Abstract

The study examines the effect of monetary policy on the economic growth of Cameroon. The model specifies economic growth measured by gross domestic product as dependent on monetary policy variables proxy by money supply, interest rate and inflation rate. Annual time series data from World Bank 1990-2022 was sourced using secondary data and analyzed using ordinary least squared estimation technique.

Results show that monetary policy has a significant impact on economic growth. Both money supply, interest rate have a significant positive effect on the economic growth of the country while inflation rate has a positive insignificant effect on the GDD growth of Cameroon. Thus, the study therefore recommends that CEMAC countries should review their interest rate policy appropriately so as to stimulate output growth. In addition, there is a need for CEMAC countries to work towards achieving an effective real exchange rate that will help to increase output growth.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Monetary policy is a key factor of macroeconomic management in both developed and developing economies. A clear understanding of the transmission mechanism of monetary policy is also virtual that significantly affect the success of monetary policy implementation (Anowor & Okorie, 2016; Srithilat & Sun, 2017).

Numerous economists and researchers have been devoted on finding evidence for monetary policy effectiveness and its impact on macroeconomy by employing data from difference countries (Mengesha & Holmes, 2013; Partachi & Mija, 2015). The most frequently mentioned of monetary transmission channels in the previous literature including interest rate channel, credit channel, exchange rate channel, asset price channel and expectation channel (Afandi, 2005; Bhuiyan, 2012; Boivin et al., 2010; Bredin & O’Reilly, 2004; Carlyn, 2004; Loayza & Schmidt-Hebbel, 2002; Maliszewski, 2005; Suzuki, 2004).

In recent years, the impact of money supply, interest rate and inflation rate on economic growth has been at the centre of attention more so than other topics related to monetary economics due to its present direct effects in the world. The importance of economic growth as a main macroeconomic objectives of developing and developed countries, has been encompassed by monetary economists such as McKinnon (1973), Shaw (1973), Mathieson (1980), Odedokun (1996), Levine (1997) and Asogu (1998) who have all dedicated their studies in examining the influence of money supply and interest rate on output, with mixed findings.

As some authors conclude that the most important influence of economic growth is the variations in the quantity of money, other researchers state that nations that pay particular attention to examining behaviour of aggregate money supply rarely experience high levels of variations in their economic activities (Handler, 1997, Mansor, 2005, Townsend &Ueda, 2005, Owoye & Onafowora, 2007), as such are sceptical about the role of money or gross national income (Robinson, 1952).

Monetary policy comprises a combination of strategies and instruments used by the monetary authorities to control money supply in an economy consistent with a desired level of short term interest rate, inflation and economic growth. In a changing economic environment, the choice of a monetary policy strategy is intertwined with the objectives of monetary policy which include ensuring price (inflation, exchange rate and interest rate) and financial stability. Thus, the conduct of monetary policy and the goal of price stability lie within the mandate of central banks (CBN, 2007).

The Classical Economists like Jean Baptiste Say, David Ricardo and Adam Smith with his principle of the invisible hand rejected government interference in an economy because such interventions result in distortions in optimal resources allocation. This view was questioned in Europe between 1925 and 1936 when unemployment rose by 25 percent, stock market prices failed between 50 and 60 percent of their face values and inflation almost doubled for every quarter of a year (Njimanted, 2016).

Due to the above economic distortions, prominent scholars of the Keynesian school like George Akerlof, Paul Krugman, Rober Shiller and John Maynard Keynes accepted the role of government in an economy. These included among others, the creating of frameworks of rules and regulations governing the production and distribution of goods and services in the economy. The government is also charged with the responsibility of defending its country from foreign aggression, establishment and implementation of justice, maintenance of internal order and operating institutions through which marginal social welfare could be encouraged.

According to the Keynesian scholars, the government is also expected to maintain economic stability through exchange rate control, price control, import control, income redistribution through taxation, pursuance of optimum growth and sustainable balance of payments surplus. It is therefore, expected that the government of any country could adopt contractionary or expansionary monetary policies to achieve its visionary goals.

Monetary policy measures play a vital contribution in the economic growth of a country. Central authorities through the managerial extent of money supply, interest rate and various monetary measures of economic activities control monetary policy to attain set objectives.

