Economics Participants Manual May 2024 PDF

TABLE OF CONTENTS 1. COURSE INTRODUCTION 1.1. The Business case for understanding Economics 1.2. The Significance of Economics in Banking 2. OVERVIEW OF BASIC ECONOMIC CONCEPTS 2.1. The Concept of Scarcity & Its Implications 2.2. Opportunity Cost & Decision Making 2...

TABLE OF CONTENTS 1. COURSE INTRODUCTION 1.1. The Business case for understanding Economics 1.2. The Significance of Economics in Banking 2. OVERVIEW OF BASIC ECONOMIC CONCEPTS 2.1. The Concept of Scarcity & Its Implications 2.2. Opportunity Cost & Decision Making 2.2. Trade-offs in Economic Choices 3. SUPPLY & DEMAND ANALYSIS 3.1. The Law of Demand 3.2. The Law of Supply 3.3. Market Equilibrium 3.4. Factors Affecting Supply & Demand 4. THEORY & PRACTICE OF MARKET STRUCTURES 4.1. Introduction to Economic Markets 4.2. Types of Economic Markets 4.3. Comparative Analysis & Conclusion 5. INTRODUCTION TO MACROECONOMICS 5.1. Role of Government in the Economy 5.2. Key Macroeconomic Indicators 5.3. Economic & Business Cycles 5.4. Stages of Economic Cycles 5.5. Implication for Banks 6. FISCAL & MONETARY POLICIES 6.1. Introduction 6.2. The Goals of Fiscal Policy 6.3. Tools of Fiscal & Monetary Policy 6.4. Impact of Government Budget on Bankers 6.5. Monetary Policy 2  6.6. Measures of Money Supply 6.7. Tools of Monetary Policy 6.8. How the MPR Affects the Economy 6.9. The Nigerian Economy - Context 7. BALANCE OF PAYMENTS 7.1. The Major Exchange Rate Mechanisms Employed by Countries 3 MODULE 1: INTRODUCTION TO ECONOMICS I. COURSE INTRODUCTION Course Purpose and Importance Economics serves as the bedrock of the banking and financial services industry. It provides a foundation for understanding how financial institutions like Access Bank operate in a dynamic and ever-changing environment. This course is designed to equip you with the knowledge and skills needed to excel in your roles, make informed decisions, and contribute to the bank's success. Learning Objectives By the end of this course, you will be able to: Explain the role of economics in the banking sector and the broader economy. Understand how economic principles influence decision-making within a bank. Recognize how economic trends impact Access Bank PLC, its customers, and the financial landscape in Sub-Saharan Africa. Apply basic economic concepts to real-world scenarios in banking, from customer interactions to risk assessment. Contribute to the bank's growth and profitability by applying informed economic analysis to your daily tasks. 1.1. The Business Case for Understanding Economics Why this course is important to you Economics is not just a subject for the textbooks or a framework for understanding global markets; it has a profound impact on your daily life, financial well-being, and future prospects. Here's why economics matters to you as an individual: 1. Financial Decision-Making: 4 Economics equips you with the tools to make informed financial decisions. Whether it's managing your personal budget, saving for the future, or making investment choices, understanding economic principles can help you maximize your financial resources and achieve your goals. Example: Knowing the concept of opportunity cost can help you weigh the trade- offs between spending money on a luxury item today or saving and investing for greater financial security tomorrow. 2. Career Opportunities: Economics provides a valuable skill set that can enhance your career prospects. In a competitive job market, employers often seek candidates who can analyze data, understand market trends, and make strategic decisions—all of which are skills rooted in economics. Example: If you're seeking a career in finance or banking, a strong understanding of economics is essential. It can set you apart from other candidates and open doors to more challenging and rewarding roles. 3. Everyday Consumer Choices: As a consumer, you encounter economic decisions daily. From choosing between products at the grocery store to deciding whether to lease or buy a car, economics helps you evaluate the costs and benefits of your choices. Example: Understanding supply and demand can help you identify when it's a good time to make certain purchases. For instance, buying a product when it's in low demand may lead to cost savings. 4. Personal Financial Goals: Whether you dream of homeownership, starting a family, or traveling the world, economics plays a role in achieving your long-term aspirations. It helps you create a financial plan, assess risk, and make choices that align with your goals. 5 Example: If you aspire to buy a home, understanding mortgage rates and the impact of interest rates on your monthly payments is crucial for making a sound decision. 5. Global Awareness: Economics provides insights into global events and trends. Understanding economic concepts can help you comprehend news about inflation, trade, or currency fluctuations, enabling you to be a more informed global citizen. Example: During international travel or when investing in foreign markets, an understanding of exchange rates and currency markets can help you navigate financial transactions more effectively. 6. Civic Engagement: Economics influences public policies and government decisions. Being economically literate allows you to engage in informed discussions about public policy issues, such as taxation, healthcare, and education. Example: As a voter and citizen, you can assess the economic implications of various policy proposals and make informed choices in elections. In summary, economics is not just a subject of academic interest—it's a practical toolkit that empowers you to make better financial decisions, advance your career, and navigate a complex and interconnected world. By embracing economic principles, you are better equipped to achieve your personal financial goals, contribute to your community, and lead a more economically secure and prosperous life. 1.2. The Significance of Economics in Banking Economics is the study of the ways that individuals and societies allocate their limited resources to try and satisfy their unlimited wants Economics is not a purely academic pursuit; it's a critical aspect of daily operations within Access Bank PLC. Here's why: Lending and Investment Decisions: Economic principles guide the allocation of funds to borrowers and investment opportunities. 