Download an overview of the nigerian economy

THE ROLE OF MONETARY POLICY IN ACHIEVING
NIGERIA’S VISION 2020 AGENDA
by
C. M. ANYANWU
Deputy Director
Research Department
Central Bank of Nigeria,
Abuja
_______________________________________________________________________
A Paper Presented at the Retraining of Middle Level Civil Servants at NIPSS Kuru,
near Jos, Plateau State, on July 27 to August 03, 2008
The Role of Monetary Policy in Achieving
Nigeria’s Vision 2020 Agenda
1.0 Introduction
Monetary policy is a package of actions carefully designed to manage the growth, value and
cost of money with the broad goal of regulating economic conditions and activities during a
given period (CBN, 2004:1) It can also be defined as a combination of measures designed to
regulate the value, supply and cost of credit in an economy in consonance with the expected
level of economic activity. In broad terms, monetary policy aims at achieving price stability, full
employment and economic growth, exchange rate stability, low interest rates and balance of
payments equilibrium (Fry et al, 2000). The formulation and implementation of appropriate
monetary policy is, therefore, one of the major responsibilities of central banks worldwide. It
is a very serious undertaking. Its efficient implementation is crucial for the achievement of any
meaningful economic plan, including Nigeria’s Vision 2020.
Vision 2020 attempts to exploit Nigeria’s economic potentials and make her become one of the
biggest twenty economies in the world by 2020. Given the country’s considerable resource
endowment and coastal location, her potentials for strong growth has a great promise. The
concept of the vision represents a mental picture of the desired future which would ensure a
significant improvement on the living conditions of Nigerians. In view of the importance
attached to the Vision, the President of the Federal Republic chairs the National steering
Committee which is the engine room of the visioning process. The process is a bottom-up
strategic planning process which ensures ownership by all stakeholders, from all sectors of the
economy.
The financial sector has been identified as the DRIVER needed to pull other sectors of the
economy towards the Vision. Consequently, the Central Bank of Nigeria (CBN), in conjunction
with other regulatory bodies initiated the Financial System Strategy (FSS) 2020, to synchronize
and integrate the on-going economic reforms and harness the gains to ensure that Nigeria
becomes Africa’s Financial Hub and to promote her to join the league of the top 20 economies
on or before the year 2020.
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The objective of this paper, therefore, is to discuss the fundamental role of monetary policy in
achieving economic development in general and Nigeria’s Vision 2020 agenda in particular. The
paper is arranged into six sections. Following the introduction, section two presents an
overview of the Nigerian economy, to enable us appreciate the current economic situation of
the nation. Section three discusses the mandate of the CBN within the context of formulating
and implementing monetary policy, and promoting economic development.
Section four
attempts to present the role of monetary policy and other financial services in attaining Vision
2020, while section five highlights other necessary conditions for attaining the Vision. The paper
is concluded in section six.
2.0 AN OVERVIEW OF THE NIGERIAN ECONOMY
Nigeria is the most populous country in Africa with a population of over 140 million people. The
country is also endowed with vast land, forest resources, and abundant natural resources,
including rivers and lakes, oil and gas, and solid minerals. It is therefore a potentially large
centre of production and consumption activities, and has the potential of becoming a big
economy.
2.1
Characteristics of the Nigerian Economy
The geographical and demographic features, natural endowments, income level and
distribution, inflation rate, unemployment rate, fiscal operations, external sector and the level
of financial system development are overviewed.
2.1.1 Natural Factor Endowments and Mono-cultural Characteristics
About 31.3 per cent of the total land area in the country is arable and almost all forms of
agriculture thrive in Nigeria. The weather condition is clement. Nigeria is also endowed with
abundant natural resources. Oil plays a major role in the economy, as it accounted for about
24.6 per cent of GDP, 95.9 per cent of foreign exchange receipts and 87.6 per cent of
government revenue in 2006 (CBN, 2006). In addition, the country is endowed with vast
reserves of natural gas, even more than oil. She is also richly endowed with a variety of solid
minerals, ranging from precious metals to industrial minerals, such as barites, gypsum, kaolin
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and marble. Others include coal, iron ore, lead, limestone, tin, columbite and zinc. The current
level of exploitation of the minerals is very minimal in relation to the deposits found in the
country. However, with the introduction of reforms in the sector in 2006, greater exploitation is
expected in the years to come.
2.1.2 STRUCTURE AND GROWTH OF GDP
Gross Domestic Product (GDP)
Nigeria’s GDP (1990 constant price) rose from N9.9 trillion in 2003 to N18.6 trillion in 2007. It
was the 49th largest economy in the world in 2006. The table below shows the structural
changes that have taken place since 1960.
Structural Change in GDP, 1960-2007
Agriculture
Manufacturing
Crude Oil
Building
Construction
Wholesale
Retail
Services
1960
1970
1981
1990
2000
2003
2004
2005
2006
2007
&
64.1
4.8
0.3
NA
47.6
8.2
7.1
NA
33.6
5.6
29.2
4.1
37.9
4.5
30.6
1.6
42.7
3.4
26.0
2.0
41.0
3.6
26.5
1.4
41.0
3.7
25.7
1.4
41.2
3.8
24.2
1.5
41.7
3.9
21.8
1.6
42.2
4.0
19.4
1.7
&
NA
NA
13.9
13.4
13.1
12.6
12.9
13.8
15.0
16.2
NA
NA
9.8
8.2
11.2
12.3
14.7
15.2
15.7
16.2
NA = Not Available Source: CBN Annual Report, Various Issues
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Growth Rate of Selected Macroeconomic Indicators
YEAR
Inflation
(Y-O-Y)
Growth
Rate of
Index of
Agric
Prod.
Capacity
Utilization
2.2
24.8
7.2
45.0
3.0
30.2
4.4
35.1
6.2
