THE EFFECT OF MONETARY POLICY ON THE FINANCE OF FOREIGN TRADE

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THE EFFECT OF MONETARY POLICY ON THE FINANCE OF FOREIGN TRADE

CHAPTER ONE

INTRODUCTION

1.1 PROBLEM IDENTIFICATION.

A number of monetary and Economic policy measures have been included in the Nigerian Economic since the 1980’s not only to achieve macro-economic stability but also to enhance foreign trade financing. But unfortunately, these policy measure have resulted in inflationary pressure, depreciated foreign exchange rate increasing foreign debt and deficit balance of payment (Ogwuma 20117). Consequently the cost of foreign exchange has risen astronomically while foreign exchange inflow has dwindled significantly. This situation has mounted pressure on foreign exchange budget and adversely affected the financing of foreign trade.

The aim of the study is to examine the effect of the monetary policy on the finance of foreign trade thus;

1. To determine the impact of monetary policy in financing foreign trade.

2. To determine the extent to which monetary policies have been effective in financing foreign trade.

3. To identify the factors militating against the effectiveness of monetary policies in Nigeria’s foreign trade activities.

1.2 RATIONALE OF THE STUDY.

This work is selected for the view of finding the ways by which foreign trade can be financed and improved through the help of monetary policy measures. The adjustment of the monetary policy of Nation plays a very important role in the finance of its foreign trade. The monetary policy affects foreign trade financing through guiding deregulation of foreign exchange market, inter-bank lending, monetization of foreign exchange earning for petroleum export devaluation and domestic price stabilization. The study is relevant for numerous reasons. Foreign trade play a very important role in any country’s economy and any distortion is bound to have a ripple effect on the economy to avoid such distortions. The Government (through the central bank of Nigeria) need to know how well their monetary policies measures is use, whether it is achieving the desired objective of stabilizing the affairs of the Economy and improving the finance of foreign trade.

1.3 SIGNIFICANCE OF THE STUDY.

This study will be of immense help to the federal Government as it will expose to them the various monetary policy to be adopted in order to achieve a good or favourable foreign trade. To the General Public and Financial Institution, this study will help them realize the needs to improve on the finance of foreign trade. Finally, the study will aid researcher who might went to research further into this topic or those doing research in related topics a basis for further studies.

1.4 RATIONALE OF THE STUDY.

This work is selected for the view of finding the ways by which foreign trade can be finance and improve through the help of monetary policies measures. The adjustment of the monetary policy of a Nation plays a very important role in the finance of its foreign trade. The monetary policy affects foreign trade financing through guiding deregulation of foreign exchange market, Inter – bank lending, monetization of foreign exchange earning from petroleum export devaluation and domestic price stabilization.

1.5 SIGNIFICANT OF THE STUDY.

This study is relevant for numerous reasons foreign trade play a very important role in nay country’s economy and any distortion is bound to have a ripple effect on the economy to avoid such distortions. This study will be of immense help to the federal Government as it will expose to them the various monetary policy to be adopted in order to achieve a good or favourable foreign trade. To the General public and financial Institution, this study will help them realize the needs to improve on the finance of foreign trade. Finally, the study will aid researcher who might went to research further into this topic or those doing research in related topics a basis for further studies.

1.6 BACKGROUND OF THE STUDY

Government adopts various economic policies which are implemented in the economy in order to influence economic activities. In doing this, the aim of the government is to achieve some target considered desirable for the economy. Usually, such economic included the monetary designed to achieve macro- economic stability and even to promote economic growth (Ogbonna 2017). Anyanuwokoro (2015) defines monetary policy as a combination of measures designed to regulate the value, supply and the cost of money in an Economy. Since the early 1980’s, many developing countries have been witnessing deterioration in their balance of payment partly because of huge foreign trade deficits. Consequently, these countries including Nig have adopted various monetary policies in order to finance their foreign trade instead of restoring to foreign borrowing (Onah, 2017).

In Nigeria, the monetary policy measure aim at reducing inflationary pressure, strengthen the exchange rate of the naira improve the balance of payment position and increase foreign exchange inflow for the financing of foreign trade (Nwankwo 2014). Prior to the introduction of the structural adjustment programme (SAP) in the second – half of the 1980’s the Federal Government adopted a policy of trade liberalization and encouraged massive importation of goods and services. To this end, the monetary policy in operations facilitated foreign trade through adequate foreign exchange constraints and the over-valuation of the naira led to the introduction of structural Adjustment programme (SAP) which severely affected foreign trade financing (Ekamem 2011).

For most of the 1990’s trade and exchange policy measure reflected prudent monetary policies. The operations of the domiciliary account scheme was to encourage foreign exchange inflation, stop subsidized funding of post second-tier foreign exchange market transaction and grant more fiscal concession on exports. So far, there has been persistent pressure on the balance of payment and this calls for an investigation into the role of monetary policies in this connection. It is against this background that this study is set to examine the impact of monetary policies on foreign trade financing.

1.7 DEFINITION OF TERMS

The following terms used in the study are defined for readers not to misunderstand the contents;-

Monetary policy;-This is the use of monetary instruments to influence the cost, value and supply of money and hence, economic activities, Or the effort by the monetary authorities (the CBN) to control the money supply and credit conditions for the purpose of achieving certain bread economic objective.

MONETARY INSTRUMENTS: This includes all the techniques used by the central bank to control the volume of money in circulation.

BALANCE OF PAYMENTS: This is the record of the sum total of a country’s economic transaction with the rest of the world over a given period of time.

MONETARY POLICY INDICATORS.: This refer to the index of the effect of current policy.

INFLATION: This is the sustained rising trend in the general price level.

FOREIGN EXCHANGE: This refers to foreign currency.

FOREIGN EXCHANGE RATE;-This is the exchange value of a national currency in terms of other national currency.-

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