1.1 Background to the Study
Monetary policy is one of the macro-economic instruments with which nations (including Nigeria) do manage the economics. It entails those actions initiated by the monetary authorities which aim at influencing the cost and availability of credits (Wrightsman 1996). It covers gamut of measures or combination of packages intended to influence or regulate the volumes price as well as direction of money in the economy. Specifically, it permits all the deliberate effort by the monetary authorities to control the money supply and credits conditions for the purpose of achieving deserve macroeconomic objectives, Ajie and Nenbee (2010). Chamberlain and Yueh (2006) adds that the supply or price of money-may exert a powerful influence over the economy. According to Nnana (2006), generally, macroeconomic policies in developing countries are designed to stabilize the economy, stimulate growth and reduce poverty. The primary goal of monetary policies in Nigeria has been the maintenance of domestic price and exchange rate stability since it is critical for the attainment of sustainable growth and external sector viability (sanusi, 2012). Economists have long been interested in factors which cause different countries to grow at different rates and achieve different levels of wealth. One of such factors is foreign trade. Nigeria is basically an open economy with international transactions constituting a significant proportion of her aggregate output. To a large extent, Nigeria’s economic development depends on the prospects of her export trade with other nations. Foreign trade provides both foreign exchange earnings and market stimulus for accelerated economic growth (Obadan, 2004). Several countries have achieved growth and export-led strategy. Small economies in particular have very little opportunity to achieve productivity and efficiency gains to support growth. Without tapping into large market through external trade, Nigeria’s relatively large domestic market can support growth but alone cannot deliver sustained growth at the rates needed to make a visible impact on poverty reduction. Hence Nigeria has continued to rely on foreign market as well (World Bank, 2002). Many economists generally agree that openness to international trade accelerate development. The more rapid growth may be a transition effect rather than a shift to a different steady states growth rates clearly, the tradition takes a couple of decades or moreso, that it is reasonable to speak of foreign trade openness accelerating growth rather than merely leading to a sudden onetime adjustment in net income (Dollar and Kraay, 2001). In Nigeria, the achievement of this are predicated on the stance of fiscal monetary policies. Monetary policy formulation is based on the duo of money supply and credit availability in the economy. In ensuring monetary stability, the central bank through the deposit money banks implements policies that guarantee the orderly development of the economy through appropriate change in the level of money supply. The reserves of the banks are influenced by the central bank through its various instruments of monetary policy. These instruments include the cash reserve requirement, liquidity ratio, open market operations and primary operations to influence the movement of reserves (Ajir and Nenbee, 2010 and Masha et al, 2004). Sequel to our discussion so far, one could be induced to conclude that the use of monetary policy in Nigeria seems not to attract the desired level of economic stability. This conclusion follows the dismal performance of the economy in recent years. Little wonder Donli (2004) writes that the last two decades witnessed series of reforms armed at the revitalization of the Nigeria economy owing to series of crises that influence the growth of the economy during this period. The problems were seen to be a direct derivative of structural imbalances in our economic system. The imbalance started right from colonial era nurtured by inappropriate policies after independence in 1960, and reinforced by the wind face gains from petroleum in the 1970s. Donli (2004) further contends that these structural defects consisted or undiversified monolithic and monoculture production bases, undue reliance on agricultural products from 1973. The outcome of those events was that the growth process relied heavily on external factors instead on the internal ones. However, of all the independences, the exclusive reliance on petroleum turned out to be the most devastating to the economy. The dismal economic outlook in Nigeria above desires investigation into whether or not monetary policy as claimed by the monetarists impact on Nigeria’s economic stability and foreign trade.
Available data on the Nigerian economy reveal that money supply and trade openness have fluctuated actively over the period of 1970 to 2012. Specifically, as seen in figure 1.1, growth rate of money supply fluctuated actively over the period attaining an all-time high peak point of 91% in 1974. Similarly, trade openness fluctuated actively and attained a peak point of 55% in 2010.
Figure1.1 Graphical trend of trade openness (TOP) and growth rate of money supply (MS)
Sources: Central Bank of Nigeria (2011)
It is interesting to note that while growth rate of money supply fluctuated actively, trade openness was below for most of the years under review. This makes it difficult to connote the actual relationship between the variables. Could this imply that money supply had an effect on trade openness? What really is the relationship between money supply and trade openness in Nigeria? Is there any correlation between both variables? Does money supply affects trade openness adversely? Or is money supply necessary for trade openness?
