IMPACT OF MONETRY POLICY ON BALANCE OF PAYME NT STABILITY IN NIGERIA

Monetary policy is the action taken by the monetary authority (Central Bank) to control the supply of money in the country, with the objective of promoting price stability and economic growth. The connection between money in circulation and inflationary rate are the main indicator for the measurement of an economy’s prosperity, performance and growth abilities. The regulation of the volume of money in circulation and maintaining price stability has been one of the main objectives of emerging nations such as Nigeria. Monetarist economist has maintained that there is an indicating relationship between inflation and money supply and uncontrollable increase in the volume of money may have adverse effect on economic condition (Chaudhry, Ismail, Farooq & Murtaza, 2015). For most economies, Nigerian economy inclusive, the objectives of monetary policy includes price stability, maintenance of Balance of Payments equilibrium, promotion of employment and output growth. Monetary policy aims at controlling money supply so as to counteract all undesirable trends in the economy, these undesirable trends may include; unemployment, inflation, sluggish economic growth or disequilibrium in the Balance of Payments. Monetary policy may either be expansionary or restrictive. An expansionary monetary policy is designed to stimulate the growth of aggregate demand through increase in the rate of money supply thereby making credit more available and interest rates lower Gbosi (2002) as cited in Abdurrauf & Abdulkareem (2019). The monetary approach focuses on the supply and demand of the money supply process. The monetary approach hypothesizes that the Balance of Payments and exchange rate movement result from changes in money supply and demand. Consider what happens if the Central Bank domestic currency money supply exceeds money demand. There is pressure for the domestic currency to depreciate. The Central Bank must sell foreign exchange reserve until the money is equal to money demand. There has been no net impact on the monetary base and money supply as the change in foreign exchange reserve offset the change in domestic currency. However, a Balance of Payment deficit as foreign exchange reserve is less than zero. For a flexible exchange rate regime, the foreign exchange reserve component of monetary base does will adjust to eliminate any monetary disequilibrium. If money supply exceeds money demand, now the domestic currency must depreciate to balance money supply and money demand. The monetary approach postulates that changes in nation’s Balance of Payment or exchange rate are a monetary phenomenon (Alan & Leland, 1982) as cited in (Udude, 2015) Thus, to modulate monetary policy in the Nigerian economy, the Central Bank of Nigeria (CBN) employs various instruments which include; Open Market Operation (OMO), Reserve Requirement (RR) and Discount Rate (DR), etc. The success of monetary policy depends on the operating economic environment, institutional framework adopted, and the choice and mix of the instruments used. However, the current monetary policy framework focuses on the maintenance of price stability and Balance of Payments equilibrium, while the promotion of economic growth and employment generation are secondary goals of the policy. Over the years, the objectives of monetary policy have remained the need for attainment of internal and external balance (that is equilibrium in the balance of payments). However, emphases on technique/instrument to simultaneously achieve internal balance and equilibrium in the Balance of Payments have changed over the years. There have been two major phases in the pursuit of monetary policy in Nigeria before and after 1986. The first phase placed emphasis on direct monetary controls, while the second relies on market mechanisms. A review of Nigeria’s monetary policy performance before 1986 shows that the economic environment that guided monetary policy was characterized by the dominance of the oil sector and over- dependence on the external sector in order to maintain price stability and a healthy balance of payments position. The monetary management authority depended on the use of direct monetary instruments such as credit ceilings, selective credit controls, administered interest and exchange rates, as well as the prescription of cash reserve requirements and special deposits. The use of market-based instruments was not feasible at this point because of the underdeveloped nature of the financial markets and the deliberate restraint on interest rate. The most popular instrument of monetary policy then was the issuance of credit rationing guidelines which primarily set the rates of exchange for the component and aggregate commercial bank loans and advances to the sector (Salihu, 2020). The sectoral allocation of bank credit in the CBN’s guidelines was to stimulate the productive sector and thereby stem inflationary pressure. The fixing of interest rates at relatively low level was done mainly to promote investment and growth. Occasionally, special deposits were imposed to reduce the amount of free reserve and credit-creating capacity of the banks. Minimum cash ratios were stipulated forthe banks in the mid-1970s on the basis of their total deposit liabilities. But since such cash ratios were usually lower than those voluntarily maintained by the banks, they proved less effective as a restraint on their credit operations (Adeanye, 1986) as cited in (Udude, 2015). The second phase depicts monetary policies aimed at inducing the emergence of a market-oriented financial system for effective mobilization of financial savings and efficientresource allocation. The instrument of the market based framework is the open market operations complemented by reserve requirements and discount window operations. In order to improve macroeconomic stability, efforts were directed at the management of excess liquidity. Also effective from August 1990 was the use of stabilization securities for the purpose of reducing the bulging size of excess liquidity. The reintroduction of the Dutch Auction System (DAS) of foreign exchange management in 2002 engendered relative stability and stemmed the depletion of reserves in the second half of 2002. Finally, in December, 2006, the CBN in its effort to respond to the ever changing economic and financial environment, introduced a monetary framework tagged “Monetary policy rate”(MPR), with the ultimate goal of achieving stability in the value of the domestic currency through the stability in short term interest rates around the “operating target”. The monetary policy rate (MPR) serves as an indicator rate for transactions in inter-bank money market as well as other deposit money banks’ (DMBs) interest rate. The aforesaid forms an overview of how Nigeria’s monetary authority has been experimenting with different policy measures to ensure internal stability and equilibrium in the balance of payments, all to no avail. Owing to the nature of Nigeria’s export and import, there existed a persistent Balance of Payments deficit in the economy. Invariably, Nigeria has paid more to foreign countries than she receives. Thus, the attendant result affects the economy, leading to gross depletion of Nigeria’s Foreign Reserves. It has also attracted reduction in the country’s productive capacities and persistent inflationary pressures. Sequel to the above, articulated efforts have been made by monetary authorities especially, the Central Bank of Nigeria (CBN), on how to drastically reduce the Balance of Payment s deficits in the economy. This is usually done through the formulation and implementation of appropriate monetary policy measures.