THE ROLE AND IMPACT OF MONETARY AND FISCAL POLICIES AS A TOOL FOR STABILIZING THE ECONOMY

1.0 Introduction

1.1 Background of the Study

The management of any economy entails to articulating a well meaning strategies as well as devising various policies and measures that will ensure efficient utilization of nation's resources with a view to promoting economic growth, ensuring full employment and maintaining both domestic and external sector stability.

The central bank as the apex monetary authority has the duty of ensuring that policies are set in motion to regulate the financial sector so as to operate in the same direction with the real sector in order to realize national economic objectives.

Section 2 [c] of CBN Decree 24 of 1991 as Amended stated that one of principal “objective” of the Bank (CBN) shall be “To promote monetary stability and a sound financial system in Nigeria.

While part V section 3 (a) of the same Decree provides that “The Bank (CBN) shall have power to carryout open market operations for the purpose of maintaining monetary stability in the economy of the country and without prejudice to the generality of the foregoing, the Bank may also for that purpose issue, sell, repurchase amortize or redeem securities to be known as “stabilization of securities”.

In general, monetary policy refers to the combination of measures designed to regulate the value, supply and cost of money in an economy in consonance with the expected level of economic activity hence it is designed to influence the behaviour of monetary variables or aggregates. It could also be rightly stated that monetary policy conduct is at the instance of the monetary authorities, to stabilize the economy. And also to stabilize the monetary sector, therefore, the discretionary measures are applied not only to sustain the sector, but also the non-bank public desired portfolio of assets.

Consequently, monetary authorities must keep the money supply growing at an appropriate rate to ensure sustainable economic growth and maintain internal and external stability.

Secondly, fiscal policy describes the institutions frame work within which the government undertakes fiscal activities in the form of taxing, spending, borrowing and transfer payment. This policy is concerned with the manipulation of the financial operations of the government with a view of further certain economic policy objectives. In other words, fiscal policy consist of government decision to vary certain fiscal aggregates, such as total tax revenues as opposed to some other aspects of public finance which are primarily concerned with the effects of specific government expenditure and taxes. Indeed, fiscal policy is one of the two ways institutions of government deal with the unhealthy changes in the level of economy activity.

Finally, when these two policies are appropriate, it helps but when it is out or off tune, it hurts the economy. Specifically, the economic environment, the instrument used and the execution of monetary and fiscal programmes are importance determinant of the effects of these two policies. in the context of Nigeria, and given monetary and fiscal transparency, accountability and probity, monetary and fiscal policies should be regarded as a panacea for stabilizing the economy.

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1.2 Statement of the Problem

One area of interest to many researchers is the relationship between the monetary and fiscal policy as a tool for stabilizing the economy. Here monetary and fiscal policy plays a very big role in the economy. The role and impact of monetary policy as a tool for stabilizing the economy has changes on the commercial banks liquidity and profitability has increasingly concerned the economics and fiscal policy matters as financial market conditions have become volatile in recent years.

Monetary and fiscal policy is the government effort to control the economy through taxation, spending and management of the public debt. Here it is necessary to note that while monetary policy deals with the regulation of the economy by the central bank controlling the money supply, fiscal policy on the hand, is concerned with actual government spending, the way it is financed and the extent to which it seeks to stimulate or restrain the economy.

The general opinion is that there are some specific problems, which this research profit will address, include the following:

1. Reviewing the range of monetary and fiscal policy is use within the period of 2000-2008.
2. Is their need to continue to use the current monetary policy measure to direct funds with the economy?
3. The limitations or constrains to the effective implementation of monetary and fiscal policy measure that have not been useful in the regulation of the activities of economy and hence the need for a change
4. To what extent has CBN stabilized price or moderated inflationary rate.
5. To what extent has deficit in balance of payment been reduced by CBN?
6. To what extent has CBN achieved economic growth rate? A positive answer to these research questions shows the effectives of CBN and other monetary authorities in Nigeria over the period.

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1.3 Objectives of the Study

Monetary and Fiscal Policy:

Monetary and fiscal policies are two sides of the same coin that operate through different ways to achieve the same objectives. Both have the same social and economic objectives.

Firstly, I will start by outlining the objectives of monetary policy in Nigeria over the years, and they are:

1. The maintenance of relative domestic prices consistent with high rate of employment.
2. The maintenance of healthy balance of payments in order to safeguard the external value of the natural currency.
3. The acceleration of the pace of economic growth of development.
4. The reduction in the rate of inflation.

To Ensure Stable Price:

In essence, all these objectives are headed towards stabilizing the economy. In 2001, government stated that the primary objective of monetary policy is “To ensure stable prices and maintain a single digit inflation rate”.

Medium Term Perspective:

In 2005, the primary objective of the newly introduced medium term perspective of the newly introduced medium term perspective monetary policy framework spanning from 2006-2007 is the achievement of price and exchange rate stability, which shall seek to subdue inflation to a single digit over the two year period.

Total Disposable Income:

Fiscal policy is often used as a means of affecting total disposable income and also as means of increasing domestic production. Finally, the objectives of these policies are headed towards the actualization of economic stabilization.

Fiscal Policy:

on the fiscal policy, it has the same social and economic objectives as the monetary policy and indeed; it is one of the two ways institutions of government deal with the unhealthy changes in the level of economic activity. Hence it is employed to achieve a variety of economic policy objectives such as:

• Price stability
• External development and growth
• Income distribution

Fiscal policy is often used as a means of affecting total disposable income and also as a means of increasing domestic production.

Finally, the objectives of these policies are headed towards the actualization of economic stabilization.

