THE IMPACT OF MONEY SUPPLY ON THE ECONOMIC GROWTH OF NIGERIA
BACKGROUND OF THE STUDY
In the critical observation of the recent Nigerian economic position, there has been a great divergence between the rate at which money is supplied and the exact impact it has on the general price level, which results in inflation and deflation on one hand, and the output growth (productivity) on the other hand. Although, it had occurred to our mind that Nigerian monetary policy continues to aim at achieving single digit inflation, a stable Naira, increase in domestic production and a stock of foreign exchange reserves equivalent of at least six months of current imports, the Central Bank of Nigeria (CBN) relies on Open Market Operation (OMO), Cash Reserve Operations, Minimum Liquidity Ratio, Discount Window Operations (OWO) etc, to control growth in monetary aggregates, changes in minimum re-discount rate (MRR) to determine interest rates, and a Dutch Unction system to determine the value of the Naira (See Anyanwu, 2003).
However, the CBN publications have proved that since 2003, the monetary authority is conducting an Open Market Operation on a daily basis instead of bi-weekly in order to exert greater control over the country’s (Nigeria) financial market conditions. Hitherto, monetary aggregates have tended to overshoot the CBN’s targets due largely to the expansionary fiscal policies. Then, as a result of this fiscal surplus, in the first nine months of 2004, annualized growth in broad money supply (M2) was only 13.2% compared with the expansion of 24% made in 2003 (See CBN Annual Report and Statement of Accounts, 2003).
In the year 2004, the Federal Government strengthened the budget process towards an improved expenditure co-ordination through the introduction of Cash Management Committee (CMC), whose function was to monitor and reconcile monthly expenditure releases, and determined projects. But in that same 2004, the annual inflation rate was moderated to an estimated 15.0% in October 2004. The persistence pressure on prices in 2004 was attributable to the impact of the partial deregulation of the 2003 monetary expansion. Since the face of the interest rates remain largely stable in 2004, it was expected that inflation will follow a downward trend in 2005, 2006 and 2007, as the continued improvement in Agricultural production reduced inflation in food prices, (Source, CBN Annual Report and Statement of Account, 2003).
Furthermore, from the recent CBN Annual Statement of Reports under the real sector, it was indicated that the growth in domestic Product (GDP) measured in 2007 in 1990 basic prices amounted to N634.1 billion thus, representing a growth rate of 6.2% compared with 6.0% in 2006. However, output growth fell below the projected average of 7.0%, estimated for the five year period 2003-2007. Growth in 2007 was broad based but driven mainly by the non-oil sector. Agriculture grew by 7.4% led by crop production and fishing. Wholesale and retail trade grew by 15.3% and service(s) subsector by 9.8%. Mining and quarrying as well as manufacturing however, grew even as electricity consumption declined. The moderation in inflationary pressure that began in 2005 was sustained in 2007, attributable largely to good Agricultural harvest and a non-accommodating monetary policy. Thus, the single digit inflation target had been sustained two years in a row. Further expansion in national output was however, constrained by poor infrastructures, a mild drought and flooding experienced in some food producing areas.
Available data from the National Bureau of Statistics (NBS), indicated that the national unemployment rate in the 1st quarter of 2007 was 14.6%, compared with 13.7% in 2006. The Urban and Rural rates were 14.4% and 15.0% respectively compared with 10.2% and 14.8% in 2006.
Meanwhile, the reason behind the monetary trends above, is to understand the...
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