Background of the Study

Monetary policy as a technique of economic management is to bring about sustainable economic growth and development. This has been the pursuit of nations, as observed by Onyewu (2012) and formal articulation of how money affects economic aggregates. And this view dates back to the time of Adam Smith and later championed by the monetary economists. Since the expositions of the role of monetary policy in influencing macro-economic objectives like economic growth and development which include employment generation, stability in prices, growth in Gross Domestic Production (GDP), equilibrium in balance of payments and host of others monetary authorities are saddled with the key responsibility of using monetary policy to formulate and implement policies that gear toward driving the economy on an even keel.

If the economy slows and employment declines, policy makers will be inclined to soften monetary policy to stimulate aggregate demand. When growth in aggregate demand is boosted above growth in the economy’s potential to produce, slack in the economy will be absorbed and employment will return to a more sustainable path. In contrast, if the economy is showing signs of overheating and inflation pressures are building, the Central Bank will be inclined to counter these pressures by tightening the economy through monetary policy to bring growth in aggregate demand below that of the economy’s potential to produce for as long as necessary to defuse the inflationary pressures and put the economy on a path to sustainable expansion. While these policy choices seem reasonably straightforward, monetary policy makers routinely face certain notable uncertainties because the actual position of the economy and growth in aggregate demand at any point in time is only partially known as key information on variables only come with lags such that policy makers are constraint to rely on estimates of these economic variables when assessing the choice of appropriate policy and therefore could act on the basis of misleading information.

More so, monetary policy is not the only force acting on output, employment, and prices. Many other factors affect aggregate demand and aggregate supply and, consequently, the economic position of economic units. Some of these factors can be anticipated and built into spending and other economic decisions while others like shifts in consumer and business confidence, posture of creditors, natural disasters, disruptions in the oil market that reduce supply, agricultural losses, and slowdowns in productivity growth can be totally unpredictable and influence the economy in unforeseen ways.

The works of Christiano et al. (1999); Mishkin (2002); Bernanke et al. (2005); and Rafiq and Mallick (2008) showed that there is substantial evidence of the effectiveness of monetary policy and the consumption of imported foods in innovations on real economic parameters in developed economies like the United States (US) and some core European countries. However, there have been various regimes of monetary policy and consumption of imported foods in Nigeria.

The economy often witnessed either expansionary or contractionary monetary policy in an attempt to achieve its set objectives. Nevertheless studies by Gertler and Gilchrist (1991); Batini (2004); Folawewo and Osinubi (2006); Onyemu (2012); Fasanya et al. (2013) observed that despite efforts made towards achieving the desired macroeconomics objectives through monetary policy and the consumption of imported foods in Nigeria have not been sustainable enough as there are evidences of relatively high rate of unemployment, increased poverty rate, low standard of living, unacceptable rate of inflation etc. especially in less developed economies. The prevalence of these macroeconomic vices as mentioned above clearly showed that the issues of economic development especially in Nigeria has not been visibly addressed by monetary policy. This therefore gave rise to the need to investigate the actual relationship existing between the monetary policy and economic growth in Nigeria. The question therefore remains: “could the period of growth and development be attributed to appropriate monetary policy or could the period of economic down-turn be blamed on factors other than monetary policy inefficiencies?

It is in against the following backdrop that the objectives of this study is to reassess monetary policy and the consumption of imported foods in Nigeria by determining the relationship existing between reserve ratio (RR) and the gross domestic product (GDP), the relationship existing between interest rate and GDP and the relationship existing between monetary policy rate (MPR) and the GDP.

