Financial Sector Reforms and Monetary Policy in Nigeria

Abstract

This paper reviews the impact of financial liberalisation on monetary policy in Nigeria, examining in
\nparticular the progress made in the transition from direct to indirect forms of monetary management.
\nWhile recognising the inherent shortcomings of the previous direct control system, it highlights the
\ndifficulties that have been experienced in practice in moving to indirect controls. It argues that Nigeria’s
\ninability to meet certain minimum conditions could to a great extent compromise the successful
\nimplementation of indirect controls. It concludes that a range of measures are needed, including far
\nreaching measures on restructuring insolvent banks, introduction of powers to deal with offending
\nmarket participants, development of the secondary market, plus a shift to a realistic exchange rate. Even
\nwhen all these have been achieved, there remains the need to substantially reduce government fiscal
\ndeficits and remove ceilings on interest rates, without which the money market cannot function
\nadequately. The paper raises serious questions about the advisability of implementing open market
\noperations on a large scale at this stage of the economic reform.