The Structural Adjustment Programme (SAP) was adopted in July 1986 against the cash in the international oil market and the resultant deteriorating economic conditions in the country. It was designed to achieve fiscal balance and balance of payment viability by altering and restricting the production and consumption
patterns of the economy, dominating price distortions, reducing the heaving dependence on crude oil exports and consumer goods inputs, enhancing the non-oil expert based achieving sustainable growth. Other aims were to rationalize the role of the public sector and accelerate the growth potential of the private sector. The main aim strategies of the programme were the deregulation of external trade and payment arrangement, the adoption of a market determined exchange rate for the Naira, substantial reduction in complex price and administrative controls and more reliance on market forces as a major determinant of economic activity.
The objective of monetary policy since 1986 have remained as in the earlier period the stimulation of output and employment, and the promotion of domestic and external stability. In line with the general philosophy of economic management under SAP, monetary policy was aimed at inducing the emergence of a market oriented financial system for effective mobilization of financial savings and efficient resource allocation. The main instrument of the market- based framework is the open market operations. This is complemented by reserve requirement and discount policy the adoption of a market based framework such as Omo in an economy that had been under direct control for longs required substantial improvement in the macroeconomic, legal and regulatory environment.
In order to improvement macroeconomic stability, efforts were directed at the management introduced to reduce liquidity in the system, these included the
reduction in the maximum ceiling on credit growth allowed for banks, the recall of the special deposits requirements against outstanding external payment arrears to CBN from banks, abolition of the use of foreign guarantees currency deposits as collateral for Naira loans; and the withdrawal of public sector deposit, from banks to the CBN. The use of stabilization securities for purposes of reducing the bulling size of excess liquidity in banks was re-introduced. Commercial bank’s cash reserve requirements were increased in 2003, 2004, 2005 and 2006. The rising level of fiscal deficits was identified as a major sources of macroeconomic instability. Consequently government agreed not only to reduce the size of its deficits but also to synchronize fiscal and monetary policies.
In recognition of the fact that well capitalized banks would strengthen the banking system for effective monetary management, the monetary authority increased the minimum paid up capital of conical and mechanist banks. Minimum paid-up capital of merchant and commercial banks has been reduced to a minimum level of 500 million with effect from 1St January, 2003. All existing banks are to recapitalize by 31st December, 2004.
By way of inducing efficiency and encouraging a good measure of flexibility in banks, credit operations, the regulatory environment was also improved. Consequently, the sector-specific credit distributed targets were compressed into four sector in 2002, all mandatory credit allocation mechanisms were abolished by the authorities. The commercial and merchant bank were subjected to equal treatment since their operations were found to produce similar effects on the monetary process. Area of perceived disadvantaged to merchant bank were
harmonized in line with the need to create a conducive environment in their operations. In August, 2005. All controls on interest rate were removed. However, in 206, bank maximum lending rate were pegged at 21.0 percent, while a minimum of 13.5 percent was stipulated for interest rate controls.
However, control measures were reintroduced in 2002. But in October, 2003, the control on interest rates were abolished to give way to an era of deregulated interest rate regime.
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