One of the challenges that is facing any modern economy is the achievement and sustenance of economic growth and development with the ultimate objective of enhancing the welfare of its citizens. This has prompted development economics to propose a paradigm shift from Pro-Poor Growth to inclusive growth. Migap, Okwanya and Ojeka (2015) posited that growth is good and sustained high growth is better, but sustained high growth with inclusiveness is the best of all. Nigeria has long been recognized as the largest African nation, due to its estimated population of 174 million inhabitants (2012estimate), but it is only recently, that it has been acknowledged as the continent’s largest economy (Mckinsey Global Institute-MGI, 2014). However, despite strong GDP growth (productivity and per capita GDP) between 1999 and 2010, poverty did not decline materially (Migap, Okwanya and Ojeka, 2015). While the World Bank (2013) ranked Nigeria as one of the fastest growing economies of the world with GDP growth rates of 7.8%(2010), 7.4%(2011), 7.5%(2012) and 7.6%(2013), the UNDP (2013), ranked Nigeria among the countries with Low Human Development Index (HDI) of 0.471, placing the country at the 153rd position out of a total of 186 countries sampled. Growth in Nigeria in the last decade therefore has not been adequate to be accompanied by reduction in widespread poverty and unemployment. This clearly shows that the present economic growth is not inclusive enough and needs to be addressed.

Therefore, the inability of economic policies to guarantee balanced of imported foods in to the country and inclusive growth to ensure high employment and equal opportunities which will enhance reduction of widespread poverty in the economy forms the research problem to be investigated in this paper. One of these macroeconomic policy options for addressing the problems of inadequate growth and widespread poverty in Nigeria is the monetary policy. It is believed that monetary policy can be conducted efficiently in an economy to achieve inclusive growth that will reduce unemployment and widespread poverty to guarantee equal opportunities in the economy.

Monetary policy is one of the available tools for macroeconomic management. It aims at controlling the growth of monetary aggregates and assists other policy tools to achieve macroeconomic goals of low inflation, balance of payments viability and sustainable output growth. It is generally believed that monetary policy works in concert with other policy tools to enhance the achievement of overall macroeconomic objectives. Therefore, monetary policy is central to macroeconomic management and is indeed supportive of other policy tools, especially fiscal policy in enhancing economic growth and development of both developed and developing economies.

The ultimate objective of monetary policy is to promote sound economic performance and high living standards of the citizens. This gives the citizens confidence in the currency as a store of value, unit of account and medium of exchange, so that they can make sound economic and financial decisions. Monetary policy impacts on the wellbeing of individuals depending on the policy measures put in place. For instance, monetary policy affects welfare by influencing the cost and availability of credit in the economy. An expansionary monetary policy reduces the cost of credit and thus, boosts investments. This would in turn increase output and employment and wellbeing (CBN, 2011). The reverse also holds when the monetary authorities seek to pursue a restrictive monetary policy.

The mandate of the CBN is to achieve and maintain price stability in the interest of balanced and sustainable economic growth. Price stability reduces uncertainty in the economy and provides a favourable environment for growth and cumulative employment creation over the long-term. This makes monetary policy a key element of macroeconomic management and its effectiveness is crucial to the overall economic performance of Nigeria. This paper therefore seeks to examine theoretically, the possibilities of achieving inclusive growth in Nigeria through the conduct of monetary policy among other economic policies. The paper also in addition to tracing the evolution of the concept of inclusive growth and why growth must be inclusive, constructs a theoretical model for monetary policy and inclusive growth in Nigeria and provides the drivers of inclusive growth in the economy.

Inflation occurs when there is a general and continuous rise in the prices of goods and services in the economy. A major cost is related to the inefficient utilization of imported resources because economic agents mistake changes in nominal variables for changes in real variables and act accordingly. During inflationary periods opportunity cost of holding money is increased causing inefficient use of real resources in transactions.

Therefore, inflation weakens the purchasing power of money and sinks the standard of living of the citizenry. Policy makers have tried to adopt appropriate policies that can combat inflation and ensure price stability. Generally, the level of money supply and the stock of goods and services are two crucial factors that determine the level of inflation in an economy. When inflation becomes persistent, the duo becomes the primary targets of policies. An excess or shortage in the supply of money could either induce excess aggregate demand resulting in higher inflation rate or induce stagnation thus retarding economic growth and development. While fiscal policy proves helpful in combating inflationary pressure, monetary policy has been the principal tool often employed by the central banks to ensure price stability. While it is not arguable that monetary authority have formulated various policy measures as an attempt to curbing inflationary menace, the effectiveness of policy pursuit to curb inflationary environments is questionable as most economies, particularly developing ones still experience inflationary challenges.