13.0
4.9
46.4
Growth
Rate of
Real
GDP
AVERAGE
(1980-1989)
AVERAGE
(1990-1999)
AVERAGE
(2000-2007)
Overall, there has been remarkable improvement in the economy in the last nine years,
following the extensive reforms that were carried out by the government. Agricultural and oil
production accounted for 65.8 per cent of the GDP in 2007. Services, wholesale and retail
trade, manufacturing, and building and construction accounted for 16.2, 16.2, 4.0 and 1.7 per
cent, respectively. The economy could therefore be regarded as agrarian and primary in nature.
From the early 1970s, there was a shift from agrarian monoculture to dependence on another
primary commodity – petroleum.
Data from the National Bureau of Statistics indicated that the average inflation rate, year on
year, averaged 24.4 per cent for the decade 1980-1989; rising to 30.2 per cent over the
following decade, 1990-1990; but fell sharply to 13.1 per cent during 2000-2007. Indeed,
inflation rate fell persistently from 2004, recording single digit in 2006 and 2007.
The
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deceleration in inflation has been attributed to the fiscal restraint adopted by the Federal
Government, tight monetary policy and good agricultural harvest, resulting from good weather
conditions and the various agricultural initiatives of the government.
However, the current annual GDP growth rate of 6.0 per cent is not adequate to substantially
reduce poverty and lead Nigeria to become one of the twenty largest economies in the world. A
growth of no lower than 10-13 is required annually to lead Nigeria to her Vision.
2.1.3 Sectoral Characteristics
The Nigerian Agriculture is annalistic in structure, having both the formal and informal sectors,
side-by –side. Also an analysis on sub-sectoral basis showed that in 2006 crops production was
predominant and accounted for 89.0 per cent of total production, followed by livestock (6.3%),
fishery (3.3%) and forestry (1.1%).
The structure of the industrial sector is also dualistic and characterized by a large number of
informal small enterprises and relatively few formal modern firms. By size, the small and
medium scale enterprises accounted for 65.5 and 32.0 per cent of industrial employment,
respectively, while the LSEs contributed only 2.5 per cent. However, in terms of output, the
SSEs and MSEs accounted for just 10 and 5 per cent, respectively, while the LSEs contributed 85
per cent of total industrial output (CBN, 2000). In the last five years, manufacturing capacity
utilization rate averaged 54.8 per cent, but fell persistently from 56.5 per cent in 2003 to 53.5
per cent in 2007. Manufacturing production has been constrained by inconsistent government
policy, overdependence on the external sector, low level technology and poor infrastructure.
Nigeria is a major producer of oil and a member of the Organization of Petroleum Exporting
Countries (OPEC), with a production quota of 2.16 million barrels per day (mbd). The oil and gas
industry in Nigeria has maintained dominance over the economy since the 1970s. Oil revenue
accounted for 26.2 per cent of GDP, 89.8 per cent of foreign exchange receipts and 83.0 per
cent of government revenue in the last five years.
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Major infrastructural inadequacies exist in power supply, road and rail transportation, port’s
operations, etc. For example, the length of roads in Nigeria is about 195,200 kilometres out of
which about 15.3% is paved. About 28% of these paved roads are bad and un-motorable
(Anyanwu et al, 2003). Electricity generation remained almost static averaging about 2,693.7
megawatts per day between 2003 and 2007, as against the average requirement of 6,000
megawatts needed for the current level of economic activities. Very limited power supply
along with poor transportation system raises the cost of business. By some estimates, the cost
of power to the private sector is six or seven times the price paid by international competitors.
The table below shows the level of electricity generation and consumption in Nigeria.
Electricity Generation and Consumption in Nigeria 1999-2007
Electricity
Generation
(MWH)
Average Daily
Electricity
Consumption (MWH)
1999
1,859.8
896.39
2000
1,7738.3
1,44.97
2001
1,689.9
1,120.05
2002
2,237.3
1,289.23
2003
2,398.5
1,540.63
2004
2,763.6
1,851.15
2005
2,779.3
1,873.14
2006
2,767.8
2,399.06
2007
2,659.5
2,245.65
Year
The services sub-sector has fared better.
Average Daily
Since the introduction of Global System of
Communication in 2000, the transformation in the telecommunications service sub-sector has
led to increases in the number of telephone lines, subscribers and services providers, and also
created massive employment within the country. As at December 2007, the number of
telephone lines in Nigeria, has increased to almost 58 million lines (connected fixed and mobile
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lines). Nigeria has the fastest growing GSM market in the world, after China. The airline
industry has also improved in service delivery, following keen competition among the
operators.
A review of Nigeria’s educational structure shows the continued dominance of primary and
secondary education, with less emphasis on vocational and technical education capable of
imparting entrepreneural skills (Ojo, et at, 1997). There has been an upsurge in private sector
undertaking in the education sector in recent times, but infrastructure and services have
decayed in public schools.
Overall, the health indicators showed relative improvement between 2000 and 2005.
Population per physician improved from 24,020 in 2000 to 3,059 in 2005, while population per
hospital bed declined from 3,104 to 1,806 during the same period.
Fiscal Operations
 Government revenues in Nigeria are classified into oil and non-oil.
 Since the 1970s, oil revenue has been the dominant source of government
revenue, contributing over 70 per cent to federally-collected revenue.
 The current revenue allocation formula which became operational in
2004 allocates:
 52.7% of the revenue of the Federation Account to the Federal
Government,
 States 26.7% and,
 Local Government 20.6%.
Fiscal Operations