6 Customer-Centric Products: Understanding customer behaviour, influenced by economics, is essential for designing financial products that meet their needs. Risk Assessment: Economic insights are crucial for assessing and mitigating risks related to lending and investment decisions. Interest Rates and Profits: Economic trends directly impact interest rates, inflation, and exchange rates, which in turn affect the bank's profitability. Real-World Examples 1. Inflation and Interest Rates: Example: In Sub-Saharan African countries facing high inflation rates, such as Zimbabwe, Nigeria, or Angola, banks have had to adjust their lending rates to account for the eroding purchasing power of their currency. This has led to increased interest rates on loans and credit facilities. Customer Behavior: High lending rates have made borrowing more expensive for customers. As a result, many individuals and businesses in these regions may opt for fewer loans or seek alternative financing options, affecting banks' loan portfolios and customer borrowing patterns. 2. Currency Depreciation: Example: The depreciation of local currencies against major international currencies like the US dollar can create challenges for banks in Sub-Saharan Africa. For instance, when the Nigerian Naira or the South African Rand devalues, it can affect the exchange rate risk exposure of banks. Customer Behavior: Customers who hold foreign currency accounts or engage in international trade may change their banking behavior. They may seek foreign currency accounts to hedge against currency depreciation, leading banks to offer more currency-related services and products. 3. Economic Downturns: 7 Example: During economic downturns, such as the global financial crisis or regional economic crises like the East African Community's (EAC) financial turmoil in the late 2000s, banks in Sub-Saharan Africa often face reduced lending opportunities due to decreased business activity and increased risk aversion. Customer Behavior: In times of economic uncertainty, customers tend to become more cautious about their financial decisions. They may increase their savings, reduce borrowing, and seek safer investment options, impacting banks' deposit and lending activities. 4. Government Policies and Regulations: Example: Changes in government policies or regulations can have a significant impact on the banking sector. For instance, governments in Sub-Saharan Africa may implement stricter capital adequacy requirements, anti-money laundering regulations, or digital financial inclusion initiatives. Customer Behavior: Customers may adapt their banking behaviors in response to regulatory changes. For example, stricter know-your-customer (KYC) requirements may lead to more rigorous documentation processes for opening bank accounts, influencing how customers interact with banks. 5. Technological Advances: Example: Technological advancements, such as the rapid adoption of mobile banking and digital payments in countries like Kenya (M-Pesa) and Nigeria, have transformed the banking landscape. Banks have had to adapt by investing in digital infrastructure and offering innovative digital products. Customer Behavior: Customers have embraced digital banking solutions for convenience and accessibility. They now prefer to perform various banking activities online or via mobile apps, reducing foot traffic in physical bank branches and leading banks to develop more user-friendly digital platforms. These real-life examples illustrate how economic changes in Sub-Saharan Africa have not only impacted the banking decisions made by financial institutions but 8 have also influenced customer behaviors and preferences. Adaptability and responsiveness to these economic shifts are crucial for banks to remain competitive and meet the evolving needs of their customer base. Share specific examples of how economic changes in Sub-Saharan Africa have influenced banking decisions and customer behaviour. Highlight cases where banks like Access Bank made strategic choices based on economic forecasts, such as adjusting lending rates in response to central bank policies. III. Why Economics Matters in Different Roles Economics in Banking Roles Regardless of your specific role at Access Bank PLC, economics plays a pivotal role: Customer Service: Understanding the economic realities your customers face helps you provide tailored financial solutions. Risk Management: Assessing the impact of economic events on loan portfolios is critical for minimizing credit risk. Product Development: Economic insights inform the creation of products that align with the financial needs and preferences of customers. Strategy and Decision-Making: You can contribute to the bank's strategic planning process by offering valuable economic insights and recommendations. 9 Microeconomics VS Macroeconomics Characteristics Microeconomics Macroeconomics Focus Individual & business Economy as a whole behaviour Level of analysis Specific markets & National & global industries economies Key Concepts Supply and demand, GDP, inflation, market equilibrium, unemployment, interest elasticity, consumer rates, economic growth, surplus, producer business cycles surplus Policy implications Government policies to Government policies to promote competition, stimulate economic regulate businesses, and growth, reduce protect consumers unemployment, and control inflation MODULE 2 OVERVIEW OF BASIC ECONOMIC CONCEPTS FOR DECISION MAKING – SCARCITY, OPPORTUNITY COST & TRADE OFFS 2.1. The concept of scarcity and its implications: Scarcity is a basic economic problem that occurs due to limited availability of resources to meet unlimited human wants and needs. As a result, there is never enough of everything to completely satisfy everyone. It helps us understand why we make the choices we do and how the economy works. It is also reminds us that we live in a world of limited resources and that we need to be mindful of how we use them There are three main types of scarcity: Demand-induced scarcity - this occurs when the demand for a good or service exceeds the supply. This can be as a result of a number of factors, for example population growth, changes in tastes and preferences, or technological advances. 10  Supply-induced scarcity - this is when the supply of a good or service is limited in quantity as a result of natural or physical constraints. For example, the supply of gold is limited by the amount of gold that exists in the world. Structural scarcity – this occurs when the resources needed to produce a good or service are not available in the same place. For example, the production of a car requires steel, which is mined in one location, and rubber, which is grown in another location. Scarcity has widespread implications as it affects the way we: o Distribute resources o Produce goods and services o Make decisions about our lives. Some of the implications of scarcity include: The need for choice: due to scarcity of resources, we have to make choices about how to use them. Since we cannot have everything we want, we have to prioritize our needs and wants. The need for competition: scarcity of resources makes people compete for them. This competition can come in various ways such as economic, political, or military. The need for innovation: scarcity can lead to innovation as it makes people find new ways of producing goods and services more efficiently or to find new sources of resources. This can lead to technological advancements and economic growth. The need for cooperation: scarcity can also engender cooperation as people come together to solve common problems. 