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CHAPTER ONE

1.0   INTRODUCTION

Monetary policy deals with the discretionary control of money supply by the monetary authorities in order to achieve the desired economic goals. It cold be seen that money policy comprises of those government actions which are designed in attempt to change the influence the behaviour of the monetary sector of an economy. However, there are two views on the efficiency or monetary policy, monetarist and Keynesian view. The Keynesian view is that monetary policy should be direct towards interest rates rather than money supply and that the monetary policy should be subsidiary to fiscal policy. The monetarist recommends that the control of money supply should be the main concern of the money authorities. But it should be noted that money policy has a central role in macro economic management primarily because of the close relationship between the monetary aggregate and economic activity.   This is true irrespective of whether one is considering the monetarist or Keynesian framework. Although it may be desirable to introduce some monetary instruments the environment for their effective application may not be suitable. This fact should be borne in minds as we considered the application of various instrument of controlling money supply in the Nigerian economy. The Nigeria monetary system is part of the wider financial sector and its major operators are the monetary authorities, the banks merchant and commercial banks) as we as discount houses recently permitted to operate within the system.  
The monetary authorities design and implement monetary policy and consist of the presidency, apex bank and federal ministry consist of these, the apex bank is the agency which is primarily responsible for designing monetary policy proposal for presidential approval and ensuring implementation of the monetary policy measures accepted by the federal government.   These goals of monetary policy remain the same irrespective of the package of instruments in use. The monetary policy attempts at maintain a balance as possible between the supply and demand for the monetary assets of the economy in order to achieve adequate economic growth. This broad purpose may be transmitted or rather translated into several specific objectives such as price stability, high level of employment or an acceptance  growth rate of the real gross domestic product (GDP), as well as balance of payment equilibrium.  
Monetary management could take the form of direct or indirect control instruments comprising of interest rate registration, credit ceilings and sectorial allocation of credit. An indirect control instrument is mostly adopted by market based economy.  It has the advantage of the relationship between money supply and the monetary base and the ability of the monetary authorities to induce appropriate change in the monetary base. Banks reserves constitute an important component of the monetary base usually targeted by the monetary authorities to control the money supply in the Nigerian economic through the manipulation of the discount rate and reverse ratio. In Nigeria, the application of credit ceilings was designed to ensure that domestic credit expansion and the monetary implications of the balances of payment targets the expected increase in total demand for liquidity in the economy. But Nigerian have decided to move away from indirect and direct monetary instruments under credit ceiling for instance, the apex bank found it increasingly difficult to achieve the stated monetary targets. The techniques of indirect monetary control basically involves the control of the money stock through the manipulation of the sources of the monetary base by the application Open Market Operation (OMO), reserve requirement and rate.  
OMO is conducted mainly in the secondary market for government securities through the buying and selling of government securities, the apex bank directly changes the level of the bank reserves and indirectly induces changes in the level of interest rates, terms and availability of credit and ultimately the money supply.  
1.1   HISTORICAL BACKGROUND OF THE STUDY
The adoption of a market-base framework such as Open Market Operation in an economy that had been under direct control for long required substantial improvement in the macro-economic stability, effort were directed to the management of excess liquidity. Thus a number of measures were introduced to reduced liquidity in the system. These includes the reduction in the maximum ceiling on credit growth allowed for banks; the recall to Central Bank of Nigerian (CBN) from banks of the special deposits as requirements against outstanding external payment arrears; abolition of the use of foreign guarantees or currency deposits as collateral for naira loans and the withdrawal of public sector deposits fro banks to the CBN. The use of stabilization securities for purpose of reducing the bulging size of excess liquidity in banks was introduced in August, 1990.  
Commercial banks cash reserve requirement were increased in 1989, 1990 and 1992; the rising level of fiscal deficits was identified as a major source of macro economic but also to synchronize fiscal and monetary policies. In the legal aspect, the federal government promulgated the CBN decree (BOFID) No. 1969, the CBN decree enhanced the banks powers and discretion in the design and conduct of monetary policy, while the BOFID addressed the problem of policy leakages in the monetary management by bringing the non-bank financial intermediaries, which hitherto, were entirely outside the control of the CBN under the control and supervision of the bank.  