The following deductions are made from source before the federally
collected revenue is distributed:
 Joint Venture Cash Calls,
 Excess crude/PPT/royalties, and
 13.0% derivation for the oil producing states.
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 In addition, the Federal Inland Revenue Services (FIRS) 4.0%
 The Nigeria Customs Services (NCS) 7.0%.
 The Value-Added Tax (VAT) system was introduced in Nigeria in 1994, and
currently shared in the ratio 20:50:30 per cent to federal, states and local
governments, respectively.
External Sector
 External sector monitored through the Balance of Payments (BOP)
account
 BOP divided into current, capital and financial accounts
 The total reserve position doubled from $7,467.80 million at end 2003 to
$16,955.02 million in 2004, rising rapidly to $28,279.06 million in 2005, $42,
298.11 million in 2006 and closing 2007 at $51,333.15 million.
 This trend is explained by the high and continually rising oil prices in the
international market.
2.1.4 The Financial Sector
The financial system consists of the formal and informal segments. The informal financial
system is less complex than the formal financial system and is designed to serve both economic
social goals. The market is characterised by small scale deposit mobilisation and lending, little
or no record-keeping, dominance of cash transactions, ease of entry and exit, lending based on
personal recognition, and higher interest rates than the formal sector, among others (CBN,
2000).
The formal segment dominates the financial system and consists of the regulatory authorities,
the financial markets, the development finance institutions, and other financial institutions. The
regulatory authorities include the CBN, Ministry of Finance, the Nigeria Deposit Insurance
Corporation (NDIC), Securities and Exchange Commission, the National Insurance Commission
(NAICOM) and the Pensions Commission (PENCOM). The financial markets comprise of the
money market (deposit money banks (DMBs) and discount houses) and capital market.
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Development finance institutions include the Urban Development Bank, Federal Mortgage Bank
of Nigeria (FMBN), Bank of Industry (BOI), Nigerian Agricultural Cooperative and Rural
Development Bank (NACRDB) and the Nigerian Export Import Bank (NEXIM). Other financial
institutions include insurance companies, finance companies, community banks, microfinance
banks and primary mortgage institutions (PMI) (CBN, 2006).
Reforms in the Financial Sector
Due to the deteriorating condition of the economy, various economic and structural reforms
were introduced from 2003 under a comprehensive economic reform blue print- the National
Economic Empowerment and Development strategy (NEEDS). Recognizing that the financial
services sector occupies a pivotal position in the economic development process of Nigeria, the
NEEDS set out to build and foster a comprehensive and healthy financial system to support
economic development. The strategies for actualizing this include embarking on a
comprehensive reform process aimed at substantially improving the financial infrastructure;
restructuring, strengthening, and rationalizing the regulatory and supervisory framework;
addressing low capitalization and poor governance practices of financial intermediaries;
directing government policies towards financial deepening and financial product diversification,
etc. The reforms in the financial sector are highlighted below.
2.1.4.1 Reforms in the CBN
The financial sector reforms started with the re-engineering of the processes and realignment
of the manpower in the CBN, code named project EAGLES (acronym for Efficiency,
Accountability, Goal-orientation, Leadership, Effectiveness and Staff Motivation). In order to
reposition the Bank to play its role in the anticipated modern financial services sector, the CBN
after a thorough review of its structure and processes, from 2004 reduced the number of its
department; redeployed staff on the basis of the roles they were expected to perform; devoted
additional resources to skills development; and refocused the Economic Policy Directorate with
the establishment of the Monetary Policy Department, with a focus on Monetary policy.
Furthermore, in order to enhance the achievement of its mandates, the Bank embarked on
reforms in currency and payment systems, money market, foreign exchange market; micro
10
enterprises financing; and bank supervision. Reforms were also carried out on the monetary
policy framework, external reserve management and issue of legal tender currency.
2.1.4.2 Reforms in the Banking Sector
In the banking sector, the key elements of the reforms included:

