MacroEconomic Policies

Macroeconomic Policies definition.

Macroeconomic policies are policies established by the government of a country that aims at achieving macroeconomic objectives or to solve macroeconomic problems. They are used as stabiliser to an economy.

Types of Macroeconomic Policies

1. Monetary policy,
2. Fiscal policy, and
3. Development Policy.

• Monetary policy

Monetary policy refers to the credit control measures adopted by the central bank of a country. Johnson defines monetary policy "as policy employing central bank's control of the supply of money as an instrument for achieving the objectives of the general economic policy". G.K Shaw defines it as " any conscious action undertaken by the monetary authorities to change the quantity, availability or cost of money. "

Instruments of monetary policy

• Bankrate policy
• Open Market Operation (OMO)
• Changes in reserve ratio
• Selective Credit control

Types of Monetary Policy.

• Expansionary Monetary Policy;

This is a type of monetary policy implemented by central bank by redusing cost of credit and availability so as to increase money in circulation in the economy. Here, central bank will either reduce discount rate, buy government securities, reduce cash reserve, relax special derective, encourage banks to lend soft credit facilities to the public, or appeal to other banks to increase their credit operations. By so doing, money supply will be increased in the economy. This is implemented so as to make loanable funds cheaply available to investors.

• Contractionary Monetary 

This type of monetary policy deals with reducing money in circulation by increasing the cost of borrowing and reducing the quality of credit facilities in the economy. Central bank in this case can either raise discount rate, sell government securities, raise legal reserve ratio, introduce special deposits, give cash limit directives, or persuade the financial institutions to limit their credit creative. This usually is recommended during inflationary situation so as to reduce pressure on prices.

• Restrictive Monetary Policy

This is a policy designed to curtail aggregate demands.

 

Roles of Monetary Policy in the development of an Economy

1. To control inflationary pressures
2. The use of variable reserve ratio as an instrument of monetary policy is more effective than Open Market Operations (OMO) and bank rate policy in LCDs
3. The qualitative credit control
4. To achieve stability
5. To bridge Balance Of Payment (BOF) deficit
6. Interest rate policy
7. To create banking and financial institutions
8. Debt management.

Limitations of Monetary Policy in LCDS

1. Large non-monetised sectors
2. Underdeveloped money and capital markets
3. Large number of NBFLs
4. High liquidity
5. Foreign bank
6. Small banks money
7. Money not deposited with banks.

• Fiscal policy

This is a policy under which government manipulates into expenditure and revenue to provide desirable effects on the national income, production and employment. Fiscal policy refers to just variations in government expenditure and taxation to attain certain macroeconomic objectives like full employment, Economic growth e.t.c. Federal Ministry of Finance is implemented through budget as the instrument of fiscal policy.

Instrument of Fiscal policy

• Government expenditure;

This refers to total government spendings on both transfer payment and productive activities like health, Education, infrastructure, defence and water. Government spending could help increase the level of economic activities thereby increasing employment opportunities, attracting investment. Etc

• Taxation;

This is a compulsory levy imposed by government on productive activities, on other economic agents. Taxes remain one of the major sources of revenue to the government. Taxes can be either direct and or indirect taxes. A direct taxes are taxes in income of wealth so that the incidence of the trade falls directly on the tax payer.

Example of direct taxes are; personal income tax, corporate income tax, property tax, capital gain tax, etc. Indirect taxes are the ones imposed on spending and output inch that the incidence of the tax can fall in the third party consumers. Examples of indirect taxes are; export duties, import duties, expose duties, purchase tax, etc. Direct taxes affect the income of the payer while indirect taxes affect the prices of goods and services.

     Summaily, government can manipulate either to expenditure, taxes, or both in order to affect changes in the economy.

Forms of Fiscal Policy

• Expansionary Fiscal Policy

This is the type of Fiscal Policy which involves increasing government and/or cutting taxes to boost aggregate demand, output, and employment in the economy. This is done through a budget deficit. Where proposed government spending in greater than its revenue. Government borrows internally or externally to bridge the gap. Expansionary Fiscal Policy is recommended during Economic recession or crisis charrctirised by high unemployment, low output & poor aggregate demand, increased government expenditure and/or reduced tax rates improve effective demand of the people.

• Contractionary Fiscal Policy

This is a direct opposite of the Expansionary Fiscal Policy. This involves reducing government expenditure and/or increasing taxrate in order to control inflation in the economy. This is recommended during inflationary situation in the economy when the prices of goods and services are skyrocketing. This implies that when government reduces its spending and/or raises taxrates, there would be a drastic reduction in the people's income thereby cutting their demand down. By so doing, prices of goods and services would be pushed down, through this process, inflation is effectively controlled.

• Development Policy

Firstly, development can be defined as all attempts to improve the conditions of human existence in all ramifications. Development is also defined as a process, or societal advancement where improvement in the well-being of people are generated through partnerships between all sectors,corporate bocher and other groups in the society.

      Development policies refers to any policy aiming at reducing poverty, implement fundamental human rights and promote sustainable development. Put differently, development Policies are policies and programs under deliberately undertaken by the government with a view to upgrade the living conditions of generality of the people in all aspects of life. Therefore, development Policies seek to improve the living conditions of humanity politically, economically, socially, environmentally etc. Most developing countries like Nigeria, have over the years been designed and implemented development Policies to diversify the economy, promote gender equality, environmental saturation, economic stability, generate employment opportunities, create wealth, equitable income distributions.

Macroeconomic Policies in Nigeria.

1. National development plans
2. Structural Adjustment project.

Incoming data suggests that the economy gathered momentum somewhat in Q3, after growth slowed in Q2 on disappointing non-oil sector activity. Bank lending remained strong in July–August and the PMI hit a 15-month high in September, hinting at improved private-sector dynamics. Moreover, preliminary OPEC data showed that oil output averaged higher in Q3 than in Q2, spelling good news for the vital oil industry. That said, lower global crude prices may have capped some of the gains. In late September, the Central Bank raised the minimum loan-to-deposit ratio to 65% from 60%, the second increase in three months, to further pressure banks to boost credit to SMEsand consumers. Concerns have emerged, however, over the measure’s impact on loan quality. Meanwhile, President Buhari presenteda record NGN 10.3 trillion 2020 budget to the National Assembly on 8 October, which aims to revive sluggish growth.

Nigeria Economic Growth

Economic activity is seen gaining speed next year amid the ongoing recovery. The full implementation of the minimum wage hike and increased credit provision to the private sector should support domestic demand. However, the outlook is weighed on by elevated unemployment, high dependence on the oil sector, power shortages, insecurity, and a bleaker global economic backdrop. FocusEconomics panelists see GDP growing 2.5% in 2020, which is down 0.1 percentage points from last month’s estimate, and 2.9% in 2021.

Macroeconomic Policies confgrowth.nemployment

1. Price instability
2. Inequitable distribution of income or inequality
3. Unfavourable or negative balance of payment
4. Slowish Economic growth.