INFLATION CONTROL THROUGH OUT THE USE OF C.B.N INSTRUMENT OF CREDIT CONTROL
The system of monetary control in Nigeria is mainly relied on the use of credit instrument to limit the growth and supply of money so that the objectives set by the government are attain.In order to achieve the objectives the central bank attempts to manipulate the growth of monetary and credit aggregate to ensure adequate economic growth, employment and stability both internally and externally.
The central bank of Nigeria together with the government and other financial institutions functions as monetary authorities empowered to control money supply in order attain its objectives such as development of technology, inflation control and self-reliance in the nations economy.
However, these monetary policies have not successfully worked in controlling inflation. One would ask if these instruments of credit control is not enough to effectively control inflation or that its application are faulty.
Since this is the case, emphasis should be directed towards the curtailment of inflation. Money supply need to be checked to the target range, real rates of interest should be maintained and the country’s foreign reserves should be strengthened. Also, price stability requires slow money growth to rates compatibly with real growth.
2.2 OBJECTIVES OF MONETARY POLICY
As earlier highlighted monetary policy is made to achieve certain objectives of the government .The objectives according to Anibueze BC banking practice are as follows:
(a) Achievement of full employment
This is an important objective in many country’s monetary policy. In Nigeria particular the problem of unemployment is much. It is not possible to have full employment in the real sense but in order to ensure that the largest numbers of employable people are employed, monetary policy became necessary.
And this will result to maximum total output of the economy
(b) Economic Growth
Monetary policy is made in order to induce economic growth through the increase in there productivity capacity within the economy.
In this ways the standard of living will improve and the cost of living will be at it lowest.
© Price stability
Monetary policy is meant to keep the price level stable and thereby avoid or minimize the hash condition of inflation such as a fall in the value of money or protecting the economy against balance of payment problems.
The problem of balance of payment in developing countries are much so monetary authorities also pursue a policy that is aimed at eliminating a balance of payment disequilibrium to foreign capital flight.
2.3 THE ROLE OT CREDIT INSTRUMENTS OF INFLATION
Credit instrument which is the means by the central bank to control the supply of money in the economy has played an important role in controlling inflation. The central bank has certain policies directed to influence the availability of money supply in the economy.
This is done to safeguard the internal and external values of the currency and prevent excessive increase.
In Nigeria the monetary authorities adopt techniques, which should suit our economy. This techniques adopted involved the use of credit instruments such as open market operation, cash reserve ratio, and liquidity ratio. In order to carry on successfully the CBN has power to”
Also Read: Naira Exchange Rate Depreciation and Domestic Inflation in Nigeria
(a) Prescribe from time to the cash reserve deposit ratio which banks should maintain with the central bank.
(b) Prescribe maximum ratio of loans advances and discounts, which each commercial bank should grant to indigenous borrowers
© Call for special deposits from commercial and merchant banks
(d) Impose credit ceilings on commercial banks
(e) Approve commercial banks loans of certain size
(f) Very the composition of specified liquid assets of commercial and merchant banks.
(g) Issue, allocate to and repurchase from financial institutions stabilization securities.
The credit guidelines issued yearly usually indicate proportions of credit to be granted to different sector of the economy. And with use of the various credit instruments which will be discussed later in this chapter, the aim of monetary authority will be met.
2.4 INFLATION CONTROL THROUGH BANKING OPERATION
The daily operation of banks is also useful in controlling inflation. This is done through their lending process. And since the central bank OF Nigeria serves as a check to commercial banking activities, lending cannot be done excessively by banks.
The central bank of Nigeria has put in place some market operation, cash reserve ratio liquidity ratio, bank rate, direct selective controls securities and special deposits. And these instruments are utilized by banks under the control CBN to curtail or rather control the volume of money in circulation thereby controlling inflation.
Also, banks involves in government securities trading subscribing to the public such securities like treasury bill in primary market Auction (PMA) and Secondary market. And with the crushing rates of lending and deposits investors can save and invest in government securities.
Direct control of banking system credit is also used by monetary authorities in monetary management examples of direct control bank lending includes:
(a) Imposition of qualitative ceiling on the overall scrotal distribution of banking system credit.
