CHAPTER ONE

INTRODUCTION

1.1     Background of the Study

The monetary policy of a country deals with control of money stock (liquidity) and therefore interest rate; in order to influence such macroeconomics variables as inflation, employment, balance of payment, aggregate output in the desired direction. There is no standard and ideal structure of monetary policy target and instrument, the instrument varies from country to country, depending on the size and stage of development of the financial market. Over the years, the objective of monetary policy have remained the attainment of price stability low and stable inflation and, subject to that, to support the Government’s economic objectives including those for growth and employment. However, emphasis on techniques/instrument to achieve this objective have change over the years. Globally, the problem of the inflation is not peculiar to Sierra Leone, but it is a general problem confronting the majority, if not all countries of the world. The attempt by Sierra Leone government to attain a higher level of economic development at this period, generally lead to inflationary spiral in the country.

Monetary policy can be developed for encouraging investment and controlling inflation, while fiscal policy can be effective to reducing consumption of luxury and ostentation goods. However, our major concern will be to explore the efficiency of monetary policy in an economy in controlling inflationary pressure in an economy like Sierra Leone. Like any other developing country, Sierra Leonean 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 Sierra Leone, 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. There is no consensus among economist as to whether government intervention with 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 Sierra Leone 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, the Bank of Sierra Leone (BSL) undertake both contractionary and expansionary measures. The reason for this action is that 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 twenty-one years. One of the major objectives of monetary policy in Sierra Leone is stabilization of economic growth. Sierra Leone government has adopted various monetary policies through the Bank of Sierra Leone over years to achieve economic growth. Despite the increasing emphasis on manipulation of monetary policy in Sierra Leone, the problem surrounding its economic growth persists. Such problems include high unemployment rate, low investment, high rate of inflation and unstable foreign exchange rate. These perceived problems are being claimed to have caused a fast decline in the economic growth of Sierra Leone. It, therefore, becomes necessary to highlight the monetary policy in Sierra Leone and examine the extent to which it has actually contributed to the growth in the economy. It is generally believed by some economist that inflationary effect are quite harmful to some business establishment. Thus could be so because vender often lose in the sense that the valve of the money falls short of its original purchasing power. It is therefore under the above that we will like to adopt some of the mix of policy instrument used and hence their efficiency as regard inflation control. .

1.2     Statement of the Study

In this report, the impact of monetary policy in Nigeria banking institution will be investigated. The investigation on the impact of this monetary policy in Nigeria banking institutions will enable its complete distribution even to the local communities. It will also enable its ascertainment on the likely problem that will occur on the process of implementing monetary policy. It will also go a long way. Way in making people know how to spend their money.

1.3     Objective of the Study

To investigate the extent at which monetary policy has impacted the economy

To investigate the various various implementation strategies of the BSL towards monetray policy.

To investigate the the BSL monetary in controlling price stability in Sierra Leone.

To investigate the the growth rate of the economy in productivity towards monetary policy.

1.4     Research Question

i. What are the impacts of monetary policy?

ii. How does BSL implement their monetary policy?

iii. How does the BSL uses the monetary policy in controlling the price stability of the state?

iv. How does monetary policy increase the growth of the economic productivity?

1.5     Research Hypothesis

For the purpose of the work, the following hypothesis will be tested.

Null hypothesis; if the impact of monetary affect the banking institution

Alternative hypothesis; if the impact of monetary policy does not affect the banking institution.

1.6     Significance Of The Study

This project proposal is significant in the following ways: To prospective study who wants to know more on the impact of monetary policy in the banking sector. The study will be relevant to those who work in the bank to help them know how impact monetary policy in banking sector. To the Government on how to plan to improve the impact of monetary policy in banking institutions.

Delimitations And Limitation

This study will cover areas of academics, business, Government and banks

1.8   Limitation

A study of this nature cannot be carried out without difficulties in the process. An important constraint is the time constraint. This research proposal work and examination and the research were complied with a very short period of one week. Another constraint is finance, a research of this nature involves adequate search ( raw materials) Lastly, difficulty in securing relevant data for the study

1.9   Definition Of Terms

Monetary Policy: Harry (1962) defines monetary policy as a “policy employing central banks control of the supply money as an instrument of achieving the objectives of general economic policy”.

According to BSL brief (1999) monetary policy refers to the combination of measure designed to regulate the value, supply and cost of money in an economy in consonance with the level of economic activity.

Barbara (2006) defined monetary policy as one of the main policy tools used to influence interest rate, inflation and credit availability through changes in supply of money or variable in economy

Falepan (1978) maintain that monetary policy deals with the discretionary control of money supply by the monetary authorities in order to achieve stated or desired economic goals.