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The purpose of the study was to examine the impact of monetary policy on balance of payment in Nigeria from 1980-2017.The study adopted ex-post research design and was based on analytical examination of dependent and independent variables considered in the work. The data in this study was purely secondary and was sourced from the Central Bank of Nigeria Statistical Bulletin, Bureau of Statistics Publications and Journals. The variables considered in the work were balance of payment, broad money supply, interest rate, exchange rate, foreign direct investments, and trade openness. Preliminary test was carried out on the work to check for the stationary and serial correlation using Augmented Dickey Fuller unit root test and Durbin-Watson statistics respectively. The impact of monetary policy on balance of payment was tested and the result revealed significance which implies that the joint influence of exchange rate, interest rate, trade openness, foreign direct investment and broad money supply on balance of payment was significant. That is, the impact of monetary policy on balance of payment in Nigeria within the period under study was statistically significant. It was recommended that government should deepen the level of finance in the economy as this would encourage investment through provision of adequate credit facilities required for optimal performance of the economy as a whole.



1.1 Background to the Study

Over the years, different adjustment mechanisms to balance of payment disequilibrium have been developed, namely, the monetary approach, the elasticity’s approach and the Absorptions Approach (Dn Plessis et al 1998). Monetary policy in which may be either expansionary or contractionary is a key component of any pro-growth economic system and much so in developing economies such as the Nigerian Economy (Taylor, 2004).

            For most economies, Nigerian economy inclusive, the objectives of monetary includes price stability, maintenance of Balance of Payments equilibrium, promotion of employment and output growth. In general terms, 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 (Nnanna 2001).

            Elaborating further, an expansionary monetary policy is relevant to the triggering of growth of aggregate demand through the stimulation of money supply rate, hence making interest rate lower and credit more available. The central Bank of Nigeria (CBN) formulate and implement monetary policy in the Nigerian economy, making use of tools such as discount rates, cost tools, direct regulation of interest rates, open market operation (OMO), etc. The second category includes direct tools; credit guideline, moral suasion etc.

            Monetary policy is one of the tools of controlling money supply in an economy of a nation by the monetary authorities in order to achieve a desirable economic growth, monetary policies are effective only when economies are characterized by well-developed money and financial markets, the economic environment, institutional framework, choice and the mix of the instrument(s) used. This is where a deliberate change in monetary variable influences the movement of many other variables in the monetary sector.

            Gbosi (2002) posits that monetary policy aims at controlling the supply of money in order to counteract all undesirable trends in the economy, theses undesirable trends may include, but are not limited to; inflation, unemployment, slow economic growth or disequilibrium in the Balance of Payments.

            A review of Nigeria’s monetary policy performance before 1986 reveals that the economic environment that regulated monetary policy was characterized by the supremacy of the oil sector and over-reliance on the external sector in order to maintain price stability and a healthy balance of payment position. The monetary authority relied on the use of direct monetary instruments (tools) like credit ceilings, specific credit controls, administered interest and exchange rates, as well as the prescription of cash reserve requirements and special deposits.

            Quite unfortunately, the underdeveloped nature of the financial markets and the deliberate control and caution imposed on interest rate caused the use of market based instruments to prove abortive.

            The issuance of credit rationing guidelines took dominance as an instrument of monetary policy during this period which basically caused the rates of exchange for the component and aggregate commercial bank loans and advances to the sector (Iyoha, 1995). Rather, we would prefer to combine the amount of money in circulation, the level of interest rate and the functions of credit markets and the banking system as the basic measures designed to regulate the value, supply and cost of money in an economy, in line with the level of economic activity. 

            The sectorial allocation of bank credit in the CBN guidelines was to induce the productive sector and thereby stem inflationary pressure. The fixing of interest rates at seemingly low level was done mainly to promote investment and growth. From time to time, special deposits were imposed to reduce the amount of free reserve and credit-creative capacity of the banks. Minimum cash ratios were stipulated for the banks in the mid-1970s on the basis of their total deposit liabilities. But since such cash ratios were often less than those voluntarily retained by the banks, they proved less effective as a control on their credit operations (Taylor, 1995).

            In the second aspect monetary policies were seen to have focused on stimulating the emergence of a market-driven financial system for effective system for effective mobilization of financial savings and thorough efficient resource allocation. The instrument of the market-based framework is the open market operation which is backed up by reserve requirements and discount window operations. In order to improve macroeconomic stability, efforts were focused at the management of excess liquidity. Also effective from August 1990 was the use of stabilization instruments for the purpose of reducing the enormous magnitude of excess liquidity. The reintroduction of the Dutch Auction System (DAS) of foreign exchange management in 2002 begot relative stability and stemmed the exhaustion of reserves in the second half of 2002.      