Adoption of the universal banking system in February 2001.

Re-capitalization for banks to a minimum of N25.0 billion through mergers and
acquisition or initial public offerings (IPOs), which was completed in December 2005.

Issuance of a new code of corporate governance for the financial sector in March 2006
and effective April 1 2006, to guide the conduct of management and staff of banks in
order to ensure transparency and accountability in the sector.

Enhancing the intermediation function of banks

Adoption of a risk focused, and rule-based regulatory framework effective January 2007.

Adoption of zero tolerance in the regulatory framework; especially in the area of
data/information rendition/ reporting and infractions in September 2006.

Expeditious automation process for rendition of returns by banks and other financial
institutions through the Electronic Financial Analysis and Surveillance System (e- FASS)
in September 2006.

A framework on Contingency Planning for Banking Systemic Crises for the Nigerian
Banking system was put in place in December 2001. Its provisions were applied in
assessing the financial condition of banks in July 2002.

Work towards the establishment of an Assets Management Company as an important
element of distress resolution is in progress as the relevant legislation is before the
National Assembly.

Promotion of the enforcement of dormant laws, revision and updating of relevant laws
for effective corporate governance in 2007.
2.1.4.3 Other Reforms in the Financial Sector
11
Apart from the banking industry, some reforms also took place in the other sub-sectors of the
financial sector, often called Other Financial Institutions. These are insurance, capital market
and mortgage sub-sectors, in order to increase the depth of the financial market.
Insurance Sub-sector
Following the successful recapitalization of banks, the Federal Government, through the
National Insurance Commission (NAICOM), announced the recapitalization of insurance
companies operating in the country in September 2005. The insurance companies were allowed
18 months (September 2005 -February 2007) to achieve the graduated levels of
recapitalization.
At the expiration of the deadline end-February 2007, seventy-one (71) insurance companies,
comprising 45 non-life companies, 24 life companies and 2 re-insurance firms emerged out of
the 168 companies that existed before the commencement of the exercise. At the end of the
consolidation exercise, the industry capital grew to over N200 billion as against the N30.0
billion recorded before the take off of the exercise. The development, it is hoped, would
prepare the industry for higher stakes in big ticket projects in oil and gas, aviation and marine
sectors of the economy.
The Capital Market
To help achieve the objective of attracting fresh investment capital into the economy, the
Securities and Exchange Commission (SEC) embarked on strengthening the capital market
infrastructure as well as increasing the required capital base of the operators. The Nigerian
Stock Exchange (NSE) made remarkable progress in the internationalization of the market in
1999, with the cross-border listing of “M-net”/ Super sports” on the Exchange. The company
was also concurrently listed on the Johannesburg Stock Exchange (JSE). Furthermore, the
Exchange signed memoranda of understanding (MOU) with the Ghana Stock Exchange and the
Nairobi Stock Exchange to facilitate cross border listing of securities. Consequently, a Nigerian
12
company - Oando Plc was granted secondary listing on the JSE Securities and Exchange of South
Africa in 2005.
In order to deepen and widen the capital market, the Government changed the Abuja Stock
Exchange which was established to be a second stock exchange in Nigeria to Abuja Securities
and Commodity Exchange (ASCE). The exchange commenced operations in August, 2006. It is
expected that with this, the potentials in the agricultural and minerals sectors would be
exploited.
The Pension Reform
Prior to the National Pension Reform Act of 2004, pension was only mandatory in the public
sector and optional in the private sector. The government relied on taxes paid by the active
working population to fund the pensions of the retired workers. With an ageing workforce, the
system proved to be unsustainable, resulting in public sector pension funding deficit of over
N2.0 trillion by 2006. The new structure provides for uniform, contributory, private sectormanaged and fully funded pension scheme. The newly created National Pension Commission
has been charged with the responsibility of regulating the scheme. Several Pension Fund
Administrators and three Pension Fund Custodians were licensed accordingly.