2.2. Opportunity Cost and Decision Making Opportunity cost is the value of what you give up when you choose one option over another. It is an important concept in decision-making because it helps us to make more informed choices. When we make decisions, we are basically comparing the costs and benefits of the different options available to us. The opportunity cost is the benefit that we give up by choosing one option over another. For example, if a farmer chooses to plant corn, the opportunity cost is planting a different crop (beans) or an alternative use of the farm land. Opportunity cost can be both explicit and implicit: 11  o Explicit costs are monetary costs that we can easily measure, such as the price of a movie ticket or the cost of fuel to drive to the cinemas. o Implicit costs are non-monetary costs, such as the time that we spend going to the cinema or the opportunity to study for an exam. In some cases, opportunity cost can be difficult to measure. For example, it can be difficult to put a monetary value on the opportunity of spending time with our relatives or friends. However, even when it is difficult to measure, opportunity cost is still an important factor to consider when making decisions. By understanding opportunity cost, we can make more informed decisions that are in our best interests as we are forced to consider the trade offs involved. Here are some examples of opportunity cost in decision-making: A company decides to invest in a new factory. The opportunity cost is the money that could have been invested in other projects, such as research and development or marketing. A government decides to build a new expressway. The opportunity cost is the land that could have been used for other purposes, such as housing estates or schools. 2.3. Trade-offs in economic choices: Trade-offs are an unavoidable part of economic decision-making. By understanding the trade-offs involved, we can make better choices that are in our best interests. This is because of scarcity of resources as well as the fact that we cannot have everything we want. When we make a choice, we are essentially giving up something else in return. For example, if you decide to buy a new car, you are forgoing the money that could have saved or spent on something else. There are many different types of trade-offs in economic choices which include: Production possibilities frontier: This is a curve that shows the different combinations of output of two goods that can be produced using available resources and technology. The curve highlights the trade-off that exists between producing more of one good and less of another. 12  Choice under uncertainty: This is a situation where a consumer has to make a choice without knowing all the possible outcomes. In this case, the potential benefits and costs of each option are weighed, before making a decision based on our best estimation of what will happen. Here are some other examples of trade-offs in economic choices: A consumer decides to buy a new car. This means that they have less money to spend on other things, such as housing or food. A company decides to produce more of one product. This means that they have to produce less of another product. A government decides to spend more money on education. This means that they have to spend less money on other things, such as healthcare or housing MODULE 3 SUPPLY & DEMAND ANALYSIS Supply and demand are fundamental concepts in economics that describe the relationship between the availability of goods or services (supply) and the desire for those goods or services (demand) in a market. These concepts play a crucial role in determining the prices of goods and services in a market economy. The analysis of supply and demand is applicable in all spheres of life not only in consumer goods but also in financial markets. In banking those who save money or make financial investments whether individuals or businesses, are on the supply side of the financial market. Those who borrow money are on the demand side of the financial market. Supply and demand shapes the behaviours of buyers and sellers 3.1. The Law of Demand: The Law of Demand states that all else being equal, the quantity demanded for a good or service increases as the price decreases and decreases as the price increases. In other words, there is an inverse relationship between the price of a product and the quantity demanded by consumers. This is because, as prices fall, consumers are generally more willing and able to purchase more of a product, and vice versa. As an illustration, when the price of a dozen eggs drops from N25 to N10, the weekly quantity purchased by consumers rises from 200 crates to 400 crates. 13  When the price decreases, consumers are highly responsive in terms of the quantity they purchase. In this case, we can conclude that the demand for eggs is elastic. Elasticity here signifies a high level of responsiveness to price changes. Elasticity is synonymous with "responsiveness." When price fluctuations result in only minor changes in the quantity purchased, we describe the demand as inelastic, as is the case with products like fuel and cigarettes. 3.2. The Law of Supply: The Law of Supply, on the other hand, states that, all else being equal, the quantity of a good or service that producers are willing and able to supply increases as the price of that good or service increases and decreases as the price decreases. In essence, there is a direct relationship between the price of a product and the quantity that producers are willing to supply. Higher prices provide an incentive for producers to supply more goods or services to the market. Supply is the 'Propensity to Sell. It refers to how willing and ready sellers are to offer a certain quantity of a product or service for sale in the market at various prices. In simpler terms, it's a way of describing how much of a product or service producers or sellers are prepared to bring to the market. Think about how many things sellers would want to sell at different prices, like N200, N500, or N1,000. If you look at the supply curve, it shows that when prices are low, sellers don't want to sell a lot of eggs. So, if the price of eggs goes up from N15 to N35 per dozen, sellers will want to sell more, like going from 200 crates to 500 crates a week. How much more sellers want to sell when the price goes up depends on something called "elasticity of supply." It's like how responsive they are to price changes. 