Monetary policy also considers a source of economic growth to attaining full employment and improving balance of payment (BOP). Stabilization of exchange rate, price level and interest rate are prominent monetary policy functions performed to control money market through money measures.

Monetary policy affects macroeconomic goals like balance of payments, price stability, economic growth and other objectives, which all lead to economic development. Nokoro (2005) mentioned economic growth as prerequisite to reducing poverty and improving standard of living and priority based to its effectiveness and increasing overall economic progress.

Monetary policy performs the main function of macroeconomic policy. For this reason, it is faced with the challenge of maintaining stable inflation rate in a volatile environment of the economy. While performing this function, the economic goals of the government must also be supported to realize the general macroeconomic objectives.

As a member of the Central African Monetary Union (CEMAC), Cameroon has no independent monetary policy. This automatically means that her credit expansion depends strongly on the CEMAC conditions. Thus, proper examination of the stages of Economic and Monetary integrations within the CEMAC zone explains that the link between member countries even at the level of “Free Trade” agreement is weak.

The issues associated with coordinating and harmonizing of monetary, fiscal and exchange rate policies as well as industrial, agricultural and even socio-economic policies are still to be achieved. Since no common exchange rate is used by Member States, and member countries have no common interest rate, it means that monetary policy as a determinant of economic growth in the individual states of the CEMAC Zone is questionable. Therefore, the present study is designed to investigate how variations in monetary policy affect productivity in Cameroon through money supply, interest rate, inflation rate and real exchange rate.

To facilitate the conduct of the monetary policy in CEMAC and to achieve price stability, two monetary policy rules are incorporated in its statutes: the BEAC limits the stock of total advances to governments to 20 percent of the previous year’s fiscal revenues and BEAC’s designed to keep gross foreign reserves for each Central Bank above 20% of sight liabilities. The economic performance of CEMAC countries had experienced improvements following the devaluation of the FCFA in 1994, although there were occasional droppings, according to Zafar and Kubota (2003): “Gabon’s fiscal crisis during the 1998 election year; Congo’s civil war of 1997-1999, several army mutinies in the Central African Republic in 1990 and 2002, and the impact of oil price volatility among others”.

Price stability has been partially kept since the FCFA devaluation from 1994. The BEAC’s member governments comprehended the fact that devaluation could bring back competitiveness and macroeconomic stability only if the price level (including wages) did not proportionately increase (Zafar and Kubota, 2003).

Within the Central African Economic and Monetary Community (CEMAC), monetary policy is managed by a monetary emission body known as the Bank of Central African States (BEAC) and according to its status, the prior objective of monetary policy is to ensure monetary stability which implicitly includes: maintaining an external coverage rate of the currency on the one hand and ensure a low increase in the general level of prices (Community norms are 3% on average per year within the framework of the multilateral surveillance mechanism) on the other.

In the CEMAC zone, monetary policy is restrictive in order to avoid inflation exceeding the 3% level which seems to be dangerous for economic activity in the zone. The recent statistics of the World Bank on the evolution of monetary policy and inflation in Cameroon shows that from 2012 to 2016, the supply of money went from 20.30% of the GDP in 2012 to 20.93% in 2013, then from 21.51% in 2014 to 22.10% in 2015 and became stable around 22.68% in 2016 while the rate of inflation went from 2.94% to 1.95%, then from 1.95% to 2.69% and was stabilised around 2.60% during the same period.

Investigating into the Cameroon economy, one could observe that money supply and interest rate, which according to the Keynesian economists, induced certain changes on an economy, are observed not to have performed as expected since 1960, the year of independence. For example, in 1960, while the real economic growth stood at 8.63 percent, broad money supply stood at 30.71 billion FCFA with interest rate of 3.2 percent (World Bank, World Table, 1989-1990). Also, the slow growth rate in experienced recent years is also a call for concern.

For example, the Gross Domestic products stool at 2.70 percent in the first quarter of 2018 over the previous quarter. GDP Growth Rate in Cameroon averaged 1.04 percent from 2010 until 2018, reaching its peak of 2.90 percent in the first quarter of 2013 and a low record of -1.60 percent in the fourth quarter of 2015 (World Bank, World Table, 2019).