The Primary Mortgage Institutions (PMIs)
Prior to the enactment of the primary mortgage Act of 1989 which ushered in the primary
mortgage institutions, the Federal Mortgage Bank of Nigeria was the major mortgage
institution in the country. Thus, the emergence of PMIs has engendered competition in the
mortgage industry which could not, however, be sustained because of the distress in the
banking system in the 1990s. Many of the PMIs were affected by the distress during the period.
In 1997, the licensing and regulation of the PMIs was transferred to the CBN. In an effort to
reposition the mortgage institutions, the CBN withdrew the operating licenses of 97 PMIs in
2003 for non-rendition of statutory returns.
3.0 CBN Mandate, Monetary Policy and Economic Development
13
From the forgoing it is important to examine the core mandate of the CBN. The critical role of
the CBN in management of the Nigeria economy has been spelt out in the provision guiding the
operations of the Bank in the 2007 CBN amended Act. According to the Act, the CBN mandated
to:
a) ensure monetary and price stability
b) issue legal tender currency in Nigeria
c) maintain external reserve to safeguard the international value of the legal tender
currency
d) promote a sound financial system in Nigeria; and
e) Act as banker and provide economic and financial advise to the Federal Government.
It is imperative to have a good understanding of what these mandates are, so that we can
appreciate the role of the CBN in promoting economic development. The first mandate gives
the CBN the responsibility of maintaining stable prices or low inflation in the economy. This
enables economic agents to have value for their money overtime. CBN issues note and coins
which serve as legal tender for the promotion of trade and exchange. The third mandate is to
ensure that the Naira exchange rate is stable, while the fourth gives the CBN the power to
protect the citizen by ensuring that the banks are safe and sound. The CBN offers banking
services to the Federal Government and from time to time offers her policy advice in order to
ensure a stable economy.
The first and perhaps the most important mandate of the CBN is to ensure monetary and price
stability which is done through the formulation and implementation of Monetary Policy. As
stated in the introduction, monetary policy refers to the actions undertaken by a central bank
to influence the availability and cost of money and credit as a means of helping to promote
national economic goals of generating employment, increasing output, keeping inflation low
and ensuring exchange rate stability. In all, the central objective of monetary policy is to keep
prices stable, that is to achieve low inflation rate. In implementing this policy the CBN makes
use of some instruments which include open market operations (OMO) – this is selling of
treasury bills in the open market, discount window lending – lending to the Deposit Money
14
Banks (DMBs) directly by the CBN and reserve requirement – this is a requirement of the
amount of money the DMBs must hold in their reserve against deposit made by their customer.
3.1
MONETARY POLICY MANAGEMENT
Monetary policy is a complex process which involves setting objectives and targets for the
major economic indicators; choosing a nominal anchor, policy instruments and the framework
for
monetary
policy
implementation;
programming;
communications and evaluation of outcomes.
Liquidity
management;
and
CBN monetary policy targets include the
operational target, the intermediate target and the ultimate targets.
In designing monetary policy, the CBN reviews developments in the economy over a period of
time, currently two years, articulates the major pressure points and the risk to price stability;
and formulates a framework which guides its monetary policy implementation. This framework
is captured in a monetary programme. At present the CBN uses the IMF financial programming
framework which analyses and traces the linkages between the four sectors of the economy.
Liquidity management involves the supply/withdrawal from the market the amount of liquidity
consistent with the desired level of short-term interest rates or reserve money. It relies on the
daily assessment of the liquidity conditions in the banking system, so as to determine its
liquidity needs and thus the volume of liquidity to inject or withdraw from the market. Liquidity
management is supported by daily liquidity forecasting. Monetary policy in Nigeria has been
conducted under varying macroeconomic conditions
The stance of monetary policy is dictated by the prevailing economic situation and the period’s
objectives but, key objectives of monetary policy have remained broadly the same over the
