at 18.9 percent in November, compared with 5.8 percent in the corresponding period of 2002.the provisional balance of payment for the first half of 2001 indicated on overall surplus of #51.1 billion(us$458.9 million) compared with #78.3 billion (us $782.5 million) in the corresponding period of 2000. this development reflected the surplus in the current account, which more than offset the deficit in the capital and the financial account the current account position was bayed mainly by enhanced earning from crude oil exports, occasional by high prices of crude earnings from crude oil in the international petroleum market. The value on non oil exports however fell sharply from #14.8  billion in 2000 to #9.3 billion in June 2001. Gross external reserve increased from US $9.9 billion (#1.032.5) at end of December 2000 to US$10.6 billion (#167.8 billion) in June 2001 and declined marginally to Us$10.4 billion (#1,152.2 billion) by November.

The Naira exchange rate via-a-vis the us dollar was relatively stable in the IFEM for most of the year. After the depreciation in the first months, from #110.5 to #113.59 = us$1.00, the average IFEM rate appreciate steadily from #113.07 = us$1.00 in may to #111.60 = us$1.00 in September and remained at that level in October 2001 the rate however depreciate marginally to #111.99 = us $1.00 in November

Similarly, the average parallel market and bureau discharge rates depreciated from #123.38 and 48 = us $100 respectively, in may before appreciating consistently. The relative stability achieved was attributed destination import inspection at the ports.

The growth in monetary aggregates accelerated rapidly in the eleven months of 2001, exceeding the prescribed targeted for the year by wide margins. Provisional data indicated that broad money (M2) rose by 26.8 as against the programmed target of 12.2 percent of the year. The expansion in M2 reflected growth in both the narrow money (m1) and questioned components. M11 expanded by 19.9 percent compared with the 4.3 percent growth stipulated for the whole year. Monetary growth during the period was given by the increase in bank credit to the domestic economy and foreign assets (net) of the banking system, following the continued magnetization of excess crude oil export proceeds.

Aggregate bank credit to the domestic economy rose significantly by 77.8 percent as against the 15.8 percent growth target for fiscal 2001 the rise reflected the growth in credit to both the government and the private sector. Net claims on government and the private sector. Net claims in government rose by 132.8 percent as against the target expansion rate 2.6 percent for the entire year. Similarly credit to the private sector rose by 37.3 percent compared with the target of 22.8 percent for the whole year. The growth in credit to the private sector was, as in the previous year, largely drawn by development in the foreign exchange market.

Reported bank lending rates were generally high during the year, while the deposit rates remained low. By November 2001, the spread between the weighted average deposit and maximum lending rates was 11.6 percentage points which that between the average saving deposit and maximum lending rate was 26.1 points most deposit rates remained negative in real terms as inflation rate accelerated. During the year the CBN tightened its monetary policy to stem the liquidity surge arising from the expansionary fiscal operate of governments. The banks progressively raised its minimum rediscount rate (MRR) by 650 baize points from 14000 percent in January to 20.5 percent in September, similarly both the cash reserve requirement (CRR) and statutory minimum liquidity ratio (LR) were revised upward from 10.0 and 35.0 percent to 18.5 and 40.0 percent, respectively during the same period. The CBN also introduced its own intervention instrument, the CBN certificate in February 2001, to complement the traditional treasuring bill in addressing the problem of liquid overhang in the banking system.


The effect of fiscal federalism exacerbated the problem of excess liquidity with adverse implications for domestic price, exchange and interest rates, the persistence of structural bottlenecks in the economy also continued to constrain economic recovery in 2001 while some macro economic indicators showed marginal improvement in 2001 relative to 2000


The primary of monetary policy in 2002/2003 is the achievement of price and exchange rate stability specially, monetary policy shall seek to subdue inflation to a single digit over the two year period consequently the central focus will include effective control of anticipated liquidity injection that may arise from excessive government spending during the pre-election year of 2002/2003 in order to minimize their negative effects on domestic price and exchange rate. The effect stance of monetary policy will be non-accommodation while a more competitive financial environment will be fostered to enhance greater access to credit for the real sector. Furthermore, continued effort will be made in improving the payment system in order to further strengthen the effectiveness of monetary policy. The broad measure of money supply (m2) shall continue to be the intermediate target of monetary policy. An average growth in m2 of about 15.2 percent during the two year period which translates in 15.3 percent in 2002 and 15.0 percent in 2003 shall be maintain.


The critical rate of the CBN in the management of the Nigerian economy has been made obvious by the provisions of the law stability of the bank. The core mandate of the CBN as spelt out in the CBN Act of 1958 include, insurance of legal tender currency, banker and financial adviser to the federal government to safeguard the international valve of the currency, promotion of monetary stability of and a sound efficient financial system, although the original act mandates the CBN to promote monetary stability, it was in the 1999 amendment to the act that actually confirmed discretionary powers of governors, the board and management of the bulk, in the information and implementation of monetary policy, especially the determination of the appropriate interest rate regime and exchange rate policy.

In keeping with the principle of transparently and accountability in the conduct of monetary and financial policies. The CBN publishes its monetary policy objectives targets and measures fro a two year period. The exercise involves the review of developments in the economy during the preceding year, the identification of the prospects and problems in the years ahead and the outlining of the policy goals and performance target. For the period.

In spirit of transparency, the summary discussion and decisions of the MPC are communicated to the general public in newspaper publications every month.

Moreover, in order to enhance effectiveness and stability of the financial sector, the financial services regulation and coordinating committee (FSRCC) meets the coordination of the various regulatory institutions in the sector.

The committee works towards minimizing arbitrage opportunities  that are usually created by differing regulatory and supervisory standards among the various agencies, deliberates on problem experience by every member in its relationship with any financial institution and bridges any information in its relationship with any type of financial institution.


When the emphasis liquidity management in our monetary programmes, it is because we understand to maintain an optimal level of liquidity that is consistent with the absorb capacity of the Nigerian economy so as to avoid over heading the economy

In our use of monetary positions, we recognize that to exchange rate has to be competitive if investors are to choose Nigeria our many economies that they have to choose from, simply put, our exchange rate should  and indeed must reflect market realities to promote efficiency in resources allocation and productivity growth. It is therefore, our goal at the CBN to pursue monetary policy that is consistent with the maintenance realistic and stable exchange rate regime, via a vis those of our trading past, to accomplish the objectives of monetary policy, the CBN has over time adopted a mix of policy instrument  as was needed to deal with specific circumstances while the intermediate target has remained some aggregate.

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