Inflation Control Through The Application Of Central Bank Of Nigeria. (CBN) Credit Instruments.

ABSTRACT

            This study examined inflation control through the application of central Bank of Nigeria (CBN) credit instruments. The study seeks to identify factors responsible for high inflation rate in order to make recommendations on the best measures that may be useful for effective policy on inflation control. Employing the survey research method, the study used questionnaire instrument to generate the primary data needed. The generated data were further subjected to Chi-square inferential statistical test. The test showed that credit control measures developed by the Central Bank of Nigeria. (CBN) do not significantly impact on price stability and Central Bank of Nigeria (CBN) has not impacted significantly in checkmating inflation excessiveness in Nigeria. The study recommends that monetary authorities should adopt policy measures that will exert a long lasting impact on prices.

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

            Inflation has been a global problem over the years and no country has been exempted from its pains. Although some countries’ economy have been affected more than others, countries in the world have at one time or the other experienced inflation. Inflation started being more pronounced in the Economy of developing countries in the (1960’s). This gave rise to the various Economic measures that were taken by different developing countries to re-vitalize their economies.

            Inflation pressures assume a dimension of serious concern in Nigeria following the introduction of the structural adjustment program (SAP) in 1986 which saw a more liberalized economic environment. Accordingly, three parameters were used to measure inflation including: Gross National Product (GNP); Consumers Price Index (CPI); and Wholesale Price Index (WPI).

Inflation rates in Nigeria are mostly measured with the Consumers Price Index (CPI) of which available data are on monthly, quarterly and annual basis. Episodes of high inflation did not occur until the early 1970’s when inflation rose sharply from a very low level of 3.5 percent between 1960 and 1970. Post independence industrial policy, increase in government expenditure to finance civil war, low levels of production during the war, post – war reconstruction and the Adebo/Udoji wage increase following the oil boom. During the collapse in the oil market in the early 1980’s inflation rose from moderate level of 16 percent in 1980 to peak at 38 percent by mid 1984. The inflation rate of the economy stood at an almost 40 percent (39.6 percent precisely). This was as a result of ban in importation of food and other agricultural product by the authorities, motivated by several balance of payment pressures.

            The following year, the rate of inflation was 5.5 percent, thus showed a fall. The measure adopted by government then was the result. The inflation rate mildly raised double digit to 10.2 percent again in 1987. This was due to Nigeria adopted the structural Adjustment programme (SAP), which saw a more liberalized economic environment. However, the balance of payments crises that precipitated the adjustment programme persisted.

            The situation continued further with higher level of idle industrial capacity, plant closures, labour retremachment and alike. Shortages generally through the proceeding years to an all times high of 40.9 percent in 1989. It then clopped sharply to 7.5 percent in 1990 and 13.0 in 1991, it ascended to 44.5 in 1992, 57.2 in 1993, 57.0 in 1994, 72.8 in 1995, 29.3 in 1996 in other to improve price stability, efforts were directed toward management of excess liquidity, thus a number of were introduced to reduce liquidity in the system, this is done by increasing the commercial bank reserve requirement in 1999 which reduced the inflation rate  to 6.6 percent, in 2000 it was 6.9 percent and later increased to 18.9 percent in 2001, with the reintroduction of the  Dutch Auction System (DAS) of foreign exchange management in 2002 engendered inflation rate to 12.9 percent. In the year 2003 the inflation rate increased to 14.0 percent, the following year it increased to 15.0 percent and 17.9 percent in 2005.

            In 2006, the new monetary policy framework for monetary policy implementation was introduced, with aim to achieving price stability and non inflationary growth, as enunciated in the national economic empowerment and development strategy (NEEDS). The target for single inflation was however, achieved in 2006, the inflation stood at 8.2%. The inflation rate dropped to 5.4 percent in 2007 and finally increases to 11.5 in 2008.

1.2       STATEMENT OF PROBLEM

            One central problem facing central bank of most nations including Nigeria is the issue of formulation and implementation of monetary policies. This is because of the fact that any mistake in either the formulation or implementation will result in a negative multiplier effect to every facet of economy.

            When a target is set, the ultimate is to achieve that target. Any deviation in monetary policy is a source of serious concern to the monetary authorities. Despite the fact that CBN has been formulating and implementing good monetary policies, the rate of inflation in Nigeria has been on the increase both creditors and debtors are affected either negatively or positively. The creditors lose in inflationary period as they receives money whose purchasing power has dropped and Hence fewer commodities are bought, but the debtors gain, There is therefore need to maintain stability in prices, which will be favourable to creditors and debtors and other players in the Nigerian market economy. This study is thus an attempt to appraise the central Bank of Nigeria (CBN) roles in this regard using their credit control instruments.