years. These are: price stability and monetary stability, sound financial system, balance of
payments equilibrium, and stimulation of economic growth and development. The conduct of
monetary policy by the CBN relies on a theoretical framework as well as an institutional
framework.
The theoretical framework which formed the basis for monetary policy
formulation in the past was the Polak 2-sector model. It is an analysis of the monetary survey
which is the consolidated balance sheet of the CBN and the DMBs.
15
Presently, the Bank manipulates the operating target (reserve money) over which it has
substantial direct control. This in turn influences the intermediate target (broad money supply,
M2) which impacts on the ultimate or final objective of monetary policy, i.e., inflation and
output. A nominal anchor for monetary policy is a single variable or device which the central
bank uses to pin down expectations. Generally, there are two kinds of nominal anchor:
quantity-based nominal anchor; and price-based nominal anchor. The quantity based nominal
anchor targets money while the price-based nominal anchor targets exchange rate or interest
rate. Currently, the CBN uses broad money supply (M2) as the nominal anchor for monetary
policy.
The mechanism through which changes in interest rates are transmitted to economic activity is
complicated. Interest rate changes may have a relatively rapid influence on firms planning to
make an investment in the near future. Theoretically, the effect of interest rate changes should
be swiftly transmitted to fluctuation in asset prices.
On the other hand, it takes a considerable time for the effects of interest rate changes to
appear in actual corporate profits and household income levels. One reason is that there are
various types of borrowing and investment with short and long maturities. As new interest
rates are applied to these instruments only at the time of maturity, considerable time is
required before the overall interest rate level changes and before the new level takes effect
throughout the economy. In addition, changes in corporate profits and income levels will only
bring about a gradual change in the confidence of firms and households in their investment and
consumption, and after some delay in time, new decisions will be made on investment and
consumption. Further time is then needed before these decisions materialize in actual
spending.
It has been said that preemptive policy responses are necessary to ensure price stability. This is
because, as mentioned earlier, price stability must be achieved in the medium to long term, and
because there will always be a considerable time lag before policy permeates throughout the
economy. As this time lag in permeation of policy effects has become more widely recognized,
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greater emphasis has come to be placed in the management of monetary policy on assessing
the potential risks in the economy, to enable preemptive policy responses.
Then what role does monetary policy plays in ensuring economic growth and development. The
major role of monetary policy is to maintain price stability, in addition it also address exchange
rate stability. By maintaining both internal and external balances, monetary policy ensures
economic growth through increase in output and thereby generating employment.
4.0 Monetary Policy and the Achievement of Vision 2020
Contemporary macroeconomics agrees that economic reforms stimulate
economic transformation.
Economic reforms are deliberate policy actions
instituted by the government of a nation to redirect the operations and
processes in the economy. They are characterized by liberalisation of markets,
privatization of inefficient state-owned enterprises and the creation of an
enabling environment for the private sector to thrive. Studies done by Young
(1993, 1995), Kringman (1994) and Stiglitz (1996), all showed that governments in
eight economies that are part of the “East Asian Miracle” – Hongkong,
Indonesia, Japan, the Republic of Korea, Malaysia, Singapore, Taiwan and
Thailand – had visions and undertook major reforms that promoted economic
growth and development (Soludo, 2008). The studies, therefore, support the
philosophy underlying the National Economic Empowerment and Development
Strategy (NEEDS) and the Vision 2020.
The NEEDS was a medium term
programme that was designed to create wealth, generate employment,
reduce poverty and induce value re-orientation.
NEEDS indeed has made
notable achievements. The Vision 2020 agenda is therefore,building on the
gains from NEEDS to promote a stronger economy.
4.1 The Vision 2020 Agenda
The key features of Vision 2020 are:

