Financial Sector Reforms and Monetary Policy in Nigeria

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