Impact of Monetary Policy on Private Domestic Investment in Nigeria (1990-2018)
Chapter One of Impact of Monetary Policy on Private Domestic Investment in Nigeria (1990-2018)
Background to the Study
Investment is generally classified into four major components: the private domestic investment, the public domestic investment, the foreign direct investment and the portfolio investment. Private domestic investment refers to gross fixed capital formation plus net changes in the level of inventories whereas public investment includes investments by government and public enterprises on social and economic infrastructures, real estate and tangible assets. The combination of private investment and public investment is normally referred to as gross fixed capital formation in order to distinguish them from their counterpart foreign investment. The foreign investment when it is on tangible asset is referred to as direct foreign investment.
Monetary policy refers to the policy of the monetary authority with regard to monetary (money) matters. It deals with the controls of financial institutions, active purchases and sales of paper assets to affect changes in money supply and maintenance of interest rate (Jhingan, 2005). The objective is to achieve set macroeconomic goals such as full employment, economic growth, price stability and external balance. It is an attempt to achieve the national economic goals of full employment without inflation, rapid economic growth and balance of payment equilibrium through the control of money supply and credit. The classical theory of monetary policy postulate that changes in money supply or other aggregates will work through some intermediate variables through which some effects are transmitted to the ultimate goals of price stability, output, employment and external balance (CBN, 2011). Monetary policy transmission mechanism refers to the various intermediate channels through which changes in the nominal money stock or short term interest rates affects the macroeconomic aggregates. In Nigeria, Central bank of Nigeria Act 1969 empowered CBN the monetary policy function under the supervision of Ministry of Finance.
There are normally changes in monetary policy objectives from time to time, depending on the economic situation of a country. For instance, goals of monetary policy in Nigeria in 1993 were to reduce the inflation rate, minimize pressures on the external sector, stimulate growth in production and output, and reduce pressure on the balance of payments to ensure stable exchange and interest rates. By the end of that year, there was a rapid expansion of monetary and credit aggregates as broad money rose by 52.8 percent instead of the targeted 20 percent and narrow money by more than 50 per cent instead of the 18 percent target. The trend was the same for other key aggregates. The rate of growth of real output as measured by GDP at 1984 constant factor cost declined, inflation rose and unemployment increased (CBN, Performance of Monetary Policy, 1993).
Monetary policy in 2013 pointed fundamentally at continuing the already directed rate of inflation which was accomplished in the first half of 2013. In 2014, monetary policy focus was shifted to achieving the objective of price and exchange rate stability (CBN, Performance of Monetary Policy, 2014). It is the duty of the Central Bank of Nigeria (CBN) to formulate proper monetary policies to cater for the economy deployment of the nation. This duty is backed by various statutes of the bank such as the Central Bank of Nigeria Act of 1958, as amended in CBN Decree No. 24 of 1991, CBN Decree 1993 (Amended), CBN Decree No. 3 of 1997, (Amended), CBN Decree No. 4 of 1997 (Amended), CBN Decree No. 37 of 1998 (Amended), CBN Decree No. 38 of 1998 (Amended), CBN Decree 1999 (Amended) and CBN Act of 2007 (Amended) (CBN, Performance of Monetary Policy, 1993).
Various hypotheses have been formulated on the relationship between money and the economy. Morgan (1981) identified two causal relationships between private investment and monetary policy. McKinnon (1973) underpins the gracefully driving contention by proposing an integral connection between accumulations of cash balances (money related resources) and physical capital accumulation in developing nations. Shaw (1973) additionally supporting the gracefully driving contention and putting together his contention with respect to inside money model, suggested that high interest rates are paramount in drawing more saving (Onouorah, Shaib and Ehikioya, 2012 (Onouorah, Shaib and Ehikioya, 2012). The inabilities for the classical economists to restore equilibrium during the great depression of 1930s remain one of the challenges facing the effectiveness of monetary policy in the developing countries like Nigeria. Empirical studies on monetary policy transmission mechanism have well been documented in literature. Significant proportion of the study focused on monetary policy transmission mechanism and economic growth using Gross Domestic Product as dependent variable (Ogbulu and Torrbira, 2012; Obafemi and Ifere, 2015; Ndekwu, 2013; Ishiroro, 2013). Only few studies of citable significance have dealt on the problem of monetary policy transmission mechanism and domestic real investment in Nigeria. From the above, this study intends to examine the impact of monetary policy on private domestic investment in Nigeria from 1990 to 2018.
Statement of the Problem
It is observed from the monetary policies of the CBN over the years and related literature that the Nigerian economy is characterized by inconsistency in government policies, political instability, ineffective policy statement, deficit philosophical framework and excessive money supply. Monetary policies are designed to ensure that money supply in the economy is adequate to support desirable and sustained economic development without generating inflation pressures.
Considering all the policies and efforts of the government in improving the economy of Nigeria, this study was designed to find out whether its monetary policies have been able to bring about improvement in savings and private domestic investment in the country.
The broad objective of this study is to evaluate the impact of monetary policy on private domestic investment in Nigeria (1990-2018). Furthermore, the specific objectives include:
i) To understand the monetary policies of the Central Bank through its instruments and targets not have any significant impact on economic growth in Nigeria
ii) To ascertain the causes of the inability of these policies in achieving their stated objectives and the possible solutions
iii) To investigate the impact of money supply on the level of private domestic investment in Nigeria
In the light of this, therefore, the questions to guide this research study include the following:
i) Why has the monetary policies of the Central Bank through its instruments and targets not have any significant impact on economic growth in Nigeria?
ii) What are the causes of the inability of these policies in achieving their stated objectives and the possible solutions?
iii) What is the impact of money supply on the level of private domestic investment in Nigeria
In this study we shall examine the following hypotheses that:
i) There is no significant relationship between the monetary policies of the Central Bank and economic growth in Nigeria
ii) There is a significant relationship between money supply and the level of private domestic investment in Nigeria
Significance of the Study
This research examines the length at which monetary policy as a tool of public policy has been successfully applied in Nigeria and showed its relevance and effectiveness in raising aggregate private sector in Nigeria economy. Among other things to be looked into is how the luck will be of use to financial investment investors as it will give a just indication of how they can be affected by monetary policies.
This study will therefore be useful to stakeholders, policymakers and the government officials on the effect of monetary policy on private domestic investment in Nigeria. Also, it will serve as body of knowledge upon which foundation for further research can be built.
Scope of the Study
This study covers a period of twenty eight years, using data from 1990-2018. It is long enough for meaningful statement to be made on the results obtained. The quarterly data gave the study sufficient degree of freedom. Essentially, it is a dynamic analysis of the effects of monetary policy on private domestic investment in Nigeria. This study did not include Small Scale Enterprises because of absence of data. Furthermore the economy of Nigeria is made up of formal and a large informal sector, but the study is limited to the formal sector and did not consider the informal sector because of absence of data in that sector.