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Understanding Monetary Policy Series
Issuance of Legal Tender Currency Notes and coins
The Central Bank of Nigeria engages in currency issue and distribution within
the economy. The Bank assumed these important functions since 1959 when it replaced
the West African Currency Board (WACB) pound then in circulation with the Nigerian
pound. The decimal currency denominations, Naira and Kobo, were introduced in
1973 in order to move to the metric system, which simplifies transactions. In
1976, a higher denomination note –
N20 joined the currency profile. In 1984,
a currency exchange was carried out whereby, the colors of existing currencies
were swapped in order to discourage currency hoarding and forestall counterfeiting.
In 1991, a currency reform was carried out which brought about the phasing out
of 2kobo and 5kobo coins, while the 1k, 10k and 25k coins were redesigned. In
addition, the 50k and N1 notes were coined, while the N50 note was put in circulation.
In the quest to enhance the payments system and substantially reduces the volume
and cost of production of “legal tender notes”, the N100 and
notes were issued in December 1999 and November 2000, respectively. Similarly,
the N500 note was issued in 2001.
Maintenance of Nigeria’s External Reserves
In order to safeguard the international value of the legal tender currency, the
CBN is actively involved in the management of the country’s debt and foreign
- Debt Management:
In addition to its function of mobilizing funds for the Federal Government, the
CBN in the past managed its domestic debt and services external debt on the advice
of the Federal Ministry of Finance. On the domestic front, the Bank advises the
Federal Government as to the timing and size of new debt instruments, advertises
for public subscription to new issues, redeems matured stocks, pays interest and
principal as and when due, collects proceeds of issues for and on behalf of the
Federal Government, and sensitises the Government on the implications of the size
of debt and budget deficit, among others. On external debt service, the CBN also
cooperates with other agencies to manage the country’s debt. In 2001, the
responsibility of debt management was transferred to Debt Management Office (DMO).
- Foreign Exchange Management:
Foreign Exchange management involves the acquisition and deployment of foreign
exchange resources in order to reduce the destabilizing effects of short-term
capital flows in the economy. The CBN monitors the use of scarce foreign exchange
resources to ensure that foreign exchange disbursements and utilization are in
line with economic priorities and within the annual foreign exchange budget in
order to ensure available balance of payments position as well as the stability
of the Naira.
Promotion and Maintenance of Monetary Stability
and a Sound and Efficient Financial System
The effectiveness of any central bank in executing its functions hinges crucially
on its ability to promote monetary stability. Price stability is indispensable
for money to perform its role of medium exchange, store of value, standard of
deferred payments and unit of account. Attainment of monetary stability rests
on a central bank’s ability to evolve effective monetary policy and to implement
it effectively. Since June 30, 1993 when the CBN adopted the market-based mechanism
for the conduct of monetary policy, Open Market Operations (OMO) has constituted
the primary tool of monetary management supported by reserve requirements and
discount window operations for enhanced effectiveness in liquidity management.
Specifically, liquidity management by the Central Bank of Nigeria involves the
routine control of the level of liquidity in the system in order to maintain monetary
stability. Periodically, the CBN determines target growth rates of money supply,
which are compatible with overall policy goals. It also seeks to align commercial
and merchant banking activities with the overall target. The CBN through its surveillance
activities over banks and non-bank financial institutions seeks to promote a sound
and efficient financial system in Nigeria.
Banker and Financial Adviser to the Federal Government.
The CBN as banker to the Federal government undertakes most of Federal Government
banking businesses within and outside the country. The Bank also provides banking
services to the state and local governments and may act as banker to institutions,
funds or corporation set up by the Federal, State and Local Governments. The CBN
also finances government in period of temporary budget shortfalls through Ways
and Means Advances subject to limits imposed by law. As financial adviser to the
Federal Government, the Bank advises on the nature and size of government debt
instruments to be issued, while it acts as the issuing house on behalf of government
for the short, medium and long-term debt instruments. The Bank coordinates the
financial needs of government in collaboration with the treasury to determine
appropriately the term, timing of issue and volume of instruments to raise funds
for government financing.
Banker and Lender of Last Resort to Banks
The CBN maintains current account for deposit money banks. It also provides clearing
house facilities through which instruments from the banks are processed and settled.
Similarly, it undertakes trade finance functions on behalf of banks’ customers.
Finally, it provides temporary accommodation to banks in the performance of its
functions as lender of last resort.
Frequently Asked Questions (FAQs) on Monetary Policy
|Facts : 1/1/1900
|Structural Adjustment Programme (S.A.P.):Introduced in June 1986, the Structural Adjustment Programme was introduced after a public debate on IMF loan conditionalities. It was aimed at re-structuring the productive base of the ecnonomy and promoting non-inflationary economic growth.
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