1.2 Statement of the Problem

As a member of the Central African Monetary Union (CEMAC), Cameroon has no independent monetary policy. This automatically means that her credit expansion depends strongly on the CEMAC conditions. Thus, proper examination of the stages of economic and monetary integrations within the CEMAC zone explains that the link between member countries even at the level of “Free Trade” agreement is weak.

The issues associated with coordinating and harmonizing of monetary, fiscal and exchange rate policies as well as industrial, agricultural and even socio-economic policies are still to be achieved. Since no common exchange rate is used by Member States, and member countries have no common interest rate, it means that monetary policy as a determinant of economic growth in the individual states of the CEMAC Zone is questionable.

The dynamics of monetary policy is captured through some specified monetary policy variables such as interest rate, money supply and exchange rate. The volatility in these three variables owing to external shocks has important implications on the growth of Sub-Sahara Africa countries including CEMAC countries (Afful & Asiedu, 2013). Furthermore, the International Monetary Fund (IMF) places great emphasis on monetary policy in its programs for developing countries, especially Sub-Saharan Africa (SSA) because it views such policy as crucial in managing inflation and stabilizing exchange rates.

Furthermore, developing countries (including CEMAC countries) have introduced not only different monetary policies but also exchange policy to improve their macroeconomic performance yet much is not achieved. However, failure of these policies to meet up with their targeted objective might be as a result of not taking cognizance of the dynamics of monetary policy. Therefore, the broad objective of this study is to investigate monetary policy and output growth in one of the CEMAC countries Cameroon.

Although, there are a voluminous literature on the effect of monetary policy and its transmission mechanism channel on economic in developed and developing economies, the existing literature were mostly conducted in the well-developed financial market one. There is lack of literature and consensus about effect of monetary policy and its transmission channels shock to the real sector in the economies with underdeveloped financial market. Particularly, in countries where financial markets are at the early stage of economic development and not well functioning (Nguyen, 2014; de Mello & Pisu, 2010). The understanding of any change of monetary mechanism on macroeconomic variables assist policy maker in deciding select an appropriate policy instrument in order to promote higher investment and faster pace of economic in the future.

Low level of economic growth in Cameroon has contributed greatly to the problems the nation is currently facing especially in the North West and South West Regions of the country. As stated in the Cameroon’s Growth and Employment Strategy Paper, the Cameroonian government has made a high-level political and economic decision to improve on Agro-industrial plantations, to promote job creation, economic growth, and development. Also, it is a wish that Cameroon become an emergent nation by the year 2035 as stated in the Cameroon’s Vision 2035 Document.

Since 1960, the date of independence, the Government of Cameroon had introduced a series of internal policy thrusts to achieve her expected target of double-digit growth rate, single digit inflation rate, internal and external stability. Some of the economic policies adopted so far were the Structural Adjustment Programme (SAP) of 1988/1989 and the austerity programme of 1987.  The 60 percent reduction in the salaries of civil servants in 1993, the trade liberalization programmes of 1990, the suspension of the CFAF convertibility between BEAC and BCEAO in 1994 was further put in place.

Next were the 50 percent devaluation of FCFA by the Central African Monetary Union (CEMAC), in 1994, the poverty alleviation strategies of 2000, the National Governance Programme (NGP) of 2000, the Good Governance Unit (GGU) of the National Assembly of 2006, the national Anti-Corruption Drive (ACD) of 2006 and the operation Declaration of Assets (ODA) of 2006 were also put in place.

Despite the above policies, the level economic growth in Cameroon is still low. This means that either a right policy has been introduced at a wrong time or the root causes of the problems are still to be identified and solved. Therefore, this study intends to investigate into the influence of monetary policy via interest rate, money supply, inflation rate and real exchange rate on economic growth in Cameroon.

1.3 Research Questions

1.3.1 Main Research Question

What is the effect of monetary policy on economic growth in Cameroon?

1.3.2 Specific Research Questions

1. How does the money supply affect the GDP of Cameroon?
2. What is the effect of interest rate on the GDP of Cameroon?
3. Does the inflation rate affect the GDP of Cameroon?

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