(b) Prescription of minimum ratio of loans and advances to be granted to 100% indigenous persons and enterprises.
© Imposition of minimum growth of loans and advances portfolio.
Direct control of credit is also extended to the credit operation of non-bank financial institutions.
Also, withdrawal of large bank deposit could destroy the efficiency of liquidity management in banks as well as destroying productive base of the economy. That is where there is two much withdrawal without investing it in a productive sector of the economy when the economy will trends to crumble.
And when this is so, bank credit will be available on investment with high return on capital usually invested on consumer product.
And then, prices of goods and services will always be on the increase thereby resulting to cost push inflation which is pre-dominant in Nigeria economy.
2.5 MONETARY /CREDIT FUNCTION
The central bank as the apex bank formulate monetary policy yearly which undergoes review before they are in corporate into the federal government Budget. After the budget, the regulation I the monetary policy are issued in the form of the CBN credit policy guidelines.
Credit in this context simply means bank loans or bank lending. Invariably, credit means money on functions as money loaned out by bank to its customers. While credit control refers to the attempts to check or rather control the use, availability and cost of bank loan.
Money is usually created through bank lending and thereby increases money supply. However, on repayment credit are destroyed. And since modern market economy need bank loans in its operation credit creation becomes important. Once in commercial banks lend money it opens up a checking account in the name of the borrower for the amount of loan and thereby substitute its own credit for s that of the borrower.
2.6 INSTRUMENT OF MONETARY CREDIT CONTROL USED BY THE CBN TO CONTROL THE AMOUNT OF MONEY IN CIRCULATION
Government intervention in the free market economy is very important for efficient allocation of resources and equitable distribution of national income. However, there are two main tools used for the government market intervention activities.
These are monetary and fiscal policies. Monetary policy is changed with regulating volumes, direction in prices of money supply and credit in the economy.
Instrument of monetary policy available to monetary authorities in Nigeria are as follows:
- Open market operation
- Rediscount rate and interest rate structure
- Moral suasion
- Direct selective control
- Cash reserve ratio
- Liquidity ratio
- Stabilization securities.
OPEN MARKET OPERATION (OMO)
This involves the sales and purchase of financial assets that is government securities such as treasury bill by monetary authorities to commercial banks and the entire public. By engaging in this, the CBN help in increasing commercial banks reserves during purchase while sale reduces the reserve of commercial banks.
OMO is aimed at managing short-term liquidity and long- term monetary and credit control.
However, in Nigeria its application is not fully in existence due to the poor banking habit especially within the rural communities with in availability of bank and shortage in government securities.
DISCOUNT RATES AND INTEREST RATES
The discount rates are the rate of interest the central banks change the commercial banks on loans extended to them. It is also the rate at which the CBN rediscount first class bills of exchange and government securities.
To fight inflation the monetary authorities usually raise the bank rate to discourage borrowing by banks and consequently bank customers. On the other hand, if there is depression the CBN will want to encourage borrowing by banks and customers. When there is increase in interest rate aggregate spending tends to fall and in this way inflation can be combated.
MORAL SUASION
This is a control measures applied by the monetary authorities by any of regular informal discussions with banks official on monetary policy measures.
This is done by persuasion and appeal to get the banks behave correctly on comply with the monetary policies for the realization of specified government objectives.
The CBN utilized several media such as the bankers committee or during Annual dinner addresses to the institute of bankers, or press release to tell the banks in clear and unmistakable terms the direction and nature if policies.
CASH RESERVES RATIO
Every commercial bank maintains a minimum amount of cash deposit with the CBN banking office Lagos. The cash deposit is expressed as a ratio of each bank’s total demand deposit liabilities.
The monetary authorities tend to raise the reserve ratio during inflation thereby curtailing the creation of new deposits by banks. However, a lowering of the reserve ratio will tend to make more funds available to banks for lending.
DIRECT SELECTIVE CONTROLS
This instrument is used by monetary authorities to control money supply and also to direct the supply of money to some preferred sectors of the economy such as agriculture and manufacturing.
The aim is to keep down domestic prices and at the same time create job opportunities through increased economic activities.