Polity – By 2020 the country will be peaceful, harmonious and a stable economy.
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
Macro-Economy – A sound, stable and global competitive economy with a GDP of not
less than US$900 billion and a per capita income of not less than $4000 per annum.

Infrastructure – Adequate infrastructure services that support the full mobilization of all
economic sectors.

Education – Modern and vibrant education which provides for every Nigerian the
opportunity and facility to achieve his maximum potentials and provides the economy
with adequate and competent manpower.

Health – A health sector that supports and sustains a life expectancy of not less than 70
years and reduces to the barest minimum the burden of infectious diseases such as
malaria, HIV/AIDS and other debilitating diseases.

Agriculture – A modern technologically agricultural sector that fully exploits the vast
resources of the country, ensure national food security and contribute significantly to
foreign exchange earnings.

Manufacturing – A vibrant and globally competitive manufacturing sector that
contributes significantly to GDP with a manufacturing added value of not less than 40%.
Thus, the Vision aims at restructuring the economy in favour of industry, increasing national
and per capital incomes, improving the living standards of the people and ultimately
reducing poverty in the country. The target of raising the level of the GDP form the current
level of US$191.4 billion (2006 estimate) to US$900 billion in 2020, almost a five-fold
increase, requires that all the sectors be made to work efficiently and effectively.
4.2
Monetary Policy and Vision 2020
Monetary policy has a lot contribute to the achievement of Vision 2020. Its most important
objective is to achieve and maintain price stability – stable prices or low inflation. It is in the
course of achieving price stability that it helps in the realization of other economic
objectives, such as growth in output and reduction in unemployment.
Central banks devote significant resources at their disposal to fight inflation because it is
detrimental to economic growth.
Today the whole world is very concerned because
inflation is rising globally, owing to the phenomenal increase in the prices of food and
18
petroleum products. The concern is very justified because inflation creates uncertainly and
discourages long-term planning. It discourages savings and capital accumulation and poses
threat to investments. Inflation promotes short-term businesses and discourages long-term
investment. It penalizes the poor by devaluing their little incomes.
In contrast, an environment with relatively stable prices promotes macroeconomic stability,
aids planning, encourages savings for investment and promotes higher standard of living,
thus reducing poverty. Indeed both theory and empirical evidence are in agreement that
sustainable long-term growth is only possible in a regime of predictable low inflation. It is
only in this type of macroeconomic environment that the Vision 2020 can be achieved.
Thus, monetary policy that fights inflation does a good fight. Since inflation is a monetary
phenomenon, monetary policy tries to control money supply with a view to maintaining
price stability. Apart from controlling inflation, monetary policy impacts on the financing
conditions in the economy, especially on the cost and availability of credit, and banks’
willingness to assume risks. It also influences expectations about the future direction of
economic activities, thus affecting the prices of goods, asset prices, exchange rates, as well
as consumption and investment.
In the last nine years, the CBN has seriously committed itself to fighting inflation under the
framework of NEEDS. The result has been salutary as shown in the table below:
Selected Macroeconomic Indicators
2005
2006
2007
Average
1991-1998
1999
2000
2001
2002
2003
2004
Average
1999-2007
GDP Per Capita
(N)
24,113.9
42,938.0
59,451.3
59,388.0
65,208.6
80,320.1
89,866.1 111,569.3 130,159.6
161,336.0 89,121.7
Real GDP Growth
Rate
Inflation Rate (%)
Year-on-Year
Capacity
Utilization (%)
Average Exchange
Rate (N/$)
Interest Rate (%)
(Prime Lending
Rate)
External Debt
2.1
1.2
4.9
4.7
4.6
9.6
6.6
6.5
5.6
6.5
5.6
37.2
0.2
14.5
16.5
12.2
23.8
10.0
11.6
8.6
6.6
11.5
33.0
34.6
36.1
42.7
54.9
56.5
55.7
54.8
53.3
53.5
49.1
19.8
92.7
102.1
111.9
121.0
129.4
133.5
132.1
128.7
125.8
119.7
22.8
21.3
21.3
26.0
20.6
19.6
18.9
17.8
17.3
16.9
20.0
34.7
54.2
42.8
45.0
49.3
45.2
42.9
18.5
2.4
1.9
33.6
19
Stock (% of GDP)
External Reserves 3,548.5
($ million)
Growth in M2
30.6
5,450.0
9,910.4
10,415.6
7,681.1
7,467.8
16,955.0 28,279.1
42,298.0
51,333.2
19,976.7
33.1
48.1
27.0
21.6
25.0
12.3
30.6
30.9
29.2
34.6
Source: CBN Annual Report, Various Issues
CBN had laid down a policy strategy not only to attain Vision 2020, but also to make Nigeria the