The decree streamline and simplified procedures for licensing bank and established procedures for licensing and controlling of other financial institutions including discount houses and financial companies. Three discount houses have been fully licensed to undertake secondary market dealership in treasury security. By way of inducing efficiency and encouraging a good measure of flexibility in banks, credit operations, the regulatory environment was also improved. Consequently, the sectors specific credit distribution targets were compressed into four (4) sectors in 1986 and to only two (2) in 1987. The commercial and merchant banks were subjected to equal treatment since their operations were found to produce similar effect on the monetary process. Hence, merchant banks, hitherto excluded from cash reserve requirement, were subjected to the same cash ration with commercial banks. Also liquidity ration of merchant banks was raised to the level applicable to commercial banks. In August 1987, all controls n interest rates were removed. However, in 1991, bank maximum lending rates were pegged at 21% while a minimum of 13.5% was stipulated for saving deposits. From 1992 the markets was feed of interest rate controls. However, controls measures were re-introduced in 1994 and later deregulated in 1997. In recognition of the fact that well capitalized banks would strengthen the banking system for effective monetary management, the monetary authority increase the minimum paid capital of commercial bank and merchant banks in February 1990 from N40 million and N50 million and from N12 million to N20 million respectively. This was later increased to N500 million  for both banks in 1997. Also in 1990, the apex bank brought into force the risk weighted measure of capital adequacy recommended by the BALSE committee of the bank for international settlements for licensed banks, which were complementary to both the prudential guidelines for licensed banks, which were complementary to both the capital adequacy requirements and Statement of Accounting Standard (SAS). The prudential guidelines among others, spelt out the criteria to be employed by banks for classifying non-performance loans. The CBN and NDIC continue to monitor and examine banks in order to promote stable banking system.   In an effort to improve the operation of the money market an auction – based market for treasury securities was introduced in 1989 and these treasury instruments were made bearer bills so as to enhance transferability and promote secondary trading. The importance of timely data for the success of indirect monetary management, especially through OMO was realized by the CBN such that efforts have been made to improve the quality and timeliness of financial data. To this end, remarkable progress have been made in the computerization effort to the CBN and banks thereby creating a more conducive atmosphere for quick processing of relevant data. From 30th June 1993, the CBN commenced OMO in treasury securities with banks through discount houses. The OMO is coordinated with discount window and reserve requirement policies to ensure the attainment of the monetary policy objectives and targets. In particular OMO has been conducted every week monitoring the growth in the monetary base, which consists of currency in the hands of the non-bank public total bank reserves.  
OMO is based on the discretionary of CBN to buy and sell eligible securities in the money market from the private sector, depending on the objectives of the policy. Thus, if there is need to reduce bank credit and hence money stock in an inflationary economy, the appropriate response of CBN is to sell traded securities, hoping that the private sector (bank and non bank public) would purchase them. When purchases are made by bank on behalf of their customers, the banking system, money stock is still constrained through reduction in the system’s reserve and hence ability to expand credit. However, if the purchase security off the private is financed through currency outside the banking system, the constraining effect on money supply is direct. When the stance of the policy is monetary ease, the apex bank reserves it strategy of the banking system is expanded. This enable the bank expand credit which influence money stock, where funds sis realize from the sale of securities by non – bank public are kept outside the banking system, OMO expand money supply directly. Though, the effect of OMO is more flexible and better suited for ay to day adjustment of the reserves in the desired direction.  