LIQUIDITY RATIO
This is whereby the commercial banks are statutorily required to keep a fixed proportion of its total deposits in the form of cash and other eligible liquid assets such as treasury bills and treasury certificates. When the liquidity ratio is reduced the banks will tend to raise the monetary liquidity ratio thus lowering or curtailing the lending capacity of the banks.
This approach was used between 1959 and 1964 when the monetary authorities were trying to change the nation’s credit base.
STABILIZATION SECURITIES / SPECIAL DEPOSITS
In order to maintain monetary stability in the economy the central bank has the power to issue stabilization securities at such rates of interest, conditions of maturity and amortization as it may determine and to sell or repurchase such securities from any licensed bank.
The central bank being the apex bank has to power to sanction any bank that fails to take up its allocation of the stabilization securities when issued.
2.7 CAUSES OF INFLATION IN NIGERIA
In Nigeria, inflation is caused by structural and monetary factors.
These are grouped into four:
(a) Demand shift
(b) Export instability
© Agricultural tendency
(d) Foreign exchange scarcity.
(a) DEMAND SHIFT: The demand shift is as a result of shifts in the composition of demand, which creates increases in price level. That is when there is excessive demand the average price level would rise.
(b) EXPORT INSTABILITY: Nigeria is so independent in terms of certain goods and services needed for their development. So, the import syndrome of the country has a way of leading to inflation any pressures.
© AGRICULTURAL TENDENCY: Considering the growth of the population of the country growth of agricultural product is too minimal.
This result to the pressure on food supply since it availability cannot measure with the living standards and urbanization in developed nations.
(d) FOREIGN EXCHANGE SCARCITY: This is the problems which face most developing countries where there is difficulties in their balances of payment position due to low demand for primary products and high income elasticity of demand for impact. Usually, controls over imports and exports result to rise in domestic prices.
(e) MONETARY INFLATION:
This can be viewed under:
- The normal money supply
- The financing of budget deficit through currency inflation
- The rate of growth of real gross domestic product (GDP)
- THE NORMAL MONEY SUPPLY: The excessive money supply by monetary authorities usually result to inflation since by that too much money will go for title goods and services for instance, the present creation of bigger denomination of the naira could lead to excess supply of money.
- THE FINANCING OF BUDGET DEFICIT THROUGH CURRENCY INFLATION: The desire for rapid development particularly by developing countries had led government into adopting deficit budgets, which inevitably had resulted in inflation any pressures.
- THE DATA OF GROWTH OF REAL GROSS DOMESTIC PRODUCT (GDP): The real output per head of the citizens of Nigeria is also encouraging, the pressures of inflation in Nigeria. In a situation whereby the GDP seems encouraging however the productivity did not increase it tends to create inflation.
GOVERNMENT WAGES:
Experience has shown that increment in wages has inflation tendency
Presently. This minimum wage increment in Nigeria also result to increase in prices of goods and services. In anticipation of increase in wages and salaries produce and market women increase commodity prices and when the wage are paid, price rise again even before the wages have time to enter into production costs.
2.8 EFFECTS OF INFLATION IN NIGERIA:
The degree of openness and under developed nature of the major economic sectors in the country is the impact of inflation.
Effect of inflation on Agriculture
Inflation on agriculture shows that food prices are rising while food production has been dangerously failing because of the concentration of investment on industries like the petroleum industry and services at the detriment of agriculture.
Effects of inflation of economic growth
Effects of inflation on economy are manifested in the following ways.
(1) Inflation discourages savings and the growth of capital markets, which are needed for an efficient distribution of scarce capital among competing users.
(2) It affects privates foreign investment by promoting capital flight and discouraging capital inflow.
(3) It affects the nations balance of payments.
(4) It promotes wrong kinds of investment
(5) Balance of depreciation accounts are often far below replacement costs in inflation ny economics.
EFFECTS OF INFLATION ON INVESTMENT
(1) It discourages investment by creating uncertainty and making planning difficult, Thereby rendering short-term investments easier to assess and preferable.
(2) It is a tax on saving and reserves, which are supposed to protect one against the future. It therefore, discourage saving.
(3) It makes the work of financial market particularly difficult by reducing the possibility of debts mortgages and dealings in secondary market thereby reducing the financial options available to companies
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