1.3       OBJECTIVES OF THE STUDY

            In line with the above identified problems, this study was set to achieve the following objectives.

i.      To examines measures developed by the central bank of Nigeria (CBN) to maintain price stability in Nigeria.

ii.    To find out the extent the Central Bank Of Nigeria (CBN) has fared in curbing inflation excessiveness in Nigeria.

iii.   To evaluate the possible effect of inflation on the Nigerian economy.

iv.   To identify factors responsible for high inflation rate in order to make recommendation on the best measures that may be useful for effective policy on Inflation control.

1.4       RESEARCH QUESITONS

            Consistent with the objectives of the study the following questions were asked to guide the researcher:

i.      To what extent has the credit control measures developed by CBN impacted on price stability in Nigeria?

ii.    How far has the central Bank of Nigeria fared in checkmating inflation excessiveness in Nigeria?

iii.   What are the effects of inflation on the entire economy of Nigeria?

iv.   What are the factors responsible for high inflation rate in Nigeria?

1.5       RESEARCH HYPOTHESES

            Arising from the objectives of the study and the research questions, the following two null hypotheses are formulated to govern the study:

H01     Credit control measures developed by the Central Bank of Nigeria do not significantly impact on price stability in Nigeria.

H02     Central Bank of Nigeria has not impacted significantly in checkmating inflation excessiveness in Nigeria.

1.6       SCOPE OF THE STUDY

            The scope of this study is based on the Nigeria economy but for the purpose of a complete analysis, reference will be made on other economies where they offer substantive base. The study there for covers the various instrument that have been introduced by the Federal Government of Nigeria through the central bank to control the amount of credit in the economy.

1.7       SIGNIFICANCE OF THE STUDY

           The study will be of utmost important to the policy makers especially the Central Bank of Nigeria and the Federal Government who will from it know how best the instruments of credit control issued by the Central Bank of Nigeria to banks and other financial institutions could be applied in combating inflation in the country and thereafter be effectively used to maintain the rate to an acceptable level in economy.

With the help of the identified problems, the Central Bank Of Nigeria (CBN) and the Federal Government would know possible avenue for improvement, the sectors that need more credit facilities and the sectors that need less credit facilities.

            Furthermore, the banking sector will also profit immensely. It will be invaluable to the sector as it will reveal how well the sector has fared and at the same time support some CBN instruments of credit control that poses constraints to their profit making abilities.

1.8       LIMITATION OF THE STUDY

            In every situation, they are bound to be constraints in one way or the other and this research work is not an exception. One of the stresses undergone by the researcher is the area of cost. The cost of a thorough research work is not easy to afford by a student; the cost of transport, photocopy and library acceptance fees has gone up almost ten times of what it used to be in the past. Another factor is time; time is not in favour of the researcher because of the stress and delay in leaving school and meeting up with the time policy of Central Bank of Nigeria (CBN) and combining it with reading for the final examinations. Another problem in this research work is the meeting with appropriate bank officials for information concerning the project and when they are available, they claim to be too busy. However, inspite of all the odds, the study was carried out successfully.

1.9       DEFINITION OF TERM

            Credit Control Instrument: These instruments are used by the Central Bank of Nigeria to regulate the amount of credit facilities to be extended to the various sectors of the economy by the commercial and merchant banks.

            Consumer Price Index (CPI): This is a single number showing the average of the price of a selected number of consumer goods stand relative to some base year.

            Money Supply: This is the total money in circulation comprising the currency (notes and coins) and demand deposits with the commercial banks usually denoted by M1 and M2. M1 means money that only recognizes those things that can be spent immediately without any delay or loss in value as money. As such M1 is currency in circulation + Demand deposit held in banks by the private sector (C+DD). M2 Measures the total liquidity in the economy that is M1 + savings and time deposits. (C + DD+ SD+DT). Monetary base or high powered money or reserve money comprise certain liabilities of the CBN and includes currency notes held outside the bank and inside the banks.

            Fiscal Deficit: Refers to the excess of expenditure over revenues of the government. It is usually assessed by its size in relation to nominal Gross Domestic Product (GDP).

            Other Financial Institution: Means any individual, body, association or group of persons whether incorporated other than the banks licensed under the banks and financial institution (Bofid) under section 51 of Bofid 1991 which carries on the business of a discount bank.

Bank: Commercial banks and community banks including profit and saving banks that are yet to start operation.