Balance scale tipping in Nigeria, representing monetary wealth and economic instability.

Decoding Nigeria's Economic Puzzle: Can Monetary Policy Pave the Way to Stability?

Beau Callahan in Business & Economy August 2025 • 4 min read.

"Explore how Nigeria's monetary policies from 1970-2010 shaped its balance of payments, and what lessons these hold for today's economic challenges."

For decades, economists have debated the best approaches to balance of payment (BOP) adjustments. From classical theories focusing on gold standards to Keynesian approaches emphasizing income changes, each has had its moment in the spotlight. In the mid-20th century, the monetary approach emerged, shifting the focus to the role of money supply in correcting economic imbalances.

This article delves into a study examining Nigeria's historical application of the monetary approach. By analyzing data from 1970 to 2010, the research aimed to understand how monetary policies influenced the country's balance of payments. The core idea is that BOP disequilibrium reflects an imbalance between the supply and demand for money. An excess supply encourages imports, leading to foreign exchange reserves flowing overseas.

Building on the work of economists like Polak, Mundell, and Johnson, this analysis seeks to determine whether monetary measures significantly impact Nigeria's BOP position and serve as effective adjustment mechanisms. Ultimately, it explores whether the Central Bank of Nigeria (CBN) can use monetary policies to promote a favorable balance of trade and stabilize the overall economy.

How Did Nigeria's Monetary Policy Evolve (1970-2010)?

Balance scale tipping in Nigeria, representing monetary wealth and economic instability.

Nigeria’s monetary policy landscape has undergone significant transformations. Before 1986, the focus was on direct monetary control due to the dominance of the public sector and heavy reliance on external factors. Key challenges included:

The economic environment associated with monetary phenomenon before 1986 was characterized by the dominance of all sector in the economy and over dependence on the external sector. The major sources of problem in monetary management were the nature of the monetary framework, the interest rate regime and non-harmonization of fiscal and monetary policy, the oil boom era that led into rapid monetization of foreign exchange earnings resulted in large increase in government expenditure which contributed to monetary instability in the early 1980's.

Monetary Framework: The inherent structure of the monetary system posed challenges.
Interest Rate Regime: Issues with how interest rates were managed.
Fiscal and Monetary Policy: Lack of coordination between government spending and monetary policy.
Oil Boom Era: Rapid influx of foreign exchange earnings led to increased government spending and monetary instability.

To combat these issues and maintain price stability, the CBN relied on direct instruments such as credit ceilings, selective credit control, and regulated interest and exchange rates. However, the underdeveloped financial market limited the use of market-based instruments. Credit rationing guidance became the primary tool.

The Path Forward: Balancing Monetary Tools with Broader Economic Strategies

The study concludes that monetary measures do play a significant role in Nigeria's BOP, both causing disturbances and serving as adjustment mechanisms. Therefore, the CBN should prioritize expenditure-reducing policies, managing money supply and domestic credit to foster a favorable balance of trade and overall economic stability. While monetary tools are crucial, they should be complemented by broader economic strategies. These include prudent fiscal policy, efficient tax collection, and investments in growth-enhancing programs. By coordinating monetary policy with other effective measures, Nigeria can foster sustainable economic growth and development.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

Everything You Need To Know

What were the primary challenges in managing Nigeria's monetary policy before 1986?

Before 1986, Nigeria's monetary policy faced several key challenges. These included issues with the monetary framework itself, problems with the interest rate regime, a lack of harmonization between fiscal and monetary policy, and the rapid monetization of foreign exchange earnings during the oil boom era, which led to increased government spending and monetary instability. The Central Bank of Nigeria relied on direct instruments, because the financial market was underdeveloped.

How did the Central Bank of Nigeria (CBN) attempt to control monetary issues before 1986?

Before 1986, the Central Bank of Nigeria (CBN) primarily used direct instruments to maintain price stability. These included credit ceilings, selective credit control, and regulated interest and exchange rates. Due to the underdeveloped financial market, market-based instruments were limited, making credit rationing guidance the primary tool. These methods were used to combat challenges like the monetary framework and the influx of foreign exchange earnings during the oil boom era.

What role did the oil boom era play in shaping Nigeria's monetary challenges between 1970 and 2010?

During the oil boom era, Nigeria experienced a rapid influx of foreign exchange earnings. This led to increased government expenditure, which contributed to monetary instability in the early 1980s. The rapid monetization of these earnings created challenges for monetary management and required the Central Bank of Nigeria to implement direct instruments like credit ceilings and regulated interest rates to maintain stability.

What is the 'monetary approach' to balance of payments, and how was it applied to analyze Nigeria's economy from 1970-2010?

The 'monetary approach' to balance of payments (BOP) focuses on the role of money supply in correcting economic imbalances. It suggests that BOP disequilibrium reflects an imbalance between the supply and demand for money, where an excess supply encourages imports and leads to foreign exchange reserves flowing overseas. In the analysis of Nigeria's economy from 1970 to 2010, this approach was used to examine how monetary policies influenced the country's BOP, determining whether monetary measures significantly impacted Nigeria's BOP position and served as effective adjustment mechanisms, with the Central Bank of Nigeria potentially using monetary policies to promote a favorable balance of trade and stabilize the economy.

Besides monetary policy, what other economic strategies are recommended for Nigeria to foster sustainable economic growth and development?

While monetary tools are crucial, sustainable economic growth and development in Nigeria require complementing them with broader economic strategies. These include prudent fiscal policy, efficient tax collection, and investments in growth-enhancing programs. By coordinating monetary policy with these other effective measures, Nigeria can foster a more stable and prosperous economic environment. The study emphasizes that expenditure-reducing policies and managing money supply and domestic credit by the Central Bank of Nigeria are important.