Monetary Policy Management in
Nigeria in the Context of Uncertainty
By
Dr. O. A. Uchendu
Ag. Director, Monetary Policy Department,
Central Bank of Nigeria (CBN), Head office, Abuja
Outline of presentation





Introduction
Monetary Policy process
Nature of Uncertainty in monetary
management in Nigeria
Dealing with Uncertainty
Conclusion
Introduction

Monetary management is an integral part of macroeconomic management

Task of monetary management is performed by the CBN on behalf of
government

Monetary policy is the tool for Monetary management

It is the use of instruments at the disposal of the Central Bank to influence
the availability and cost of credit/money in order to achieve macroeconomic
stability

Stance/direction of monetary policy is dictated by the prevailing economic
situation and Policy Objectives which have remained broadly the same over
the years - Price stability; sound financial system, balance of payments
viability and economic growth and development.
Introduction…

For most central banks the objective of price stability is given premium
over others in the conduct of monetary policy

In many instances, however, the laws establishing the central bank
imposes a dual mandate of low inflation and high growth

Monetary Policy effects are transmitted through a chain linking CBN
actions to the economic goals/activity.

Macroeconomic aggregates such as output, employment and prices are in
turn, affected by the stance of monetary policy via transmission
channels: interest rate or money; credit; wealth or portfolio; expectations
channel; and exchange rate channels
Introduction…

Effectiveness depends on the level of development of financial system

A key challenge in monetary management is how to deal with uncertainty

Monetary policy must be forward looking and, thus, relies heavily on the
outlook for key macroeconomic variables

Future is generally uncertain, and so is the overall environment of
monetary management

From practical stand point, the monetary policy maker must identify the
specific risks monetary management faces within the context of the
economy in order to deal with those risks correctly
2. Monetary Policy Process

Monetary policy process is fairly complex and involves:
 setting objectives (primary focus of monetary policy)
 choosing a nominal anchor (monetary policy strategy),
 financial programming/model
 monetary policy instruments and application
 day-to-day conduct of monetary policy (routine activities
include liquidity management, adjusting policy rate,
communication)
 Feedback, evaluation of outcomes, policy review

Activities are in practice intertwined, and are not necessarily
sequenced as presented here
Monetary Policy Process…
Setting Objectives

Objectives of monetary policy are well documented - price stability,
high and sustainable output and employment, viable external sector,
etc.

Yet, every central bank must identify the primary focus of its own
monetary policy

Monetary policy is widely acknowledged as a potent instrument for
stabilizing inflation and output over the business cycle, hence the
popularity of the dual mandate


Each of the goals is important in its own right.
The CBN is expected to conduct monetary policy in such a manner as
to ensure price and output stability in the long run.
Monetary Policy Process…
Nominal Anchor



Generally, the two kinds of nominal anchor:
quantity-based nominal anchor; and
price-based nominal anchor.

The quantity based nominal anchor targets money while the
price-based nominal anchor targets exchange rate or interest
rate.

Currently, the CBN uses broad money supply (M2) as the
nominal anchor for monetary policy.
8
Monetary Policy Process…
Monetary Programme/Model
In designing monetary policy the CBN…..


reviews developments in the economy over a period,

articulates the major pressures upon and risks to price
stability; and

formulates a framework which guides its monetary policy
implementation.

This framework is captured in a monetary programme

At present the CBN uses the IMF financial programming
framework which accounts for the four sector of the
economy
9
Monetary Policy Process…
Instruments
Prior to the financial sector reforms of 1986, the CBN
conducted monetary policy by direct control. The
instruments of indirect monetary control include:







credit ceilings;
sectoral credit allocation;
interest rate controls;
moral suasion;
special deposits
issuance of stabilization securities; and
exchange controls, etc.
10
Monetary Policy Process…




Overtime and as a result of financial deepening and
economy-wide macro-economic reforms that commenced
mid 1980s, the CBN shifted to market-based instruments.
Including:
OMO
Cash reserve requirements
Discount window operations
11
Monetary Policy Process…
Liquidity Management
-Deposits of states government. Share of federation account
allocation with the DMBs.
-Emergence of increased capital private inflows.
-Both structural and short-term excess liquidity have continued
to pose a major monetary policy challenge.

It relies on the daily assessment of the liquidity conditions in the
banking system, so as to determine its liquidity needs and thus
the volume of liquidity to allot or withdraw from the market.

