The study explores the relationship between monetary policy and private sector investment in Nigeria by tracing the effects of monetary policy through the transmission mechanism to explain how investment responded to changes in monetary policy. Several studies have offered a means to understand the manner in which monetary policy actions affect investment, prominent among them are the Classical school, Majumder (2007), the Keynesian, Barro (1997), and recently the Credit Channel Approach, Kahn (2010), Bernanke and Gertler (1995). The study utilizes primary data which were derived from the questionnaire administered and simple percentage method of analysis and chi-square statistics were used to analyzed the data there in.
There is acknowledgement, OECD (2006), Hare and Fofie (2009) that high growth countries invest in excess of 25 percent of GDP. Investment fuelled by the private sector is recognised as the catalyst for attaining the twin goals of broad based sustainable economic development and poverty alleviation as investment allows for entrepreneurship and employment creation opportunities that increase incomes for the poor and rich alike. Investment is created through internally generated funds such as profits, retained earnings, and financing from shareholders, or externally generated finances through private placement, public offerings of shares on the stock market (IPO’s). Other sources of investment include short term financial sector credit (overdrafts, trade finance, debentures, mortgages, loans), long term capital raising from the secondary markets through corporate debt (preference shares, corporate and infrastructure bonds) and finally foreign direct investment. According to Rama (1993) quoted in Boopen and Khadaroo (2008), the two critical factors impacting private sector investment in industrialized countries are changes in aggregate demand giving rise to the income accelerator and secondly the effect of relative prices of capital and labour and therefore profitability. However in developing countries they allege private sector investment is determined broadly by growth of GDP, (consequently money supply), the level of foreign direct investment (FDI), real exchange rates, public investment, government fiscal deficits, real interest rates and uncertainty. These instrumental factors are complemented by the levels of residual income that private citizens accrue and the liquidity obtaining in the economy. More often then not private sector investment is determined by Government economic priorities established in the short term by the government budget (monetary and fiscal policy) and executed in the long term through a development plan. Monetary policy is one of the principal economic management tools that governments use to shape economic performance. Measured against fiscal policy, monetary policy is said to be quicker at resolving economic shocks. Discussing the impact of monetary policy on private sector investment Kahn (2010), observes that monetary policy objectives are concerned with the management of multiple monetary targets among them price stability, promotion of growth, achieving full employment, smoothing the business cycle, preventing financial crises, stabilizing long-term interest rates and the real exchange rate Nigeria being an import dependent economy is faced with stagnated growth, unstable business cycles and economic fluctuation. This usually results to unemployment, inflation, unproductivity and balance of payment disequilibrium. Government has in one way or the other regulated and controlled the economy to maximize the welfare of the citizens by way of ensuring that the resources are efficiently allocated and used. Like any other developing country, Nigerian government adopts three types of public policies to carry out the objective of income distribution and allocation of resources. These tools of public policy include: monetary policy, fiscal policy and income policy tools. In Nigeria, government has always relied on monetary policy as a way of achieving certain economic objective in the economy such macroeconomic objectives include; employment, economic growth and development, balance of payment equilibrium and relatively stable general price level. The reason for choosing monetary policy is the fact that monetary policy has very serious implications for both fiscal and income policy measures. Monetary policy refers to the combination of measures designed to regulate the value, supply and cost of money in an economy in consonance with the level of economic activities. It can be described as the art of controlling the direction and movement of monetary and credit facilities in pursuance of stable price and economic growth in the economy (CBN 1992)
There is no consensus among economist as to whether government intervention through the use of monetary policy will bring about economic stabilization. This disagreement divided the economy into different schools of thought. They are, the classical school, the Keynesian school, and the monetarist school. Each of them has its view on how variation in monetary aggregates could affect the economic stabilization. The classicists believe that given the equation of exchange and stability in the velocity of money plus the assumption that economy operates at full employment, the change in money supply will only affect price without any effect on real demand, investment and output. The Keynesians on the other hand believe that variations in money supply could lead to an increase or decrease in interest rate. A decrease in interest rate will affect aggregate investment and enhance aggregate income and output. This is based on the belief that interest rate is the key determinant of investment in the market economy. The investment process involves the employment of factors such as labour and capital which lead to increase in total employment. The monetarists base their views on money supply as the key factor affecting the wellbeing of the economy. They believe that an increase in money supply will lead to an increase in nominal demand, and where there is excess capacity they believe that output will be increased. In the long-run, the monetarist position is that the increase in money supply will be inflationary without any effect on investment, employment and aggregate demand.
In spite of these controversies, the Nigeria government in collaboration with its monetary authority still 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 both contractionary and expansionary measures. The reason for this action is because monetary policy has been successfully being introduced and implemented in developing economy. Therefore, it becomes necessary to examine how variations in monetary policy (money supply) can be used to influence output. The examination will cover a period of thirty two years. It is in view of the fluctuating nature of the monetary policy that the researcher intends to analyze the effect of monetary policy on private sector investment.
The main objective of this study is on the analysis of monetary policy effect on privet sector investment in Nigeria. But to aid the successful completion of the study, the researcher intends to achieve the following specific objectives;
1.4 RESEARCH HYPOTHESES
To aid the successful completion of the study, the following research hypotheses were formulated by the researcher
H0: monetary policy has no effect on the growth of private sector in Nigeria
H1: monetary policy has effect on the growth of private sector in Nigeria
H02: there is no significant relationship between monetary policy and the growth of Nigeria’s economy
H2: there is a significant relationship between monetary policy and the growth of Nigeria’s economy
It is believed that at the completion of the study, the findings will be of great importance to the management of central bank of Nigeria who are saddle with the responsibility of formulating these policy, as the findings of the study tend to pin-point the effect of the policy on private sector, the study will also be beneficial to the management of private businesses to align themselves with policy makers to see how they can influence the policy to their own benefit.
The study will also be beneficial to researchers who intend to embark on a study in a similar topic as the findings will serve as a spring board for further study, finally the study will be of benefit to teachers, students, lecturers, academia and the general public as the study will add to the pool of existing literature
The scope of the study covers an analysis of monetary policy effect on private sector investment in Nigeria from 1981-2013. In the cause of the study, there were some factors which militate against the scope of the study;
1.7 OPERATIONAL DEFINITION OF TERMS
A policy is a deliberate system of principles to guide decisions and achieve rational outcomes. A policy is a statement of intent, and is implemented as a procedure or protocol
Monetary policy is the process by which the monetary authority of a country, like the central bank or currency boarrd, controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency
The private sector is the part of the economy, sometimes referred to as the citizen sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the State
1.8 ORGANIZATION OF THE STUDY
This research work is organized in five chapters, for easy understanding, as follows Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study. Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion, and recommendations made of the study.