3.3. Market Equilibrium Market equilibrium is the point at which the quantity of a good or service demanded by consumers equals the quantity supplied by producers. At this point, there is no shortage or surplus of the product, and the market is in a state of balance. Equilibrium is determined by the intersection of the demand and supply curves on a graph, where the price and quantity are established. Equilibrium Price 14 Equilibrium Price is the price at which it's just right – not too high and not too low. It's the price where buyers are willing to buy exactly as much as sellers are willing to sell. Looking at the graph, it's evident that only the price of N33 per dozen can be the true equilibrium price – the price where the amount people want to buy matches the amount sellers want to sell. At the equilibrium point ε, the quantity of eggs sellers are offering in the market (300 crates a week) exactly matches the quantity buyers are taking out of the market. Any price lower than this would result in buyers wanting to purchase more eggs (creating a shortage) than there are available for sale. Conversely, any price higher than this would lead to suppliers bringing in more eggs (creating a surplus) than people are willing to buy. 3.4. Factors Affecting Supply and Demand Several factors can influence both supply and demand in a market, and they play a significant role in determining equilibrium prices and quantities. Here are some key factors for each: 3.4.1. Factors Affecting Demand a. Price: As mentioned earlier, a change in the price of a product directly impacts the quantity demanded. When prices go up, demand tends to decrease, and when prices fall, demand tends to increase. b. Consumer Income: The income of consumers can affect their purchasing power. For normal goods, as income increases, demand tends to increase. For inferior goods, as income increases, demand may decrease. c. Tastes and Preferences: Changes in consumer preferences or trends can lead to shifts in demand. For example, a sudden preference for healthier foods can increase the demand for organic products. d. Population and Demographics: An increase in population or shifts in demographics (e.g., aging populations) can influence demand patterns. More people may mean greater demand for certain goods and services. 3.4.2. Factors Affecting Supply a. Production Costs: Changes in the costs of production, including labor, materials, and technology, can impact supply. Higher production costs can reduce supply, while lower costs can increase it. 15 b. Technology and Innovation: Advances in technology can lead to more efficient production processes, increasing supply. c. Government Policies: Regulations, subsidies, and taxes can affect supply. For example, subsidies to farmers can increase the supply of agricultural products. d. Weather and Natural Disasters: Events like droughts or hurricanes can disrupt supply chains and reduce the availability of certain goods. MODULE 4 THEORY & PRACTICE OF MARKET STRUCTURES 4.1. Introduction to Economic Markets 4.1.1. Definition of Economic Markets Economic markets are environments where buyers and sellers interact to exchange goods and services. These markets play a fundamental role in economics as they dictate how resources are allocated and prices are determined. 4.1.2. Importance in Economics Understanding economic markets is crucial for businesses, policymakers, and economists. It helps in making informed decisions about production, pricing, and resource allocation. Different market structures have distinct implications for competition, pricing strategies, and consumer welfare. 4.2. Types of Economic Markets There are four primary types of economic market structures: 1. Perfect Competition 2. Monopolistic Competition 3. Oligopoly 4. Monopoly 4.2.1. PERFECT COMPETITION 16 Characteristics: Large Number of Buyers and Sellers: In a perfect competition market, there are numerous buyers and sellers, none of whom have the power to influence the market price. Homogeneous Products: All products are identical, making it impossible for consumers to differentiate between suppliers. Perfect Information: Both buyers and sellers have complete knowledge about the market, including prices, quality, and availability. Easy Entry and Exit: Firms can easily enter or exit the market without incurring significant costs. Price Takers: Individual firms have no influence on the market price and must accept the prevailing market price. Example: In agricultural markets, where products like wheat and rice are largely uniform, perfect competition is often observed. Another example often cited is the well- developed securities market. We are referring to stock market where there is free flow of information. What are the advantages of perfect market? The advantages of perfect competition are as follows: Knowledge is shared evenly between all the participating firms in the market. Due to no barriers to entry, the existing firms cannot exercise monopoly. Allocation of resources is done in the most efficient manner. 4.2.2. MONOPOLISTIC COMPETITION Characteristics: Many Sellers: There are multiple firms operating in the market, each offering differentiated products. Differentiated Products: Each firm produces goods or services that are slightly different from those of their competitors, leading to brand differentiation. 17  Some Control Over Price: Firms have some degree of control over the price of their products due to brand loyalty and perceived differences in quality. Easy Entry and Exit: Firms can enter or leave the market without facing substantial barriers. Example: The restaurant industry exemplifies monopolistic competition, as various restaurants offer different menus, atmospheres, and experiences to attract customers. Monopolistic derives its name from the fact that it combined the features of a monopoly and features of a perfect competition. Advantages and Disadvantages Monopolistic competition has both advantages and disadvantages. While it can lead to product differentiation, innovation, and improved consumer benefits, it can also result in higher prices, inefficient production, and reduced competition. 