For years, the Nigerian economy faced socio-economic stagnations traceable to inflationary spiral, particularly in the 1970s when inflation increased to a double digit. The analysis of the non-core inflation in the early 1990s reveals inflation rate of 63.6% in late 1994. Headline inflation rose rapidly by 1995 to reach an all time high of 72.8%, though it decelerated gradually to a single digit in 1997. In the same vein, core inflation, which began a gradual ascent in early 1990, peaked at about 69.0% in the mid-1995 before slowing down in 1997. Since, then inflation remained at single digits between 1998 and 2001. In 2003, macroeconomic stability was restored, following the gains of a comprehensive and consistent economic reform program. The low inflation rate regime did not last for too long with the resurgence of spikes in headline and core-inflation between 2000 and 2001. Headline inflation rate remained at double digits between 2002 and 2005 as it recorded 12.9%, 14%, 15%, and 17.9% in the respective years. However, it decelerated dramatically to 8.24% and 5.38% in 2006 and 2007 before rising astronomically to 11.60% and 12.00% in 2008 and 2009 in that order, although fell marginally to 11.8% and 12.3% in 2010 and 2013 respectively. In sum, although the workings of economic theory are clear that monetary policy abates inflationary pressure but available empirical studies provide conflicting evidences. This study provides new evidence base on an emerging African country, Nigeria. The investigation is an attempt to known empirically the degree at which monetary policy is effective to controlling inflation in the economy. The study relies on historical quantitative data.

Population ageing around the world is likely to increase the demand for healthier products and reduce the consumption of starchy staple foods. There will probably be a higher demand for fish protein, while meat consumption is expected to level off. In theory, healthier eating habits will lengthen human life expectancy, which in turn will prolong the employment period. Along with this, the proportion of educated people is expected to rise; thus, work productivity and disposable income should also increase. The income elasticity of demand for food varies greatly among countries.

For low-income countries, increases in income will be accompanied by almost proportional increases in expenditure on food; whereas for high-income countries, elasticities are much lower. Thus, while per capita food consumption is reaching a plateau in more mature economies, the increase in disposable income in some emerging economies will result in an increase in food consumption, but also a composition change, with greater demand for important nutrients such as protein. Nonetheless, significant portions of the population in Africa and Asia will remain undernourished.

Consumer preferences for food products will probably continue to shift in the period until 2030. The main trends that will probably influence future food demand are food safety and health benefits, social concerns, production systems and innovations, sustainability and food origin. To contend with all these drivers of demand, fisheries, aquaculture and agriculture will need to intensify in sustainable and efficient ways. The population increase very much depends on the fertility rate. The UN’s medium variant projection sees fertility rate decline from 2.52 children per woman in 2005–2010 to 2.17 children per woman in 2045–2050. Despite the fact that the fertility rate in developed regions increased slightly to an estimated level of 1.66 children per woman in 2005–2010, all the major increases will happen in the developing world, in Africa and Western Asia in particular.

According to Lutz and Samirm(2010), the devastating AIDS pandemic in the worst-hit countries of Africa will shorten life expectancy and eventually slightly slow population growth. However, it will not have a significant impact on population over time. Slow population growth brought about by reductions in fertility rate leads to population ageing. This refers to the process whereby the population’s proportion of older persons increases while that of younger persons decreases. Currently, about 8 percent of the total world population is above the age of 65 years (Table 2). According to the UN report World Population Prospects. The 2010 Revision, in the more developed regions,1 22 percent of the population is already aged 60 years or over, and this proportion is projected to reach 32 percent in 2050. In developed countries as a whole, the number of older persons has already surpassed the number of children (persons under 15 years), and by 2050 the number of older persons in developed countries will be nearly twice the number of children. Lutz and Samir (2010) report that Asia is the most rapidly ageing continent, where the proportion of inhabitants above 65 will increase from the current 7 percent to 21 percent by 2050, that is, higher than current European level (16 percent). China’s current proportion of people above 65 is only half of that of Europe. However, China’s population is also experiencing a significant ageing trend and will rapidly be aligned with Europe, reaching 27 percent of people above 65 by the middle of this century.