The type of securities used for OMO varies from country to county but generally they consists of both government and non-governments with issues ranging from very short to long term maturities. The essentials is that the securities trade should be those which the CBN can use easily to influence the level of reserves, credit and money and money stock thereby inducing favourably changes in order relevant variables for economic growth. Depending on the sophistication of the financial market the operation vary from outright sales and purchases to temporary trading securities. Temporary trading could be reports in which case securities are sold with an agreement to purchase in future before maturity; or reverse response in which securities are purchased with an agreement to resell later before maturity. Other techniques of OMO include forward sales sand purchase as well as swaps.   Recruitment of participations of OMO depends largely on the structure of the financial system. Where there are discount houses, it is common for the apex bank to channel transaction primary through discount houses, in their absence the CBN relies on the selected from the foregoing that the main purpose of OMO is to influences banks liquidity with a view of influencing monetary growth. However, the expansion or contraction in money stock is not desired for its own sake but rather to achieve monetary growth, that is consistent with short term to long term objectives of the economy especially with regards to exchange rates, interest rate, investment and low or non-inflationary growth in goods and services. extreme
1.2    STATEMENT OF GENERAL PROBLEM
The fundamental problem of any government is it economic or otherwise its implementation. a number of government monetary policy instrument have been designed and applied in Nigeria in the hope of achieving the desired result of stable price level, low level of unemployment, efficient banking system etc. but the application of direct monetary instrument have not bring forth the desired objectives stated above hence, left the government with no any other alternative than to turn to the direct monetary instrument. Therefore, the problem under study is the application of OMO as an instrument of monetary policy in Nigeria.  
1.3   OBJECTIVE OF THE STUDY
The main purpose of this research work is to evaluate the monetary policy in Nigeria. The research also is at reviewing the evolution and performance of monetary police in Nigeria, so also present a clear picture of the effort of to introduce the instruments.
1.4    HYPOTHESIS
The objective of this study will be pursued vigorously by in directing analytical tools towards putting into imperial test, the following are the major hypothesis.
HA:  Alternative Hypothesis The CBN monetary policies have been properly ruled out to activate our depressed economy.  
Ho: Null Hypothesis: The monetary is not properly out to activate our depressed economy.  
HA: - Alternative hypothesis. The CBN monetary policies is a bit too stringent for the banks in the country and will therefore hamper an effective operations of banks sin the economy.  
Ho: Null hypothesis: The CBN monetary policies are not too stringent for the bank in the country, it will enhance productivity.
1.5    LIMITATION OF THE STUDY
Obviously, every research work may be faced with some difficulties which limit the extend of the research. Therefore, this research work is limited to financial, data collection is not sufficient. it is most adequate and has been put to the maximum utilization.  
1.7    DEFINITION OF TERMS
Monetary Policy: The discretionary control of money supply by the monetary authorities in order to achieve the desired economic goal.
Monetary Base: The sum total of bank reserve and currency in the hands of non-banks public “vault cash and balance with apex bank”.
Money: As a medium of exchange, a store and measure of value which economic agents preserve, and units of account which form the basis of comparing prices and evaluating relative values, generally, anything that is acceptable as an instrument of settlement can be term as money for the settlement of legal payments, it is conferred as status of “legal tender”.
Money supply: Represent the measure of money and include currency in circulation (with non-bank, public) and demand deposit at the commercial bank – MI. The broad measured of money include MI and savings and time deposits, also called quasi – money (QM) at the commercial and merchant banks and represents by M2.
Interest Rate: the cost of or price charged for using someone’s money which is normally expressed as a percentage of the amount borrowed. Discount House: A financial institution devoted to trading in government secondary market instrument treasury bills certificates and other eligible instrument.
Offer:  Willingness to sell securities. i.e. willingness on the part of government through apex banks to sell securities (treasury bill) to the public.
Tenor: Maturity period that a security takes to mature for the payment of principal amount interest attached.
Subscription: Willingness to buy or purchase i.e. willingness on the part of the public through banks commercial and merchants banks to buy or purchase securities offered by the government.
Securities: Money market instruments created by government for financing short term fiscal operation. There are two(2) types of securities in Nigeria and are in use, these are treasury bill and certificates.

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