4.2.3. OLIGOPOLY Characteristics Few Dominant Firms: In an oligopoly, a small number of firms dominate the market, often resulting in significant market power. Interdependence: The decisions of one firm directly impact the market share and profits of other firms in the industry. High Barriers to Entry: Entry into an oligopolistic market can be difficult due to high capital requirements or other significant barriers. Product Differentiation or Homogeneous Products: Products may be identical (homogeneous) or differentiated (as in the case of monopolistic competition). Example: The automobile industry is a classic example of an oligopoly, with a few major companies holding significant market share. Mobile Network Operators also falls into this category in Nigeria. low level of competition; Advantages of Oligopoly 18  high potential to receive big profits; a great demand for products and services controlled through oligopolies; a limited number of companies makes it easier for customers to compare and choose products; more competitive prices; 4.2.4. MONOPOLY Characteristics: Single Seller: There is only one supplier in the market, giving them complete control over supply and pricing. Unique Product: The monopolist offers a product with no close substitutes, giving them a virtual monopoly on that particular good or service. Complete Market Power: The monopolist can set prices and quantities without fear of competition. High Barriers to Entry: It is extremely difficult for new firms to enter the market. Example: Utilities like water and electricity often operate as monopolies in certain regions, as the costs and infrastructure required for entry are prohibitively high. Railways is also a form of monopoly in Nigeria. It’s exclusively for the Federal Government; now Lagos Stage has a light railway system. Advantages and Disadvantages of a Monopoly Market What are the advantages and disadvantages of a monopoly market? Traditionally, monopolies benefit the companies that have them, as they can raise prices and reduce services without consequence. However, they can harm consumer interests because there is no suitable competition to encourage lower prices or better-quality offerings. 4.3. COMPARATIVE ANALYSIS & CONCLUSION Efficiency and Competition Levels Perfect competition is considered the most efficient market structure, while monopoly is the least efficient due to lack of competition. Price Determination 19  Prices are determined by market forces in perfect competition, while monopolies have the power to set prices. Innovation and Product Development Perfect competition may lead to less innovation, while monopolistic competition and oligopoly encourage firms to differentiate and innovate. Consumer Welfare Perfect competition generally leads to higher consumer welfare due to lower prices and greater choice. Importance of Understanding Economic Markets Understanding market structures is crucial for businesses to make informed decisions about production, pricing, and resource allocation. For us as bankers, it helps to ascertain the economic strength of the customers we are dealing with, in the marketplace. The greater a firm has in the marketplace, the more it’s not affected by the developments in the economy. Customers with a bigger strength is able to compete with other players as well as dictates its own terms to buyers and suppliers. A customer’s strength in its industry also determines the stability of profit and cashflow. Implications for Businesses and Policy Makers Different market structures have distinct implications for competition, pricing strategies, and consumer welfare, which should be considered by businesses and policymakers. In conclusion, a thorough understanding of economic market structures is essential for making informed business decisions and for crafting effective economic policies. Each market structure has its unique characteristics and implications, and businesses must adapt their strategies accordingly. By comprehending these structures, businesses and policymakers can navigate the economic landscape more effectively, ultimately benefiting consumers and the economy as a whole. MODULE 5 20 INTRODUCTION TO MACROECONOMICS 5.1. Role of Government in the Economy 1. Provide Legal, Regulatory and Social framework 2. Maintain completion 3. Provide public goods and services 4. Redistributes Income 5. Correct externalities 6. Stabilize the economy 5.2. Key Macroeconomics Indicators Growth rate Economic growth is defined as the increasing capacity of the economy to satisfy the wants of the members of its society Growth rate is a measure of the increased (decreased) capacity of the economy Evidenced by consumer spending patterns in any economy which indicate the health of an economy Inflation can simply be defined as the sustained rise in the prices of goods and services over time. Often described in layman’s terms as too much money chasing too few goods Interest rate Rates at which businesses borrow in order to supply their goods and services Have a direct impact on production costs and profitability of a company High interest rates is dependent on the MPR of the central bank Currency Exchange rate The rate of exchange between different countries’ currencies Movement in exchange rates affect production costs and demand for goods and services Stability in exchange rates allows companies to plan and forecast productivity performances 5.3. Economics & Business Cycles This is the predictable long-term pattern changes in national income. The Economy experiences a regular trade or business cycle where the rate of growth of production, incomes and spending fluctuates over time. These 21 movements are captured and used to measure the cyclical movement of the economy. As follows: Boom, Slowdown, Recession and Recovery When real GDP (or national output) is rising quickly the economy is said to be experiencing economic growth or recovery. A good example of this was the economic boom in Nigeria in the early 1970s. When real output falls to negative in 2 consecutive quarters - then economic recession exists. With changes in economic cycles, businesses also experience changes in activities and overall business condition ranging from expansion of output to periods of prosperity. When economies experience slowdowns and negative growth, business also experience contraction of output and recession. 5.4. Stages of Economic Cycles Economic boom Economic Slowdown Economic Recession Economic Recovery 5.5. Implication for Banks When there is a boom in the economy, the economic activity grows, new businesses are formed and jobs are created. With this, the Central bank makes it easier to lend money by reducing MPR rates, which will directly impact on interest rates of banks, thereby increasing credit in the banking sector, since banks key role is that of intermediation. (More profit) But when economic activity slowdown or in recession, the banks are affected in a way, in that banks earnings are tied to customer’s ability to repay their loans. Since spending will reduced drastically, consumer’s appetite for more credits will decrease. (Lower profit) MODULE 6 FISCAL AND MONETARY POLICIES 6.1. Introduction 6.1.1. FISCAL POLICIES 22 Fiscal policies are policies used by the government to manage its revenues and expenditure as detailed in its budget. Government budget shows its EXPECTED REVENUE on one hand its EXPECTED EXPENDITURE on