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THE IMPACT
OF MONETARY POLICY ON FOREIGN TRADE IN NIGERIA
ABSTRACT
This
research work examines the impact of monetary policies on foreign trade in
Nigeria. The research made use of secondary data which are collected from the
Central Bank of Nigeria, Statistical Bulletin (2010). The data were collected
for the period of thirty years (i.e.) 981-2010). The study employed
quantitative analysis approach. The variables considered appropriate indices
for monetary policy were Money Supply, Interest Rate, Exchange Rate,
Inflationary Ratio and Liquidly Ratio. The major tool of analysis is a multiple
regression analysis model specified on the basis of perceived function
relationship between monetary policies and foreign exchange earnings in
Nigeria. Treating foreign exchange earnings as the explanatory and the others
as the explanatory variables, a multiple regression model was specified to
forge a link between the variable sets. The model was estimated using the
ordinary least squares (OLS) techniques and evaluated based on relevant data
from the regression output. The result showed that Money Supply, Exchange Rate,
Inflationary Ratio exerted positive effect on foreign exchange while Interest
Rate and Liquidity Ratio exerted negative influence on foreign exchange. In
addition, the model exhibited high explanatory power and indicated absence of
first order serial correlation in the explanatory variable. Based on the
findings, the study concluded that a clear-out and obvious relationship existed
between monetary policy and foreign trade in Nigeria and, thus recommended for
conscious efforts to be made to fine-tune the various monetary variables in
order to provide an enabling environment to stimulate foreign trade.
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 permeates 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
earning and market stimulus for accelerated economic growth (Obadan, 2004).
Several
countries have achieved growth an 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 one time
adjustment in net income (Dollar and Kraay, 2001).
In Nigeria,
the achievement of this objectives 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 cast 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 discussions 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 economy system. The imbalance started right from colonial era nurtured
by inappropriate policies after independence in 1960, and reinforced by the
wind face gains form 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 independences, the exclusive reliance on petroleum turned out to be the
must devastating to the economy. The dismal economic outlook in Nigeria above
dismal economic outlook in Nigeriasaa above desires investigation into whether
or not monetary prolicy as claimed by the monetarists impact on Nigeria’s
esdeconomic stability and foreign trade.
1.2 STATEMENT OF THE RESEARCH PROBLEM
Monetary
policy as a technique of economic management to bring about sustainable economic
growth and development through foreign trade has be the pursuit of nations and
formal articulation of how money affects economic aggregates dates bank the
Adams Smith and water championed by the monetary economists. Since the
expositions of the role of monetary policy in influencing macroeconomic
objectives like economic growth price stability, equilibrium in balance of
payments and host of other objectives, monetary authorities are saddled the
responsibility of using monetary policy to growth their economies.
In Nigeria,
monetary policy has been used since central Bank of Nigeria was saddle the
responsibility of formulating and implementing monetary policy by Central Bank
act of 1958. this role has facilitating the emergence of active money market where
treasury bills, a financial instrument used for open market operations and
raising debt for government has grown in volume and valued becoming a prominent
earning asset for investors and source of balancing liquidity in the market.
These have been various regimes of monetary in Nigeria some times, monetary
policy is tight and at other times it is loose mostly use to stabilize price.
The economy
has also witnessed times of expansion and contraction but evidently, the
reported growth in foreign trade has not been a sustainable one as there is
evidence of growing poverty among the populaces. The question is, could the
period of growth in foreign trade be attributed to appropriate monetary policy?
And could the periods of economic down term be blamed on factors on other than
monetary policy ineffective? What measures are to be considered if monetary
policy would be effective in bringing about sustainable economic growth and
development?
1.3 OBJECTIVES OF THE STUDY
The main
objective of the study is to investigate the impact of monetary policies on
foreign trade in Nigeria economy and how it affect economic development.
Specifically,
the study seeks to:
To examine
the impact of monetary policies on foreign trade.
To examine
the hindrances to monetary policies operations in Nigeria.
To proffer
suggestions on how monetary policies can be managed for better contribution to
foreign trade and the economy development.
1.4 RESEARCH HYPOTHESES
Ho: A monetary policies have no significant
impact of foreign trade in Nigeria.
Hi: A
monetary policies has significant impact on foreign trade in Nigeria.
Ho: A
monetary policies has no significant impact on economic development in Nigeria.
Hi: A Monetary policies has significant impact
on economic development in Nigeria.
1.5 SCOPE AND LIMITATION
The research
work will be centered on the beginning structure, operations and objectives of
monetary policies on foreign trade market management in determining the foreign
trade in Nigeria. This study will be particularly limited to pre-oil and post
oil boom in the mid 1981, so as to be able to make rational comparison between.
Historical and current article like unpublished project, journals and text
books of different author. The publication data ranging from 1981 up till 2010.
Finance is
one of the element that assist a good research of financial constraint created
difficulties in the process of this research work however, it did not hinder
the research. Chapter two is basically literature reviews limited book were
found to accomplish this work. Time frame within which the research must be
carry out I s another problem.
1.6 DEFINITION OF TERM
Monetary
policies: Monetary policy can be defined as the measures or combination of
measures designed to influence or regulates the volume price and direction of
money and credit. [Nwankwo, 1979]. It can as well be seen as the management of
the expansion and contraction of the volume of money in circulations for the
purpose of achieving certain declared national objectives (Uzoaga, 1981). The
stock of money is managed through expansion (lowering the cost and
reducing/increasing the quantity) of money depending on the macroeconomic
policy target. Economists agree that monetary policy entails the process of determining
and varying the cost and availability of credit. They are also unanimous on the
fact that the purpose is to enhance monetary stability (Nwikina, 1993).
Economic
growth: Refers to the increased every time of an economy’s capacity to produce
those goods and services needed to improve the well-being of the citizen in
increasing number and diversity. It is the study process by which productive
capacity of the economy is increased every time to bring about rising level in
national income.
Economic development:
Economic development is a multidimensional process involving the provision of
basic needs, acceleration of economic growth reduction of inequality and
unemployment, eradication of poverty as well as changes in attitude institution
and structure in the economy.
Foreign
trade is the trade between two or more countries; it involves trade outside the
national boundaries of a country.
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