The purpose of this note is to define the meaning of the term "monetary poilcy, the objective of Monetary policy and it effect". Using the new foreign exchange policy by the Central Bank of Nigeria as a case study.
Nigeria's Central Bank Governor, Godwin Emefiele on Wednesday, 15 June 2016. Announced the guidelines of Nigeria's new foreign exchange policy. The new policy is expected to set the naira free and allow it to be affected by market forces.
"In John Maynard Keynes view, during the 1930s and 1940s, it was believed that the success of monetary policy in stimulating recovery from a depression was severely limited than in controlling a boom and inflation". Some may wonder or ask what exactly is monetary policy?
Definition: Monetary policy is how central banks manage the money supply to guide healthy economic growth. The money supply is credit, cash, cheques, and money market mutual funds. The most important of these is credit, which includes loans, bonds, mortgages, and other agreements to repay. In a statement released on Wednesday, The Governor of the Central Bank of Nigeria said "the CBN had to take the measures as Nigeria has witnessed a significant decline in her foreign exchange reserves from about US$42.8 billion in January 2014 to about US$26.7 billion as of June 10, 2016.
In terms of inflows, the bank’s foreign exchange earnings have fallen from about US$3.2 billion monthly to current levels of below a billion dollars per month, he explained. The interplay between reduced foreign exchange supply and rising demand accounted for a substantial reduction in our foreign exchange reserves".
The Central Bank Governor further stated that "our reserves, despite having fallen, is still robust and is able to cover about five months of Nigeria’s imports as against the international benchmark of three months". He said, adding that his team at the CBN would ensure transparency in the new foreign exchange market regime and that there would be no place for speculators. Though quick to blame the poor foreign exchange receipts on the over 70 per cent drop in the price of crude oil, global growth slowdown and geo-political tensions along critical trading routes in the world, and normalisation of monetary policy by the United States Federal Reserve. He, however, stated that the country is still in a good position."
Objectives of Monetary Policy
The primary objective of central banks is to manage inflation. The second is to reduce unemployment once inflation has been controlled.
With Nigeria inflation rate at 15.10 percent in May of 2016 over the same month in the previous year. Core Inflation Rate in Nigeria averaged 9.50 percent from 2007 until 2016, reaching an all time high of 19.28 percent in January of 2007 and a record low of 0.49 percent in March of 2008. And unemployment rate at 12.1 percent in March quarter of 2016, up from 10.4 percent in the fourth quarter of 2015, reaching the highest since December of 2009.(National Bureau of Statistics).
Effects.
Here are things that are expected to happen in the next 10 days as a result:
•Naira will get a new official price against the dollar when the market opens on Monday
•The naira will be appreciated against the dollar immensely at the black market
•Scarcity will be reduced as dollar will be more available to buy
•The gap between the official market and the parallel market will shrink
•Round-tripping by dollar dealers (individuals and companies) will be massively reduced
•The restrictions on naira cards abroad will be removed
•The pump price of petrol may reduce
•Inflation rate will reduce
By this announcement to revise the guidelines for the operation of the Nigerian interbank foreign exchange market. The new foreign exchange policy will provide greater flexibility in the foreign exchange market. According to IMF spokesman Gerry Rice, the move was important to reduce fiscal and external imbalances in Nigeria's economy. "As we have said before, a significant macroeconomic adjustment that Nigeria urgently needs to eliminate existing imbalances and support the competitiveness of the economy is best achieved through a credible package of policies involving fiscal discipline, monetary tightening, a flexible exchange rate regime and structural reform, Rice said. Allowing the exchange rate to better reflect market forces is an integral part of that".
Comments
Post a Comment