the other. Government revenue is made of Earned revenues (earnings from Trade), Taxation and Borrowings. The sum of the Revenue is matched against government expenditure. Government expenditure on the other hand, is made up of Capital expenditure (spendings that represent investment in infrastructure and amenities e.g Building roads, schools, hospitals, stadia, ports, etc) and recurrent expenditure (debt servicing, statutory transfers etc). Usually there would be more Revenue than Expenditure (Surplus Budget) or more Expenditure than Revenues (Deficit Budget), but rarely a situation where both sides are equal (Balanced Budget). Fiscal Policy hence is Government’s use of taxation, public spending, and borrowing to influence and manage the overall health and performance of the economy. Depending on what the government is trying to achieve, the budget may be a Surplus Budget or a Deficit Budget. So….let us bring it down a notch for easier comprehension. Alright, imagine that as a newly employed worker, you’re the government, and you've got this allowee coming in monthly to your pocket….we’ll call it "The National Treasury." Now, fiscal policies are like the rules/formula you would use to manage that piggy bank…focus pls….your pocket/bank account. Now you’ve set rules as follows: 1. Splurging or Saving: Sometimes, you have to decide if you're going to go all out and buy new clothes and stuff (that's like increasing government spending) or if you're going to be super thrifty (that's like cutting back on spending). Imagine you debating whether to take your friends out (all bills on you) or save up for your own accommodation. 2. The Taxman Cometh: Just like when you have to ‘drop something’ for you siblings, the government collects money from grown-ups in the form of taxes. In this case, you have an additional bit of something coming in from your parents (additional income). Let’s call this Taxation income. Fiscal policies decide if taxes go up (your parents drop more) or down (they ‘drop’ less). 3. Balancing Act: It's like juggling flaming torches while riding a unicycle! The government (…that would be you…) needs to balance the piggy bank so 23  you don't run out of money (that's bad) or have too much money sitting around (also kinda bad). 4. Economic Rollercoaster: Fiscal policies try to make sure the economy is as steady as a table, not wobbly like a one-legged chair. They might boost spending to kick-start the economy when it's slow, or put on the brakes when things are overheating (imagine spending more in the first months of your job on your dressing so you look the part more). 5. Helping Hands: Just like you want to succeed, the government wants to assist people who need it. Fiscal policies can be like you increasing your sibling’s pocket money and reducing your own spending money, or reducing the pocket money thereby increasing your spending money. So, fiscal policies are basically the government's way of handling money matters, just like you do at home. They try to strike a balance between saving, spending, and making sure everyone in the country has a fair shot at a good life. It's like you managing the family budget, but on a gigantic scale! The Goals of Fiscal Policy The total level of government spending can be changed to help increase or decrease the output of the economy. In order to increase output; The Government implements an Expansionary Fiscal Policy by deliberately increasing its expenditure and/or reducing taxes. This will increase output but increase the size of the Government’s budget deficit. This approach is often adopted to stimulate the Economy during Recession, as it will mean that government’s spending and reduced taxation will free resources into the economy that will stimulate economic/business activities and increase the output of the economy. In order to decrease output; The Government implements a Contractionary Fiscal Policy by deliberately decreasing its expenditure and/or increasing taxes. This will reduce output and reduce the size of the Government’s budget deficit/ or increase its surplus. This approach is often adopted to contract the Economy during a period of inflation, as it will mean that reduced government spending and/or 24  increased taxes will hold back resources from the economy, thereby reducing the amount of resources in the economy and restrict the growth of economic/business activities. In summary, fiscal policies involve government actions related to taxation and public spending to achieve specific economic goals and manage the overall health of the economy. They are a key component of a country's economic policy toolkit. 6.3. What are the tools of Fiscal Policy and Monetary Policy The tools of Fiscal policy are therefore Taxes and government expenditure. NIGERIA - 2024 BUDGET BREAKDOWN 6.4. IMPACT OF GOVERNMENT BUDGET ON BANKERS All Bankers need to be conversant with their Country’s budget for the following reasons; 25  To gauge the direction that country is headed in the budget year Forecast the likelihood of achieving the budget objectives/provisions. To find out the business opportunities in the budget as a banker? To develop unit/individual business plan and/budget for the current year. To be able to provide advisory services to customers or be able to answer their questions on the year’s budget 6.5. Monetary Policy Monetary policy refers to the set of actions and measures taken by a country's central bank to control and manage the supply of money and interest rates in the economy. The primary goal of monetary policy is to achieve specific economic objectives, such as controlling inflation, promoting economic growth, and maintaining overall economic stability. This is achieved by controlling (increasing or decreasing) MONEY SUPPLY i.e. the VOLUME OF MONEY IN CIRCULATION, as a means of controlling the above named economic indices. Again, let us tone things down a notch for easier comprehension. Monetary policy is like managing the flow of water in a garden hose. Imagine you have a garden hose, and you want to water your plants effectively without flooding them or letting them dry out. Controlling the water flow in the hose is a bit like what the central bank does with monetary policy to manage the economy. Here's how it works: 1. Water Flow (Money Supply): Think of the water in the hose as the money in the economy. The central bank is like the gardener in charge of adjusting the water flow to make sure it's just right. They want to make sure there's enough water for the plants to grow (the economy to thrive), but not so much that it floods the garden (causes problems like inflation). 