Liquidity management is supported by daily liquidity forecasting
12
Monetary Policy Process…
Liquidity Management…

Liquidity management involves the supply/ withdrawal
from the market the amount of liquidity consistent with a
desired level of short-term interest rates or reserve money.

Main source of excess liquidity
-monetisation of oil receipts and sharing of oil profits
receipts
-Government borrowing from CBN.
13
Monetary Policy Process…
Routine M/P making:

Day-to-day conduct of monetary policy by the CBN relies on a
theoretical framework which links the operating target (RM) to the
intermediate target (M2) and to the final objectives of price and
output stability

In principle, the Bank is able to control the RM which has a definite
impact on the broad money

Changes in broad money influence the domestic price level and
output

Open market operations; changes in policy rate and reserve
requirement, and communication are some of the important day-today actions
Feedback, evaluation of outcomes, policy review

3. Uncertainty

For most developing countries, the key risks are the same due
to the similarity of economic and social conditions

In Nigeria, monetary management confronts three kinds of
uncertainty principally



Uncertainty about monetary and other data
Uncertainty about the transmission mechanism of
monetary policy, and
Uncertainty about the fiscal policy outlook.
Uncertainty…

Data



Bulk of the data informing monetary management are
monetary data which are typically subject to frequent
revisions
Quality concerns are often high with other non-monetary
data such as real sector statistics, many of which are
infrequently available
Timing of availability of the real sector statistics less
predictable.
Uncertainty…

Transmission Mechanism

Limited knowledge of the transmission mechanism of monetary
policy is a common feature in developing countries

For Nigeria knowledge of the relative strengths of the
transmission channels of monetary policy is still at the
rudimentary level

Transmission mechanism of monetary policy is not fixed, i.e.,
changes over time

Monetary policy is formulated with some assumptions about the
path (and/or strength of the path) through which policy impacts
on the economy

Uncertainties add to complications of monetary management
Uncertainty…

Highly Uncertain fiscal environment





Fiscal policy matters a great deal for monetary policy
High possibility of fiscal shock in primary commodity
dependent economies like Nigeria
Relatively strong fiscal freedom at the lower tiers means
high risk of fiscal surprises
Fiscal surprises can undermine monetary management
substantially
Risk is enshrined in the possibility of that monetary policy
grossly underestimates or overestimates the magnitude of
needed intervention.
4. Dealing with Uncertainty

As a consequence the conduct of monetary policy by the
CBN involves elements of risk management –

Process requires an understanding of the many sources of risk and
uncertainty that the monetary policy policymakers face

Identifying key risks

Devising, in light of the risks, a strategy for policy aimed at
increasing the likelihood of achieving the goals of policy - price
stability and the maximum sustainable economic growth – over time.
Dealing with Uncertainty…

Data





Bank relies a lot on knowledge of the stable characteristics of certain
variables (data) in forming opinion about the reliability of available
data
Bank recently established a separate Statistics Department to liaise
with the operational departments where monetary statistics are
generated
Bank invests a lot in uplifting the capacity of her staff to manage data
at different levels
Collaboration with the country’s statistical agency, the NBS, to ensure
early availability and improvement in the quality of real sector
statistics which are critical to monetary policy making
Automation of its key data generating processes - e-FASS, ERP and
T24, to aid data collection, storage and retrieval .
Dealing with Uncertainty…

Transmission Mechanism and underlying macro
relationships

CBN encourages and sponsors research and utilizes the outputs of those
studies in making an opinion about monetary policy transmission on a
continuous basis

Monetary policy makers at the Bank learn extensively Nigeria’s and other
countries’ experiences in making assumptions about the transmission path of
monetary policy

Over time experiences are formalized through independent as well as Bankled studies and knowledge sharing

Development of institutional memory- Efforts in this direction has received a
boost in recent years as part of the internal reform initiatives of the Bank
Dealing with Uncertainty…

Dealing with fiscal policy uncertainty
 Bank’s major strategy continues to be to seek closer and
more effective coordination with the fiscal authorities to
obtain early signals



FLAC
Involvement of the Ministry of Finance in monetary policy
formulation
MPC factors into the decision process, staff analysis and
projections of fiscal variables based such developments as the
international oil prices, government budget and past fiscal
behaviors
5. Conclusions




Uncertainty remains a major challenge for monetary
policy not only in Nigeria but every where else.
Central banks generally continue to seek better ways
of dealing with them.
Major approaches are research and close monitoring
of key sources of uncertainty like data generating
institutions and the treasury.
Judgment is key in monetary policy management