How monetary management will be addressed

By 

Joseph Sanusi

Essentially, monetary and financial policies are geared towards providing a sound and stable financial environment that is conducive for the attainment of both macroeconomic stability and growth.

The Central Bank of Nigeria (CBN) as the apex financial institution, has the responsibility for the design and implementation of monetary and financial policies, as well as the regulation and supervision of the nations financial policies.

The latter function is, however, carried out in collaboration with other key financial regulatory agencies of the Federal Government.

To appreciate the mechanism for managing the monetary and financial system, it is pertinent to understand why the authorities pay so much attention to a sound and stable financial system, and why attempts are usually made to strike a balance between the growth of monetary aggregates and macroeconomic stability. A sound and efficient financial system provides a medium for financial intermediation to take place and for resources to be deployed efficiently for greater productivity.

In the conduct of monetary policy, the authorities focus on controlling the growth of money because empirical evidence suggests that excessive monetary growth leads to an unstable macroeconomic environment with its attendant adverse consequences for economic activities. Thus, central banks deliberately strive to control the rate of growth of money supply in order to influence key macro variables and economic activities in general, in the desired direction.

This implies that, there is an optimal rate of monetary growth that would foster exchange rate and price stability, and savings and investment that are consistent with a given output growth. Thus, it is highly desirable to exercise appropriate control, not only over the growth of monetary aggregates, but also over the financial sector through which the monetary policy measures are transmitted to the real sector of the economy.

Basically, monetary management deals with the control of the money stock (or liquidity) and, therefore, interest rates, in order to influence such macroeconomic variables as domestic prices, employment, balance of payments and aggregate output in the desired direction. There is no standard or ideal structure of monetary policy targets and instruments. The structure varies from country to country, depending on the size and stage of development of the financial market, and for any one country, the optimal targets and structure change over time. Where the financial environment is under-developed, the instruments of monetary management tend to be limited largely to direct measures, such as administered interest rates regimes, directed credit, and mandatory guidelines to banks. Market-based instruments, on the other hand, usually work best in economies where the financial market is developed and the real sector is responsive to changes in monetary policy stance.

The institutional framework for monetary and financial policies management is usually provided by the law, which defines the relationship between the central bank and its stakeholders. Also, since monetary and financial policies are part of the overall national economic policy, efforts are normally made to reconcile and harmonise them with the various policies of government to ensure consistency and effectiveness.

In Nigeria, monetary and financial policies are carried out by the Central Bank of Nigeria in collaboration with the other relevant regulatory agencies of the government. However, the instrument autonomy granted to the bank in 1998 insulates it from undue political interference in its conduct of monetary and financial policies and, thereby, enable it to act more pro-actively and promptly in its policy responses to changes in economic conditions.

As you may recall, the CBN adopted the indirect techniques of monetary control in 1993 with reliance on the use of market-based instruments, such as, Open Market Operations, complemented by reserve requirements and discount window operations. In addition, there was significant deregulation of financial activities, as the operation of the techniques of indirect monetary control requires a deregulated, competitive and sound money market.

Other measures were also taken to strengthen the legal and institutional framework, as well as check excess liquidity in the system and foster prudential regulation.

Specifically, some of these measures included regular review of the minimum paid-up capital requirement for bank; issuance of prudential guidelines on income recognition and provisioning for non-performing loans to enhance standardization and improve the quality of financial reporting; measures to deal with technically insolvent and distressed banks; and the improvement of regulatory and supervisory framework for banks and other financial institutions.

Experience shows that monetary policy and banking activities have strong links. Monetary policy is implemented through the banking system and influences the activities of banks and other financial institutions and vice versa. Thus, while some policy measures are designed to achieve appropriate growth of money stock, others are taken to foster safe and sound financial system.

As you are all aware, the CBN issues its approved monetary and financial policies in the form of "Monetary, Credit, Foreign Trade and Exchange Policy Guidelines". The guidelines do not only prescribe what the banks would do in order to foster a sound financial system and enhance macroeconomic stability, but also prescribe the penalties for default.

Furthermore, the effects of the policy measures on the movement of money stock, and the health of the banks are regularly reviewed while the overall impact of policy on the economy is also appraised. This exercise assists the CBN to determine whether to continue with the existing measures or to initiate a review of the policy package, either to change the direction or to fine-tune existing policies.

Monetary and financial policy outcomes in recent years, have been influenced largely by the surge in banking system liquidity, resulting in excessive growth in monetary aggregates vis-à-vis programme targets. You will recall that excess liquidity persisted in year 2000, especially as a result of the lagged effect of the CBN financial of the huge fiscal deficit in the first half of 1999. This situation was further compounded by the substantial monetisation of enhanced foreign exchange receipts and the transfer of most government and parastatal accounts to commercial and merchant banks during the year.

These developments, coupled with the unprecedented surge in foreign exchange demand, threatened monetary and exchange rate stability in year 2000. Also, the wide spread between bank deposit and lending rates was a major concern to the bank.

The CBN's policy responses to these developments during the year were guided by the desire to keep inflation within a single digit level, maintain interest rates at a level that would encourage productive borrowing/investment, as well as improve overall confidence in the financial system. In addition, the bank remained committed to nurturing a more competitive and efficient financial environment, guided by market criteria, and enhancing the effectiveness of the monetary management process.

In continuation of the distress resolution efforts, three banks recently had their licenses revoked and were transferred to the Nigeria Deposit Insurance Corporation (NDIC) for eventual liquidation. Perhaps, I should take this opportunity to stress that efforts would be sustained in 2001 to address any symptom of distress in the system in a timely and decisive manner.

In the spirit of greater transparency in the conduct of monetary and financial policies, which has become the norm globally, the bank has also established a Monetary Policy Forum where key government officials, financial market operators, academia, as well as other stakeholders in the private and public sectors of the economy, will be invited from time to time to brainstorm on major monetary and financial policy issues.

This new initiative is designed to enhance the transparency of monetary and financial policy process in Nigeria. Increased transparency in the manner we envisage, would help to clarify long-term policy objectives, improve the workings of financial markets, enhance the credibility and accountability of the Central Bank of Nigeria, as well as work to strengthen the effectiveness of monetary and financial policies.

I have sought to review some conceptual issues in monetary and financial policies management with a view to putting our discussion in proper perspective. I have also tried to examine the policy outcomes in recent years and observed that a number of measures were adopted since 1990 to strengthen the financial system. In this regard, I should stress that the central bank will continue to play its statutory role in ensuring monetary stability and enhancing the health and efficiency of the financial services industry.

The management of the bank is very open and receptive to new ideas and initiatives and will welcome any useful suggestions that will assist it in designing and implementing sound monetary and financial policies.

Part of the the address delivered at the workshop on Monetary and Financial policies management organised by the Chartered Institute of Bankers of Nigeria in Lagos.