2. Adjusting the Hose (Interest Rates): To control the water flow, you can twist the nozzle on the hose to make the water come out faster or slower. Similarly, the central bank adjusts something called "interest rates" to control the flow of money in the economy. When they want the economy to 26  be more active and people to spend and invest more, they might lower interest rates (like opening the nozzle wider). This makes it cheaper to borrow money, so people and businesses are more willing to spend and invest. If they want to slow down the economy to prevent inflation (like avoiding overwatering), they raise interest rates, making it a bit more expensive to borrow, so people spend less. 3. Keeping the Garden Healthy (Economic Goals): Just like you want your garden to be healthy and flourishing, the central bank wants the economy to be in good shape. They aim to do three main things: keep prices steady (so things aren't too expensive), make sure people have jobs (so they can take care of their needs), and avoid economic chaos (like preventing a flooded garden). 4. Timing Matters (Economic Timing): You water your garden when it needs it the most. Similarly, the central bank looks at how the economy is doing and adjusts interest rates at the right time. If they see that the economy is slowing down and needs a boost (like dry soil needing water), they lower interest rates to encourage spending and investment. If they see signs of too much activity and the risk of inflation (like soggy soil from too much water), they raise interest rates to slow things down. So, in simple terms, think of the central bank as the gardener of the economy, using interest rates to control the flow of money like adjusting the garden hose to keep the economy healthy, not too dry and not too flooded. They aim to make sure everything grows and thrives just right. That's what monetary policy is all about! 6.6. MEASURES OF MONEY SUPPLY The ultimate objective of Monetary policy tool is to control money supply. Measures of money supply: M1, M2 are: M1- Narrow measure of money supply M1- This is also called transaction money because it is money available to settle transactions immediately. – Notes and coins in circulation – Balance on demand deposit accounts M2 is also called quasi money or Broad Measure of Money Supply – Balances on savings accounts – Balances on time deposits accounts – notes, coins, demand deposits, savings deposits and time deposits 27  6.7. What are the tools of monetary policy? Every Central Banking system in the world controls money supply with: 1. Reserve requirements (called Cash Reserve Ratio in Nigeria 45%). 2. Rediscount Rate (called MPR in Nigeria 22.75%) 3. Open Market Operation 4. Liquidity Requirements (also known as Liquidity Ratio 30%) Reserve Requirements: Central banks can establish reserve requirements, which dictate how much money banks must keep in reserve (rather than lending out). Adjusting these requirements can influence the amount of money banks have available for lending. Increasing Reserve Requirement reduces the volume of money in circulation as more money has to be held in reserve, while decreasing Reserve Requirement increases the volume of money in circulation. Rediscount Rates (Monetary Policy Rate): Central banks can influence the economy by setting Monetary Policy Rates. This is the rate at which the central bank lends money to Commercial Banks, who in turn are able to lend to businesses and individuals. When the government wants to stimulate economic activity, it may, through the Central Bank, lower MPR, making it cheaper to borrow money for businesses and individuals. Conversely, they may raise interest rates to slow down the economy when it's growing too quickly or to combat rising inflation. Open Market Operations: Central banks can buy or sell government securities (like Treasury bills, treasury bonds etc) on the open market. When the Central Bank buys securities, it results in an injection of money into the banking system, while selling them removes money. This helps control the money supply and interest rates. Liquidity Requirement is the ratio of bank’s deposits that banks are mandated to hold in liquid and semi liquid instruments. This requirement can be increased or decreased to facilitate an increase or decrease in the overall Supply of Money in the economy. 6.8. How the MPR Affects The Economy 28 The Monetary Policy Rate is basically the rate at which the apex bank (Central Bank) lends money to other commercial banks in the country. Depending on what the rate is at a particular time, the monetary policy rate has a rippling effect on almost every aspect of the economy and essentially the quality of life of citizens. Below are six (6) ways the monetary policy rate affects the economy: Regulates Cost of borrowing Regulates Cost of servicing loans: Regulates Inflation Rate: Availability of Credit: Regulates Employment: Regulates Inflation: A SUMMARY OF MONETARY POLICY TOOLS 29  6.9. The Nigerian Economy Context: DISCUSSION The economy of Nigeria since COVID has had a series of upheavals. Currently, the following are some of the latest developments: High and rising levels of inflation Foreign exchange challenges Increase in the Value Added Tax rate Looking at a Pre-Covid and Post-Covid review of the above indices, explain how Fiscal and Monetary policies can be used to address these chllenges. Suggested Addressing economic challenges such as high inflation rates, poor exchange rates, and a recently increased VAT rate typically requires a combination of fiscal and monetary policies. Here's how each policy can be applied in such a scenario: High Inflation Rates: 1. Monetary Policy: The central bank can use monetary policy tools to combat high inflation: Raise Interest Rates: By increasing interest rates, borrowing becomes more expensive. This encourages people and businesses to save rather than spend, which can help reduce demand in the economy and put downward pressure on prices. Reduce Money Supply: The central bank can also implement policies to reduce the money supply, such as selling government bonds to absorb excess money in the economy. 2. Fiscal Policy: Fiscal measures can complement monetary policy: Reduce Government Spending: The government can cut back on its spending to decrease demand in the economy. This can include postponing non-essential projects or reducing subsidies. Increase Taxes: Raising taxes, especially on non-essential goods and services, can help reduce consumer spending, which can contribute to lower inflation. Poor Exchange Rates: 30  1. Monetary Policy: Foreign Exchange Market Interventions: The central bank can buy or sell its currency in the foreign exchange market to stabilize exchange rates. If the domestic currency is depreciating, the central bank can sell foreign currency reserves to support its value. 