ABSTRACTS
Open market operation was introduced as a monetary policy tool in Nigeria in 1993. Since then, it has been
extensively used in conjunction with other tools such as reserve requirement, discount window operation, and moral
suasion as an instrument of price stability; however, inflation in Nigeria has not reduced to the desired single digit
level on a
consistent basis. It is against this background that, our paper investigated the impact of OMO as a tool for
monetary policy on price stability in Nigeria from 1993-2007. Using OLS regression model, our result reveals that
open market operation has positive non-significant impact on consumer price stability as proxied by inflation rate in
Nigeria. Our result also reveals that there was a positive correlation between
open market operation and consumer
price stability of the Central Bank of Nigeria for the period, therefore remains a useful tool, hence our
recommendation is that it should be used in conjunction with other relevant ones in the maintenance of price stability
in Nigeria.
Introduction
The goals of indirect Open Market policy in the developing countries like Nigeria are usually to contribute to the stability of overall output growth, achieve and maintain low unemployment, and maintain predictable exchange rates with other currencies. Apart from the stated objectives, the policies are adopted to stabilize prices, control money supply and monitor credit creation by financial institution. In Nigeria, the outcomes of the indirect monetary tools suggest that Nigeria does not often enjoy ideal conditions to adopting a monetary policy regime aimed primarily at achieving the objectives. One of the reasons is that the Nigerian macroeconomics environment often faces a very volatile macroeconomic environment and a more acute inflation output trade-off than other emerging open market economies which have embraced price stabilization programs (Alimi and Alese, 2017). Moreover, it could often be observed that the apex bank adopted different mix of indirect tools to stabilize price and control the supply of money in circulation. The use of these policy instruments has exposed the country to price and quantity-type shocks, which renders price stabilization to be more complicated. Thus, given the above, the problems associated with the use of indirect monetary policy tools owing to its objective of maintaining stability are inflation and money supply.
Monetary policy refers to a combination of measures designed to regulate the value, supply and cost of money in an economy, in consonance with the expected level of economic activity. It has been argued that the objectives of open market policy include price stability, maintenance of balance of payments equilibrium, promotion of
employment and output growth, and sustainable development and these objectives are necessary for the attainment of internal and external balance, and the promotion of long-run economic growth (Nnanna, 2001). The importance of price stability is derived from the harmful effects of price volatility, which undermine the ability of policy makers to achieve other laudable macroeconomic objectives.
Statement of the problem
However, the success of monetary policy often depends on the operating economic environment, the institutional framework adopted, and the choice and mix of the
instruments used. In Nigeria, the design and implementation of open market policy is the responsibility of the Central Bank of Nigeria (CBN). The mandates of the CBN as stated in the CBN Act of 1958 as amended include; issuing of legal tender currency, maintaining external reserves to safeguard the international value of the currency, promoting monetary stability and a sound financial system and acting as banker and financial adviser to the Federal Government. All these objectives are aimed towards the maintenance of stable price in the country. As have been observed over the years, Nigeria’s consumer prices are very volatile, and more unpredictable than in other emerging open market economies countries due to policy inconsistency of monetary policy regulators and again partly because of the long rule of military regime in the country, which created problems for the conduct of a
monetary policy aimed at price stability. In an attempt to maintain price stability in the economy, the Central bank of Nigeria uses several monetary policy instruments such as open market operation, reserve ratio etc. However, Open Market Operation as a monetary policy tool in Nigeria was introduced at the end of June 1993 and is conducted wholly on Nigerian Treasury Bills (NTBs), including repurchase agreements (repos). OMO entails the sale or purchase of eligible bills or securities in the open market by the CBN for the purpose of influencing deposit money, banks’ reserve balances, and the level of base money and consequently the overall level of monetary and financial conditions. In this transaction, banks subscribing to the offer, through the discount houses, draw on their reserve balances at the CBN thereby reducing the overall liquidity of the banking system and the banks’ ability to create money via credit.
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