Although the projected population growth varies from region to region, the projected increase in life expectancy together with declines in fertility rates will result in significant ageing of the population in all regions in the longer run. Even in Africa, where the population is still very young (only 3 percent of the population are above 65), the proportion of people aged 65 and older will reach 5 percent by 2030 and 7 percent by 2050. A supply chain is a network of product-related business enterprises through which products move from the point of production to consumption, including pre-production and post-consumption activities. Each link in a food supply chain affects the availability, affordability, diversity and nutritional quality of foods. Moreover, as discussed in Chapter 6, the handling of food throughout a chain has an impact on nutrition, price and accessibility, which in turn affects consumer choices, dietary patterns and nutritional outcomes (FAO, 2013).

In supply chains, production is focused on efficient logistics using upstream and downstream businesses aimed mostly at pushing products to market. Supply chains are concerned with costs and how long it takes to present the product for sale, with the main objective of chain management being to maximize profits by reducing the number of links in the chain and improving efficiency. Supply chains work to keep to a minimum issues such as bottlenecks in supply, costs incurred, and time to market. Food supply chains are currently changing in many ways, driven by economic development, rapid urbanization and facilitated in some cases by policy reforms that are resulting in consumers receiving food in many diverse ways (FAO, 2013b).

With globalization and the liberalization of markets as well as the rise of the middle class in developing countries, fish trade has liberalized, with supply chains lengthening. Traditionally, developing countries mostly exported to major developed country markets, whereas today some developing countries are likely to export within their own regions to meet growing demand for food, especially in the growing economies of Latin America, Africa and Asia (FAO, 2013a). International supply chains are diverse and complex, but are typically led by vertically integrated companies, including large processors, distributors and retailers. These companies coordinate activities to set themselves apart from the competition (FAO, 2013b; De Silva, 2011).

Income and price elasticities of imports refer to the degree of responsiveness of imports to any slight change in the income and prices of imports. Here, the price of imports is usually the relative prices, while the income is the real gross domestic product. The income and price elasticities of imports are very crucial for both economic forecasting and trade policy analysis. Thus, a number of studies have attempted the estimates of income and price elasticities of imports and other related issues across countries of the world. However, the values of the income and price elasticities of imports remained a subject of diverse opinion in most international economic policy debates. This is due to the fact that most of these empirical studies continue to show conflicting results. Also, there appears to be dearth of empirical studies that have undertaken a systematic estimation of income and price elasticities of imports using Nigerian data. In this section, some recent empirical studies are extensively reviewed. Vojnovic and Unevska (2007), estimated the price and income elasticities of export and import and economic growth for the Republic of Macedonia during 1998 – 2006. The study follows the ARDL modelling framework. The results confirmed the existence of long term relationship between export and import demand and relative prices and income. Also, the study found evidence for high import elasticity on domestic income changes and relatively significant export elasticity to changes in the world income.

The study concluded that the higher income elasticity of import over that of export accounts for the trade balance deterioration. Chimobi and Ogbonna (2008), estimated the aggregated import demand function following cointegration and error correction modelling approaches over the period 1980 – 2005. The results suggested that real GDP largely explains the import demand. Bobic (2009), estimated income and price elasticities of Croatian trade using panel data approach. The using of panel data method was to disaggregate data which allowed for sectoral differences in the data as well as dynamic adjustment of the data through time.

Statement of the Problem

One of the major objectives of monetary policy in Nigeria is price stability on imported foods. But despite the various monetary regimes that have been adopted by the Central Bank of Nigeria over the years, inflation still remains a major threat to Nigeria’s economic growth. Nigeria has experienced high volatility in inflation rates especially on imported foods. Since the early 1970’s, there have been four major episodes of high inflation, in excess of 30 percent. The growth of money supply is correlated with the high inflation episodes because money growth was often in excess of real economic growth. However, preceding the growth in money supply, some factors reflecting the structural characteristics of the economy are observable. Some of these are supply shocks, arising from factors such as famine, currency devaluation and changes in terms of trade.

The first period of inflation in the 30 percent range (12months moving average) was in 1976 (CBN, 2009). One of the factors often adduced for this inflation is the drought in Northern Nigeria, which destroyed agricultural production and pushed up the cost of agricultural food items, a significant increase in the proportion of the average consumer’s budget. In addition, during this period, there was excessive monetization of oil export revenue, which might have given the inflation a monetary character.