2. Fiscal Policy: Promote Exports: The government can implement policies to boost exports, such as providing incentives to exporters or improving infrastructure to facilitate trade. A stronger export sector can improve the balance of payments and support the currency. Recently Increased VAT Rate: 1. Monetary Policy: Monitor Price Movements: The central bank should closely monitor the impact of the VAT rate increase on overall prices. If it leads to a significant increase in inflation, monetary policy tools, like interest rates, can be adjusted accordingly to counteract the inflationary pressures. 2. Fiscal Policy: Income Support: To mitigate the immediate impact on lower-income individuals and families, the government can consider targeted income support programs or subsidies for essential goods and services. Communication and Education: The government should communicate the reasons for the VAT rate increase and its intended impact clearly to the public. Additionally, educating consumers about how to manage their finances and make informed decisions can help them adapt to the new tax regime. In all these scenarios, coordination between fiscal and monetary authorities is crucial. Additionally, policymakers should be prepared for potential side effects and unintended consequences of policy changes and be ready to adjust their strategies as needed to achieve their economic goals. MODULE 7 BALANCE OF PAYMENTS 31  To understand Balance of Payment (BOP), you can think of it in terms of a country having one bank. Just like an individual having a piggy bank or a savings account to keep track of money, countries also have an account to keep track of all the money they spend and get when they do business with other countries. This account has two sides to it; The "In" Side (Exports and Investments): This side keeps track of all the money that comes into the country from other places. It includes things like money earned from selling products to other countries (exports) and money that comes in when people from other countries invest in businesses or buy things in our country. The "Out" Side (Imports and Spending Abroad): On this side, we keep track of all the money that goes out of our country to other places. It includes things like money spent on buying products from other countries (imports) and money that our people spend when they go on trips or buy things from other countries. Now, the important thing is to make sure that the money on the "in" side is balanced with the money on the "out" side. Just like you wouldn't want to spend more money than you have saved, a country wants to ensure that it spends just as much as it receives from other countries at the very least. If the "in" side has more money than the "out" side, we call it a "surplus." It means the country is making more money from other countries than it is spending there. On the other hand, if the "out" side has more money than the "in" side, we call it a "deficit," which means the country is spending more money in other countries than it's earning. Balancing the money is important for a country because it helps keep the economy healthy. If we have a big deficit and spend way more than we earn from other countries, it can cause problems like owing lots of money. But if we have a surplus, it's like saving for the future, which is good too. The balance of payments (BoP) is a systematic record of all economic transactions between the residents of one country and the rest of the world during a given period of time, typically a year or a quarter. It is an important economic indicator that helps countries and policymakers understand their international financial position and track the flow of money in and out of their economy in relation to the rest of the world. 32  The balance of payments is typically divided into three main components: Current Account This accounts for the trade in goods (exports and imports), trade in services (such as tourism and consulting services), income (such as interest and dividends), and transfers (like foreign aid or remittances) between a country and the rest of the world. It reflects the day-to-day economic activities of a nation with other countries. A surplus in the current account indicates that a country is exporting more than it is importing and is often seen as a positive sign for the country's economy. A deficit in the current account suggests that a country is importing more than it is exporting, which can raise concerns about its ability to pay for these imports. Capital Account This accounts for international capital flows, including investments in financial assets like stocks and bonds, as well as physical assets like real estate. It also includes transfers of ownership of fixed assets. Financial Account This accounts for changes in a country's ownership of foreign financial assets and liabilities. It includes foreign direct investment (FDI), portfolio investment (such as purchases of stocks and bonds), and other financial transactions like loans and currency reserves. 7.1. THE MAJOR EXCHANGE RATE MECHANISMS EMPLOYED BY COUNTRIES An exchange rate is the rate at which one currency can be exchanged for another. It represents the value of one country's currency relative to the currency of another country and plays a critical role in international trade and finance. 33 Countries use various exchange rate mechanisms to determine the value of their currency relative to other currencies. The following are the primary exchange rate mechanisms employed by different countries, each with its advantages and disadvantages. The choice of mechanism depends on a country's economic goals, stability objectives, and overall economic conditions: 7.1.1. Fixed/Pegged Exchange Rate Mechanism In a fixed exchange rate system, a country's central bank or government sets a specific value for its currency in terms of another currency or a fixed asset like gold. The central bank then intervenes in the foreign exchange market to maintain this fixed rate by buying or selling its currency as needed. This mechanism provides stability but can be challenging to sustain over the long term. 7.1.2. Floating Exchange Rate Mechanism In a floating exchange rate system, the currency's value is determined by market forces of supply and demand. Governments and central banks do not actively intervene to maintain a specific exchange rate. Instead, the currency's value fluctuates based on various economic factors like interest rates, inflation, and economic performance. It's a more flexible system, and exchange rates can change frequently. 7.1.3. Dirty Float Mechanism In a dirty float system, the government or central bank occasionally intervenes in the foreign exchange market to influence the exchange rate. This intervention can be to stabilize the currency, prevent excessive fluctuations, or achieve specific economic goals. It's a flexible system with some level of government involvement. 34