Monetary Policy in Nigeria

There’s always a regulatory policy in every country to regulate the value, cost and supply of money and they regulatory policy is called the “Monetary Policy” of that particular country. In Nigeria, the monetary policy is the macroeconomic policy laid down by the Central Bank of Nigeria. Monetary policy involves the management of money, the supply of money and interest rate. It is the demand side economic policy implemented by the government to achieve macroeconomic objectives like growth, consumption, liquidity and inflation. Without firm and well-structured monetary policy, there would be continuous instability, irregular inflation and deflation and unbalanced monetary circulation in the economy.

There are other various objectives of Nigeria’s monetary policy that are explicitly stated in the laws established by the Central Bank of Nigeria. There are two main objectives/views of Nigeria’s monetary policy – the first view of the monetary policy looks to achieve and maintain and price stability and the second looks to execute macroeconomic objectives. The major way monetary policy is achieved by the Central Bank of Nigeria is through the ‘money supplied’ in the money circulation system.

The Central Bank of Nigeria defines ‘money supply’ as comprising narrow and broad money. The expatiation of narrow money (M1) is explained as the currency in circulation with demand, deposits and current accounts in the banks. The broad money (M2) includes everything that is comprised in the narrow money aspect plus time deposits and savings, as well as foreign denominated deposits. The total volume of money supply in the economy is measured by broad money as it comprises money in and out of private and public banks, currencies exchanged from and to the Nigerian naira, and transactional exchanges.

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There must be a foundational knowledge of the stability and balance between the supply of money into monetary circulation and economic activities, as there’s the need to regulate the money supplied into circulation. Every supply must be limited to what is needed or required for the support of productive economic activities. The lapse in regulation of money supply, sometimes no matter how minute, will result in undesirable effects such as inflation and high prices. Thus, liquidity may arise in the economy when there is a lapse in the amount of broad money is over and above the level of total output in the economy.

The Central Bank of Nigeria (CBN) derives its mandatory monetary policy from the CBN Act of 1958 and the amendments that has followed over the years. In specific terms, part 1, section 1 of the CBN Decree No. 24 of 1991, stipulates that the principal objectives of the Bank shall be to:

  • Issue legal tender currency in Nigeria.
  • Maintain external reserves to safeguard the international value of the legal tender currency.
  • Promote monetary stability and a sound financial system in Nigeria, and
  • Act as banker and financial adviser to the Federal Government.
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Over the years, the Central Bank of Nigeria has conducted its monetary policy towards achieving the said objectives. The Bank has more recently refocused on achieving a better price stability which in truth is not as easily achieved and maintained as some finance professionals and economic strategists make it seem. Also, there are several factors that affect the Central Bank of Nigeria’s monetary policy, some within the control of the CBN and some beyond its control.

The state of the economy, exchange rate, the country’s revenue and reserve are some factors that are put into consideration by policy makers.

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