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1.4 Research Questions

• What are the roles and impact of monetary and fiscal policies?
• To what extent has the role of monetary and fiscal policies played as a stabilizing tool?
• What are the monetary and fiscal policy instruments?
• Has the monetary and fiscal policies assisted in the reduction of inflation in Nigeria economy?
• Does the monetary and fiscal policies contributed to the development of the economy?

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1.5 Significance of the Study

The Fiscal Policy:

The study is of high significance in the sense that, the fiscal policy is used in addressing the unhealthy economic situation such as inflation, low production capacity via government spending, unemployment and other macro economic instability.

Monetary Policy:

Monetary policy is designed by monetary authorities to influence the behaviour of the monetary sector via the monetary variables or aggregates. It thus, constitutes the major policy thrust of the government in the realization of various macro-economic aggregates and objectives such as interest rates, exchange rates and balance of payment position while ensuring stability of the financial sector.

Frame Work of Government:

Both monetary and fiscal policies are two major policy framework of government in the conduct, stabilization or regulation of the economy. While the fiscal policy applies the instruments of government taxing and government transfers.

Government Purchases:

Government purchases to influence the activities of the real sector, the monetary policy uses such instruments as, open market operations, interest rates, reserve requirement, to stabilize the economy especially the monetary or financial sector.

Finally, the significance of this study is the stabilization function which is play in the economy.

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1.6 Scope of the Study

The scope of this study tends to have a wider and deeper ground or impact on the economy. The range or extent of this study is based on the role and impact of monetary and fiscal policies as a tool for stabilizing the economy.

Meanwhile, the central bank of Nigeria (CBN) uses monetary policy to stabilize the economy that is to say the monetary sector by using the monetary policy instruments while the government uses fiscal policy implementation to stabilize the real sector with the use of fiscal policy instruments.

Finally, the scope of this study is to know the role-played by monetary and fiscal policies and its impact on the economy. The monetary sector and the real sector are the major and most important sectors of the economy that is needed to be stabilizing by the uses of monetary and fiscal policies.

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1.7 Limitation of the Study

Inability To Visit:

The researcher encountered a lot of constraints for instance, inability to visit central bank of Nigeria (CBN) regularly due to far distance.

Poor Response:

Another problem being that of poor response to the questionnaire and that of harsh weather like raining season, which prevented movement in most cases.

Accurate and Sufficient Date:

The use of monetary and fiscal policies is limited by the problem of accurate and sufficient data for economic analysis.

Time — Lag:

There is also the problem of time-lag, between the time the policies are conceived and implemented.

Monetary and Fiscal Policies:

Monetary and fiscal policies measures especially as it affects the budget are some times difficult to implement. This is because there are controllable and uncontrollable portion of the budget.

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1.8 Definition of Terms

The following terms has been precisely defined as they relate to the context of this research work.

Monetary Policy Circular:

These are guidelines the country are to direct their affairs in the allocation of credit within the economy.

Open Market Operation (OMO):

Refers to the central bank's purchases and sales of government securities (generally short-term securities called Treasury bill) through transactions in the open market. It is one of the ways used by the monetary and fiscal policy of the country to direct central credit creation in an economy.

Moral Suasion:

This is a gentle measure employed by the central bank against member banks; it is seen as informal technique of monetary control. It has no force of law. However, its disregard could result in new legislation on the subject matter.

Credit Control Or Guidelines:

This comes in the form of administrative order where by the central bank using guidelines, to instruct banks on the cost and volume of credit to specified sectors depending on the degree of priority of each sector.

Fiscal Policy:

Fiscal policy is the government's effort to control the economy through taxation, spending and management of the public debt.

Special Deposit:

This is an instruction from the central bank asking the commercial banks to keep with it special deposits over and above their statutory requirements. This is a mechanism used by the central bank to curtail credit facilities of the commercial bank.

Bank Rate:

This, which is also called discount rate, is the of interest the central bank charges commercial banks and other financial institutions for discounting their bills. If the central bank feels like curtailing the lending powers of commercial banks and other financial institutions, it will raise its discount rate which will force other rates to rise.

Special Directives:

These are special instruction which the central bank gives to commercial bank and other financial institutions as to which directions their lending policies should follow. The central bank will tell them the sector of the economy they should direct their lending policies.

Cash Reserve:

This is also known as liquidity ratio. As we saw in the last chapter, commercial banks are required by law to keep certain percentage of their total cash or liquid assets in the form of cash either in their vaults or with the central bank.

Interest Rate:

Interest rate is a price of capital to the borrower either externally or internally, and a return on capital to the saver or lender. It can be use to combat inflation, ease budget burden, promote capital flight etc. it can also be used to promote the growth of capital and monetary market.

Quantitative Ceiling On Bank Credit:

Credit ceiling are quantitative limits expressed in percentages to ensure that domestic credit expansion and the monetary implication of the balance of payment target will match in the expected increase in the demand for total liquidity in the economy. This ceiling on credit promotes the growth of credit and general operations of deregulated markets.

Selective Credit Control:

This comes in form of administrative order whereby the CBN using of credit to specified sectors depending on the degree of priority of each sector.

Reserve Requirement:

Commercial banks are required by law to maintain certain reserve requirement in order to control their liquidity and influence their operations. These reserve requirements are usually expressed as a percentage of customer's deposits, and they can be manipulated by the central banks to vary the ability.

Discount Rate:

The central banks discount rate also called minimum Rediscount Rate (MRR) or Bank Rate, is the rate at which central bank will offer financial assistance to financial institutions through loans or discounting of bills. It is also the rate at which central banks is prepared to lend to the deposit money banks.