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Full Project on the Effect of Monetary Policy on the Level of Poverty in Nigeria

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                                                                                             CHAPTER ONE




1.1       Background to the Study


Over the years, the use of both fiscal and monetary policies has been inextricable in
the pursuit for achieving macroeconomic stability and economic growth in Nigeria. The achievement of full-employment equilibrium, rapid industrial growth, price stability and external balance is anchored on the use of monetary policy. This is further supported by Sanusi (2012) when he explained that 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. This is why the Central Bank is charged with the task of implementing the monetary policies of the government. Since its establishment in 1958, the objectives of the Central Bank of Nigeria have remained broadly the same, but the strategies for achieving these objectives have only changed in consonance with the varying legal, institutional and macroeconomic environments.


The central bank has continually developed means using its monetary policy tools to reduce the unfavourable macroeconomic variables such as inflation so that the price level will be such that will not have any effect to add to the existing poverty level in the country. Furthermore, we can say that in Nigeria, governments formulate policies and guidelines with a view to achieve economic growth and development through reduction in the level of poverty while increasing industrial output and achieving price stability. In order to improve macroeconomic stability in the country over the years, efforts have been focused towards the management of excess liquidity; thus a number of measures have been introduced to reduce liquidity in the system (Adam, 2004). These include the reduction in the maximum ceiling on credit growth allowed for banks, the recall of the special deposits requirements against outstanding external payment arrears to CBN from banks, abolition of the use of foreign grantee/currency deposits as collaterals for Naira loans and the withdrawal of public sector deposits from banks to the CBN.


However, monetary policy has appeared to be more flexible in terms of formulation and
implementation. It is relatively easy to alter and apply its policy tools. Hence, it has become
a fashionable means (after the introduction of structural adjustment programme in 1986) for
correcting short-term macroeconomic maladjustments in Nigeria. The Central Bank of
Nigeria (CBN) since its establishment in 1959 has been playing a traditional role expected
of a central bank, which is the regulation of money in a way to regulate the social and
economic welfare of the country. According to Nnana (2006), generally, macroeconomic policies in developing countries are designed to stabilize the economy, stimulate growth and reduce poverty. The main objectives of monetary policy remained achieving internal and external balances, and the promotion of non- inflationary growth in output. Specifically, monetary policy measures are designed to ensure stable prices, stimulate growth in the productive sectors and reduce pressure on the balance of payments in order to maintain a stable exchange and positive interest rates. However, the Nigeria government in collaboration with its monetary authority adopts monetary policy to regulate the economy. Thus adopting monetary policy in manipulating the fluctuations experienced so far in the economy, Central Bank of Nigeria (CBN) undertake either contractionary and expansionary measures. The reason for this action is because monetary policy has been successfully introduced and implemented in many developing economies. Therefore, it becomes necessary to examine how variations in monetary policy (money supply) can be used to influence output while keeping the level of poverty at its barest level.


Economists have long been interested in factors, which once reduced to its barest minimum, can cause different countries to grow at different rates and achieve different levels of wealth. One of such factors is the level of poverty. A concise and universally accepted definition of poverty is elusive largely because it affects many aspects of the human conditions, including physical, moral and psychological. Different criteria have, therefore, been used to conceptualize poverty. Most analyses follow the conventional view of poverty as a result of insufficient income for securing basic goods and services. A good example is the definition of poverty as the situation where “a person’s resources (mainly their material resources) are not sufficient to meet minimum needs (including social participation)” (Joseph Rowntree Foundation, 2013). This definition is based on historic definitions such as those above, but also adopts elements from broader definitions of poverty by acknowledging the importance of the social life of the individual and not merely his or her purely material circumstances. Hence, it captures both the absolute and relative characteristics of poverty. Others view poverty, in part, as a function of education, health, life expectancy, child mortality etc. Blackwood and Lynch (1994) identify the poor, using the criteria of the levels of consumption and expenditure. Poverty can also be the outcome of inefficient use of common resources. This may result from weak policy environment, inadequate infrastructure, weak access to technology, credit etc.


However, Ravallion and Chen (2008) state that “a common method used to measure poverty is based on incomes or consumption levels. A person is considered poor if his or her consumption or income level falls below some minimum level necessary to meet basic needs. This minimum level is usually called the “poverty line””. When estimating poverty worldwide, the same benchmark poverty line has to be used, and expressed in a common unit across countries. Therefore, for the purpose of global aggregation and comparison, the World Bank uses reference lines set at $1.25 and $2 per day (in 2005 Purchasing Power Parity terms). Such a simple monetary approach to measuring poverty is widely used, for example in tracking progress towards the fulfilment of the Millennium Development Goals. Such extremely low income levels are very rare in the UK, although in certain cases of extreme poverty (e.g., the homeless), such levels of income might be relevant.


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