CHAPTER ONE INTRODUCTION 1.1. Background to the Study The fundamental roles of fiscal policy, monetary policy and trade policy cannot be over-emphasized in any open economy, especially in terms of economic management. Notably, the quests to achieve and sustain macroeconomic objectives explain the vital roles played by fiscal, monetary and trade policies in both developed and developing economies, which Nigeria is inclusive. Ishola & Titiloye (2020) noted that it is the goal of any rational government to improve the living conditions of her populace through major economic policy either through fiscal, monetary or trade policy. Again, these economic policies are mostly used to stabilize and sustain the economic progression, especially during the period of economic crisis. For example, fiscal policy measure is used by government of different economies to counter economic imbalances by adjusting the public spending to moderate taxation which is an important approach to control aggregate demand, financial uncertainty and economic distortions (Idris& Ahmad, 2018). Keynes posited this approach need to be adopted, especially during economic recession so as to build a stable framework to attain full employment; hence, this theoretical model had been practically used as policy guide to sustain economic activities over time (Martes, 2018). Meanwhile, the classicalists argued for effective price mechanism where efficient and robust resources allocation can guarantee economic freedom that is devoid of government intervention in the cause of addressing economic crisis (Chinedu, et al, 2018). On the other hand, monetary policy is adopted by the Apex Bank of any given economy to stimulate collective demand through adjustable changes in money supply and interest rate. In the time of economic crisis, government combines both fiscal and monetary policies to curb fluctuations of business cycle. In a similar vein, government put in place trade policy with the aim of improving trade relation and builds the necessary safety net against external shocks through stabilized exchange rate. Over the years, many developing economies have been facing the problem of huge fiscal, monetary and trade deficits, which Nigeria is inclusive. The insufficient and the nature of public goods such as infrastructure and utilities services hugely rely on the rate of government spending, which affect both the nature and condition of macroeconomic framework and fiscal sustainability in any small open economy. Fiscal policy, monetary policy and trade policy in Nigeria are characterized by profligacy, poor financial framework, which is strengthened by poor management of huge oil revenue that pose a threat to macro-economic stability (Ayomitunde, et al., 2018). Relatedly, policy makers in Nigeria have implemented series of trade policies through various objectives, for example the export promotion strategy in 1981; exchange rate liberalization and trade liberalization in 1986; creation of Nigerian Export–Import in 1991; and several trade bilateral and multilateral agreements with different countries among others (Adigwe, 2015). The main objectives of these trade policies are: to achieve Nigeria’s macro-economic stability and to improve trade nexus with the global community via hitch-free inflow and outflow of both liquidity and non-liquidity transactions across the borders, while these activities are expected to increase international competitiveness which in the long run could bring about an improvement in national economic growth (Afolabi, et al., 2020). However, in the time past, the Nigerian economic growth has not significantly tapped from those expected gains from trade policies which could have been traced to the mono-economic nature of the Nigerian economy where government mostly relied on oil revenue. This has caused incessant rise in budget deficit in recent times; hence, there is need for policy makers to adopt effective fiscal and monetary measures so as to stabilize the aggregate economic outlook. Notably, a persistent rise in military spending to counter terrorism and additional unproductive outlays might have contributed to slow economic growth in Nigeria. In the meantime, Idris & Ahmad (2017) posit that continuous show of fiscal deficit in Nigeria may be connected to over dependency on gains from oil coupled with external borrowings. Consequently, significant effects of improved fiscal measures would increase aggregate growth which could curb persist ineffective monetary and fiscal policies. It is worth agreeing with the position of Khattry & Rao (2002) which state that trade policy improves fiscal balances through rise in tax revenue. And this is expected to increase the size of government revenue that could be channeled to various productive sectors via government spending on infrastructure. In lieu of the above narrative on the nexus between fiscal policy and economic growth, or nexus between monetary policy and economic growth, or relationship between trade policy and economic growth, it has been observed through the studies that increase in government spending and trade openness and decrease in interest rate have not transmitted to improved economic growth in Nigeria. Interestingly, further related studies have equally come up with mixed revelations. For example, Kemal et al. [2003] conclude that regulated and restricted flow in the level of imports expand the nation’s economic output, whereas Martes [2018] observed that trade liberalization impact negatively on productivity rate. Again, Amassoma et al., (2018) explained that monetary policy is a vital tool which could be used to achieve price stability, and hence strengthen both private and foreign investors that guarantees economic progress in the long. Also, Idris et al., [2018] posit that robust and effective fiscal operations guarantee economic growth since any slight distortion in fiscal operation in the form of deficit brings adverse effect on growth rate, which further substantiate the epistemology method of neo-classical theory that posit growth-retarding effects on the general economic performance due fiscal deficit. With this narrative, it can further be observed that studies on the subject matter in Nigeria have come up with different results, but most of these previous works are not encompassing in terms of linking fiscal policy, monetary policy, trade policy and economic growth rather most of these works had either attempted to link monetary policy with economic growth or relate fiscal policy with economic growth. It is interesting to note that this study intends to fill the gap observed from previous studies through empirical investigation into the nexus between fiscal policy, monetary policy and economic growth in Nigeria. Going forward, series of questions arise, which this study seeks to address; thus, do fiscal, monetary, trade policies matter on economic growth? What is the nexus between economic growth and fiscal, monetary, trade policies in Nigeria? Therefore, the aim of this study is to empirically estimate the link between the key variables while the outcome from this study would further provide guide for both government and policy makers so as to address the current perennial economic recession in Nigeria. 