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THE IMPACT OF FISCAL POLICY ON THE NIGERIA ECONOMY

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND OF THE STUDY

The Central bank of Nigeria (CBN) started with effect from 2002 fiscal year, adopt a medium-term perspective monetary policy framework. Unlike earlier program which were designed for one year, the new programmes are for a two year period beginning January 2002 to December 2003. the shift is in recognition of the fact that monetary policy actions affect the ultimate objectives of policy with a substantial lag. Thus, the current shift will free monetary policy implementation from the problem of time inconsistency and minimize over reaction due to temporary shock..

This circular outlines the monetary, credit, foreign trade and exchange policy guideline applicable to bank and others financial institution in Nigeria in 2002/2003. in particular, monetary and credit policy will be implemented within the framework of the medium-term programme. The guidelines will be subjected to fine turning in the light of development in monetary and financial market conditions, as well as the performance of the economy, which could be conveyed to the relevant institutions in supplementary circulars as necessary. The circular contains four major sections and four appendices following the in production, which is section 1, section 2 review the development in the economy and policy environment in 201 and thus 2002/2003. section 3 outlines the monetary and credit policy financial institutions in fiscal 2002, while the foreign trade and exchange policy measures are highlighted in section 4. the appendices contain prudential guidelines for licensed banks and reporting format.

REVIEW OF MEACRFO ECONOMIC AND POLICY ENVIRONMENT IN 2001 Macro economic developments major economic inclies indicated mixed macro economic performance in 2001 the environment for the continued expansionary fiscal operations of the three tiers of government, as a result of the magnetization  of the excess crude oil, receipt and proceeds from the GSM license later in the year, as well as monetary financial of fiscal deficit. This resulted in large injections of liquidity into the economy, which undirected rapid monetary growth and intensified inflationary pressure interest rates were influenced by the state of bank liquidity as well as policy actions aimed at addressing the problems of liquidity over having. The average naira exchange rate at the fiscal market however remained relatively stable for most of the period, while relative implement was observed in agricultural and industrial production. The outcome of external sector development remains favorable up to the third quarter of the year. The fourth quarter, however witnessed a slide in the report price of crude petroleum with negative implications for export earning and government revenue.

Growth in real gross domestic product (GDP) was estimated at 3.8 percent during the first half of 2001 compared with the 5.0 percent targeted in 2001. the growth in output reflected the inv=crease in both agricultural and industrial production. Aggregate manufacturing capacity utilization rose marginal by 0.3 percent point over its level in the first half of 2000 the preceding half year. The upward pressure in inflation trend observed since July 2000 continued in the fourth quarter of 2001, with the inflation rate at 18.9 percent in November, compared with 5.8 percent in the corresponding period of 2002.the provisional balance of payment for the first half of 2001 indicated on overall surplus of #51.1 billion(us$458.9 million) compared with #78.3 billion (us $782.5 million) in the corresponding period of 2000. this development reflected the surplus in the current account, which more than offset the deficit in the capital and the financial account the current account position was bayed mainly by enhanced earning from crude oil exports, occasional by high prices of crude earnings from crude oil in the international petroleum market. The value on non oil exports however fell sharply from #14.8  billion in 2000 to #9.3 billion in June 2001. Gross external reserve increased from US $9.9 billion (#1.032.5) at end of December 2000 to US$10.6 billion (#167.8 billion) in 

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