            The central bank of Nigeria in its effort to respond to the dynamic economic and financial environment, introduced a monetary framework in December, 2006, tagged “Monetary Policy Rate” (MPR), with the paramount goal of achieving stability in the value of the Domestic currency through stability in short-term interest rates around the “operating target”. The MPR serves as an indicator rate for transactions in inter-bank money market as well as other deposit money banks (DMBs) interest rate. The fore mentioned forms an overview of how Nigeria’s monetary authority has been experimenting with different policy measures to ensure internal stability and equilibrium in the balance of payments, all to no avail.

1.2 Statement of the Problem

            The rate of instability on the overall balance of payment of Nigeria has, in recent times witnessed persistence which invariably stems the serious concern and question on the potential cause(s) of this imbalance. Consequently, Nigeria had paid more to foreign countries than she gets. The consequence, gross depletion of Foreign Reserves in Nigeria, like any other country aims at maintaining a stable equilibrium in her balance of payments as one of the objectives of macroeconomic policy (Soludo, 2003).

            Invariably, it has also attracted reduction in the country productive capacities and persistent inflationary pressures – this depletion.

            According to Fleermuys (2005), the monetary approach to the balance of payments has been blamed for disregarding the fiscal and real factors that influence changes in the balance of payments, while concentrating only on monetary factors. The feeble standing in the country’s current account was due to the deterioration in the services and income account which outweighed the surplus recorded in the merchandise trade and involved net transfer account, Gbosi (2002).

The balance of payments in Nigeria recorded noteworthy progress between the years 2004 -2005. Nevertheless, this was not long lasting as it worsened in 2008 as a result of the global financial & economic meltdown coupled with the decline in prices of crude oil in the international oil market, Gbosi (2002). Certain measures were set in place aimed at correcting balance of payment using monetary policy instrument. This informed the necessity to investigate the effects of monetary policy variables on Nigeria’s balance of payments. However, this work specifically seeks to examine the impact of monetary policy on balance of payment in Nigeria.

1.3 Objective of the Study

General Objective

            The general objective of this study is to determine the effect of monetary policy on balance of payment in Nigeria from 1980 to 2017.

Specific Objectives

However there are specific objectives this study seeks to attain which includes thus:

1)         To examine the impact of money supply (M2) on balance of payments in Nigeria.

2)         To examine the impact of exchange rate on balance of payments in Nigeria.

3)       To determine the impact foreign direct investment on the balance of payments in Nigeria.

4)        To examine the effect of trade openness on Nigeria balance of payments.

1.4 Research Questions

            The following research questions were raised for the study

1)         What is the relationship between of Money Supply (M2) and balance of payments in Nigeria?

2)         To what extent does exchange rate affect balance of payments in Nigeria.

3)      How does foreign direct investment affect balance of payments in Nigeria?

4)     What is the impact of Trade openness on balance of payments in Nigeria?

1.5 Significance of the Study

            The significance of this study is to establish a monetary policy framework that transcends and builds on recent historical experience around the world and in Nigeria specifically which should bring about economic growth and development. The monetary control measures which relies heavily on credit ceiling and selective credit controls increasingly fails to achieve the set monetary target as their implementation became less effective with time. Therefore, the importance of the study includes;

i)          To ensure the achievement of a stable balance of payment in Nigeria.

ii)         To influence the direction of economic progress in the country.

iii)        To ensure efficient and effective control of money in the economy.

iv)        To help determine the effectiveness of monetary policy in attaining economic growth during the period under study.

1.6 Scope of the Study

            This research work deals on the impact of monetary policy balance of payments in Nigeria. The work covers the period from 1980 – 2017. The data used was secondary data which was obtained from the publications of central bank of Nigeria statistical bulletin and annual report of account.

1.7 Definition of Terms

Credit Channel

            The credit channel of the monetary transmission mechanism relates to asymmetric information in the financial market and work through effects on bank lending and on the balance sheet of firms and households.

The Balance Sheet Channel

            The balance sheet channel is associated with the effects of a policy induced change in interest rates on cash flows and on the subsequent balance sheet positions of non-financial firms that depend mostly on bank loans.

Balance of Payments

             The difference in total value of transactions that occurs between individuals of a particular country with other countries over a period of time.

Monetary Policy

             This is the process by which the monetary authority of a country like the central bank or currency board controls the supply of money often targeting an inflation rate to ensure price stability and general thrust in the currency.

Broad Money supply (M2)

             Is a measure of the money supply that includes more than just physical money such as currency and coins (also known as narrow money). It generally includes demand deposits at commercial banks and any other money held in easily accessible accounts.

Exchange Rate

             This is the value of one currency for the purpose of conversion to another.

Interest Rates

This is the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.

Foreign Direct Investment (FDI)

This is an investment made by a firm or individual in one country into business interests located in other countries. Generally, foreign direct investment takes place when an investor establishes foreign business operations or acquires foreign business assets, including establishing ownership or controlling interest in a foreign country.

Trade Openness

Trade Openness is defined as the ratio of the total trade to GDP. It is given as Export Import/GDP.

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