1.2 Statement of the Problem
Monetary policy as a technique of economic management to bring about sustainable economic growth and development through foreign trade has been the pursuit of nations and formal articulation of how money affects economic aggregates dates bank to Adams Smith and Walter championed by the monetary economists. Since the expositions of the role of monetary policy in influencing macroeconomic objectives like economic growth price stability, equilibrium in balance of payments and host of other objectives, monetary authorities are saddled the responsibility of using monetary policy to grow their economies. In Nigeria, monetary policy has been used since central Bank of Nigeria was saddled the responsibility of formulating and implementing monetary policy by Central Bank act of 1958. This role has facilitated the emergence of active money market where treasury bills, a financial instrument used for open market operations and raising debt for government has grown in volume and value becoming a prominent earning asset for investors and source of balancing liquidity in the market. There have been various regimes of monetary policy in Nigeria some times, monetary policy is tight and at other times it is loose mostly used to stabilize price. The economy has also witnessed times of expansion and contraction but evidently, the reported growth in foreign trade has not been a sustainable one as there is evidence of growing poverty among the populaces. The question is, could the period of growth in foreign trade be attributed to appropriate monetary policy? And could the periods of economic downturn be blamed on factors on other than monetary policy ineffectiveness? What measures are to be considered for monetary policy to effect a positive increase in foreign trade in Nigeria.
Evidence from the graphical trend of money supply and trade openness above shows that there has been fluctuations in the estimate of money supply and trade openness within the period under study (1970-2012). However, given the fluctuative manner of money supply and trade openness, a fundamental question that readily arises is “Has monetary policies affected international trade in Nigeria” if yes, the next question that follow is “What are those factors that influences growth in foreign trade in Nigeria?”. Moreover, many attempts have been made to empirically examine whether monetary policies promotes international trade in Nigeria. The results obtained from such empirical studies, which we recently applied causality test to examine the nature of causal relationship between money supply and trade openness are also mixed. Although some studies have found a positive correlation, others resulted in the reverse conclusion. It is not clear in the literature to what degree is the positive relationship between these two variables. This is a problem which this study seeks to address. However, the rate of growth and the extent to which money supply contributes to foreign trade differs among countries.
In the same vein, there is agreement both among developed and developing countries about the type of monetary policy that can stimulate international trade growth.
Hence, this research work seeks to empirically investigate the nature of relationship between monetary policies and foreign trade in Nigeria between 1970 to 2012, using time series data, this is as a result of the short fall or inability of several previous studies to come up with a consensus on the money supply and trade openness relationship in Nigeria.
1.3 Objectives of Study
The broad objective of this study is to examine the relationship between monetary policy and international trade in Nigeria between the period of 1970 to 2012. The specific objectives of this study are:
· To investigate the influence of monetary policy on international trade in Nigeria
· To determine the nature and direction of causality between money supply and trade openness in Nigeria.
1.4 Research Questions
This study would be guided by the following research questions;
· Does money supply affect trade openness in Nigeria?
· What is the relationship between money supply and trade openness in Nigeria?
· What is the nature and direction of causality between money supply and trade openness in Nigeria?
1.5 Research Hypothesis
To analyze the specific objectives of this research, the following hypothesis were tested:
Ho1: There is no significant relationship between money supply and trade openness in Nigeria.
Ho2: There is no causality between money supply and trade openness trade openness in Nigeria.
1.6 Significance of Study
An empirical investigation of the relationship between international trade and monetary policy in Nigeria is pertinent given the contentious nature of the subject matter. Therefore, this research work will be of great benefit to both the Nigerian government and the economic policy makers as it will shape and guide them when formulating fiscal, monetary, and other socio-economic policies.
To the private sector this study will help them to understand the impact of monetary policies on their sectors and also guide them to take viable economic decisions. The student and other economic researcher shall find this research as a relevant input in their individual research works. While the general public shall see this research project as a first - hand guide to understanding the circumstances surrounding monetary supply, interest rates, government expenditure, population growth rate, foreign direct investment and other variables on trade openness in Nigeria. To the existing literatures, this research project constitute a vital input that will facilitate future research, since the money supply and international trade relationship is analysed exhaustively with relevant and précised facts about the variables revealed.
In reality, this research work shall be immensely significant to the government of Nigeria, policy makers and the entire public, as it serves as a framework that will guide economic policies in Nigeria to a reasonable extent. It further serves as a working document to the stake – holders and monetary authorities on how to regulate proper foreign trade, employing efficient fiscal, monetary and other socio-economic measures.
1.7 Scope and Limitation
This study investigates the impact of monetary policy on international trade in Nigeria between 1970 to 2012. Thus data used for analysis is limited to the period of 1970 to 2012. Constraints to the smooth conduct of this research included: the non-availability of reliable data and Lack of sufficient time.
1.8 Organization of Study
This study is divided into five chapters. Chapter presents the background to the study, while chapter two states the theoretical framework and reviews relevant literature, chapter three explains the methodology of research employed in the study, while the result of the empirical analysis and their interpretations result are presented in chapter four..