Financial Hub of Africa. It had launched the Financial System Strategy 2020 (FSS 2020) to
complement the Vision 2020. The strategy is to make Nigeria Africa’s financial centre by year
2020.
The of FSS 2020 envisions to make Nigeria the safest and fastest growing financial system
amongst the emerging markets and the mission is to drive rapid and sustainable economic
growth primarily in Nigeria and in Africa. To achieve these goals, the FSS 2020 has been
configured to develop and transform Nigeria’s financial sector into a growth catalyst so as to
engineer Nigeria’s evolution into an international financial centre. To achieve this aim the
strategies adopted include:
o Strengthening the Domestic Financial Market – This will be achieved through the
development of internal capacity in both the CBN and the DMBs as well as encourage
diversified markets. The market would develop various products, such as derivatives,
hedge funds, etc, and enhance the payment process with the aim of discouraging huge
cash transactions, develop credit market where Nigerians will access loans easily and
encourage saving culture.
o Enhance Integration with External Market – This will allow the Nigerian financial
market to compete for global funds, to be accomplished through creating a platform for
seamless and robust link to international financial markets, pursuing currency
convertibility while maintaining macroeconomic stability, maintaining a healthy foreign
reserve level, assisting in the progressive unification of trade and commercial laws
20
among ECOWAS and African Union (AU) countries and creating an enabling environment
for entry into global financial service providers.
o Build an International Financial Centre – For Nigeria to be one of the top 20 economies
in the world in year 2020, there is need to consciously build an international financial
centre. This will confer Africa’s Financial Hub on Nigeria. To accomplish this objective,
Nigeria will establish a financial free zone, pursue Naira convertibility, foster open
economy and entrench rule of law.
5.
Other Necessary Conditions for the Attainment of Vision 2020
Apart from monetary and price stability, there are other necessary conditions that are
necessary for the attainment of Vision 2020. The economy can only develop under harmonious
and consistent policy formulation and implementation. For the vision to come to fruition there
is need for a political will that can see the initiative through and ensure the continuity of
policies and programmes that are executed by bodies backed by laws. The role of the judiciary
is central to not only stable polity but also to economic development. Effectiveness and
efficiency of government institutions is important to foster market friendly environment.
Governments at all levels must be divested of all inefficient commercial enterprises. The
present state of the energy supply must improve significantly. There is need for massive
prudent investment in the sector, particularly electricity generation and distribution, as well as
in petroleum refinery. Given that huge resources would be required, private public partnership
would help in providing the necessary resources for energy requirements. Therefore,
government has to promote a viable and workable energy policy that generates adequate
institutional capacity with strong linkages between the sector and the economy in general.
Other socioeconomic infrastructures have to be developed for the country to attain the top
position in the committee of nations. There is need to embark on extensive road rehabilitation
and construction of new ones, develop the rail system, expand and modernise the airports and
21
the seaports, improve the quality of education and health. Massive productive investment in
education and health sectors must be made to produce a healthy and skilful manpower needed
to drive the economy to the vision. Security of life and property is also critical in investment
decisions and the attainment of the economic objectives.
6.0
Conclusion
The paper discussed the role monetary policy could play in the attainment of Vision 2020. It
gave a brief overview of the Nigerian economy and rekindled the hope that, indeed, high and
sustained economic growth which will help to achieve the ideals of Vision 2020 is possible. To
achieve this feat, a lot of work has to be done in both the financial and other sectors of the
economy. The FSS 2020 was reviewed and seen to be in the right direction – towards achieving
2020. Other necessary conditions for realizing the dream includes effectiveness of government
and its institutions; rebuilding infrastructure, especially energy, transportation and social
services; and providing security for life and property.
22
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