1.2. Statement of the Problems The failure of the monetary policy in curbing price instability has caused growth instability as Nigeria’s record of growth and development has been very poor. An examination of the summary of the long-term pattern reveals the following secular swings: 1965-1968 Rapid Decline (Civil War Years), 1969-1971 Revival, 1972-1980 Boom, 1981-84 crash, 1985 – 1991 Renewed Growth, 1992-2010 Wobbling, (CBN, 2010). Despite the various monetary policy systems adopted by the Central Bank of Nigeria over the years, the menace of inflation to Nigeria’s economic growth still persist. Nigeria has experienced high level of instability in inflation rates. Since the early 1970’s, the country have recorded more than three incidence of high inflation in excess of 30 percent. The high rate of inflation is associated with growth of money supply, which was often in excess of real economic growth. Furthermore, the dualistic nature of Nigeria financial and product market constitutes a major restriction in the formulation and efficient implementation of monetary policy. The informal sector in Nigeria accounts for a greater percentage of the GDP, thus the existence of a large informal credit market and exchange rate market in Nigeria has many consequences for the transmission mechanism of monetary policy. Furthermore, the payment system is a fundamental medium that connect the financial and the real sector of the economy. In Nigeria the payment system is primarily cash base and the prominence of cash for transaction purposes increases the level of money/currency in circulation which renders monetary control difficult. Although, in the recent years, various electronic means of payment has been in vogue and gradually replacing cash transactions In the light of the above therefore, this study intends to subject these issues to empirical examination in order to evaluate the effect of government monetary policy on banking industries and economic growth in Nigeria. 1.3 Objective of the Study The main objective of monetary policy is to achieve price stability and finally economic growth. This study intends to evaluate the impact of government monetary policy on banking industry and economic growth in Nigeria using major growth components. However, the following specific objectives will be pursuing: i. To assess the impact of the interest rate on deposit money banks performance in Nigeria. ii. Examine the effect of exchange rate on price stability in Nigeria iii. Investigate the influence of inflation rate on economic stability 1.4. Research Questions i. What are the impacts of the interest rate deposit money banks performance in Nigeria? ii. To what extent does exchange rate enhance price stability in Nigeria? iii. What are the influences of inflation rate on economic stability? 1.5. Research Hypothesis The hypotheses to be tested in the course of this research work are: H01: Interest rate does not have significant influence on deposit money banks performance in Nigeria H02: Exchange rate does not have significant influence on Price stability in Nigeria H03: Inflation rate does not influence economic stability in Nigeria 1.6. Significance of the Study This study will be of immense importance to the monetary authority in achieving macroeconomic targets of price stability and a well sustained economic development. It will also be of great importance to financial institutions in carrying out macroeconomic goals of the country where they operate. This study will propose various ways through which regulatory authorities can influence interest rates and other monetary policy tools to attain their aspiration. It will provide an objective view of the effectiveness of the monetary policy in Nigeria; Lastly, the suggestion in this research will offer recommendations to policy-makers on ways to make the Nigerian economy vibrant through the monetary policy. 1.7 Scope and Limitations of the Study This study will only focus on major growth components such as the gross domestic product and price level. This research will cover all aspect that make up the monetary policy, but our focus will be to empirically investigate the effect of the major ones. This study on the impact of the monetary policy on the macroeconomic variables in Nigeria shall be restricted to the period between 1981 and 2014. Lastly, the study will also investigate the monetary policy instruments that have been adopted in Nigeria since independents to date and equally evaluate its performance. Limitation Of The Study The scope of the study is limited to the relevance of the effect of government financial policies on the economic development financial policies on the economic development as a tools in achieving the improvement of banking services (a case study of GTB plc, Ilorin). 1.9. Operational Definition Of Terms These are the definition of terms of the study. They are as follow: Bank: Bank is a commercial institution which perform various financial activities e.g. accepting and handing of deposit of it customers. Industry: Is the production of goods and services within an economy. The major sources of revenue of a group or company is the indicator of its relevant industry. When a large group has multiple sources of revenue generation. It is considered to be working in different industries. Monetary Policies: Monetary policies as all monetary decisions and measures irrespective of whether their aims are monetary or non-monetary and all non-monetary decision and measures aim at affecting the monetary system Effects: Are the result or an outcome of something.
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