In addition, in the late 1980’s, following the Structural Adjustment Program, the effects of wage increases created a cost-push effect on inflation. In the long run, it was the structural characteristics of the economy, coupled with the growth in money supply that translated these into permanent price increases. In 1984, inflation peaked at 39.6 per cent at a time of relatively little growth in the economy. At that time, the government was under pressure from debtor groups to reach an agreement with the International Monetary Fund, one of the conditions of which was devaluation of the domestic currency. The expectation that devaluation was imminent fuelled inflation as prices adjusted to the parallel rate of exchange. Over the same period, excess money growth was about 43 percent and credit to the government had increased by over 70 percent (CBN, 2010).

In other respects the cause of the inflation may also be adduced to the worsening terms of external trade experienced by the country at that time. It is possible therefore that Nigeria’s inflationary episodes were preceded by structural or real factors followed by monetary expansion.

The third high inflation episode started in the last quarter of 1987 and accelerated through 1988 to 1989. This episode is related to the fiscal expansion that accompanied the 1988 budget. Though initially the expansion was financed by credit from the CBN, it was later sustained by increasing oil revenue (occasioned by oil price increase following the Persian Gulf War) that was not sterilized. In addition, with the debt conversion exercise, through which “debt for equity” swaps took place, external debt was repurchased with new local currency obligations. However, with the drastic monetary contraction initiated by the authorities in the middle of 1989, inflation fell, reaching one of its lowest points in 1991 i.e 13% (CBN, 2010).

The fourth inflationary episode occurred in 1993, and persisted through the end of 1995. Though inflation gathered momentum towards the tail end of 1992, it reached 57 percent by the end of 1994, the highest rates since the eighties, and by the end of 1995, it was 72.8 per cent (CBN, 2009). As with the third inflation, it coincided with a period of expansionary fiscal deficit and money supply growth. The authorities found it too difficult to contain the growth of private sector domestic credit and bank liquidity. Continuous fall of the inflation rate has been experienced since 1996 as a result of stringent monetary policies of the Central bank. It however, increased in 2001, 2003, 2005, 2008, 2012, and 2015 to 16.49%, 23.84%, 11.56%, 15.1%, 12%, and 9.6% respectively (CBN, 2010; CBN, 2011, CBN, 2012, CBN, 2015).

Structural factors have proven to be important in the inflation spiral. Reduction in oil revenue (a supply shock) led to a reduction in real income, with serious distributional implications. As workers pushed for higher nominal wages, while producers increased mark-ups on costs, an inflationary spiral followed. In addition to these factors the government also had a transfer problem in order to meet debt obligations.

The failure of the monetary policy in curbing price instability on imported foods has caused growth instability as Nigeria’s record of development has been very poor. In marked contrast to most developing countries, its GDP was not significantly higher in the year 2000 that it was 35 years before. As many economic indicators show, Nigeria’s economy has experienced different growth stages. The GDP growth rate recorded negative growth in the early 1980s (-2.7 in 1982, 7.1 in 1983 and -1.1 in 1984). The growth rate increased steadily between 1985 and 1990 but fell sharply in 1986 and 1987 to 2.5% and -0.2%. Except in 1991 when a negative growth rate of -0.8% was recorded, 1990s witnessed an unstable growth. However, the growth rate has been relatively high since 2001 until mid 2014 when it began to fall from 6.54% in 2014Q2 (CBN, 2015) to -0.36% in 2016Q1 (NBS, 2016) due to oil price crash. An examination of the long-term pattern reveals the following secular swings: 1965-1968 Rapid Decline (civil war years), 1969-1971 Revival, 1972-1980 Boom, 1981-1984 Crash, 1985-1991 Renewed Growth, 1992-2013 Wobbling, 2014-2016 contraction.

The main thrust of this study is to evaluate monetary policy and the consumption of imported foods in Nigeria from 2005to 2014. This would go a long way in assessing the extent to which the monetary policies have impacted on the importation of foods in Nigeria using the major objectives of monetary policy as yardstick.

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Updated: 10th August 2017 — 9:39 pm