MONETARY POLICY AND THE INFLATIONARY PROCESS: THE NIGERIAN EXPERIENCE, 1970 – 1993

MONETARY POLICY AND THE INFLATIONARY PROCESS: THE NIGERIAN EXPERIENCE, 1970 – 1993

ABSTRACT

The course of economic history the world over is replete with substantial price disturbance. The concept commonly used to describe negative price disturbances in the form of upward movement of prices is inflation. The immeasureable attention accorded the problem of inflation can best be understood in its ability to alter social progress. Attempt at arresting the inlfationary situation in Nigeria dates back to the late 1960s following the civil war and its attendant consequences. Ever since then, the problem of upward price pressure has continued unabated (in relative terms) notwithstanding its monetary explanation and the various liquidity restraining strategies employed. The framework within which monetary authorities design and implement actions necessary to bring the monetary situation under its control is the monetary policy and inflation viewed to a very large extend as a monetary phenomenum have over the years been addressed via monetary policy. Monetary policy actions which involves not only measures designed to regulate the volume but also the cost and direction of money supply in the economy have not yielded the required results. What seems to be happening is that the polices designed over the years have not been able to mainatin a close track with developments in the financial sector and the associated intricacies of liquidity. Developments such as the liquidity disposition of non-bank financial institutions, domestic monetisation of foreign savings by individuals especially over the eleven (11) years of political transition and the extra government budgetary expenditure that has characterised the nations budgeting system are cases in view. The results emanating from the empirical test as informed by the analytical frawmework and the specifications arrived at proved the significance of the variables captured in the model. For instance, the quasimoney variable used here as a surrogate proved to be significant. This means we can inferentially conclude that the inflow of financial resources in the eleven (11) years of political transition has been contributory in facilitating money inflation. Also, the growth in domestic credit, a larger proportion of which is usually brought about by government deficit proved significant, and the fact that the major component of the monetary base is credit to the banking (commercial and Merchant) sector, activities in the non-bank financial sub-sector have proved to be providing a counter working effect on efforts towards inflation moderation. It is the position of this study that the non-success of the policy actions taken can be associated with the considerable incoherence and inconsistency inherent in them and policy oversight on, not ncessariily economic, policy actions of government that have possible monetary implications. Thus, while there is the need to exercise restraints on unwarranted monetary expansion, especially within the realm of the public sector, a major economic challenge of the future is for the monetary authorities to understand the role monetary policy has played and should play in influencing the behaviour of important economic magnitudes and the restructuring of the economy in general.

MONETARY POLICY AND THE INFLATIONARY PROCESS: THE NIGERIAN EXPERIENCE, 1970 – 1993