Central Bank of Nigeria Communiqué No. 84 of the Monetary Policy
Committee Meeting of Monday and Tuesday July 23 and 24, 2012

The Monetary Policy Committee met on July 23 and 24, 2012
with 11 out of the 12 members in attendance. The
Committee
reviewed
the
economic
conditions
and
challenges in the first half of the year against the backdrop
of developments in the international economic and
financial environments with a view to considering the
monetary policy options for the remaining part of 2012.
The Global Economy
The Committee noted the continued fragility of global
economic recovery and the increased downside risks to
growth in 2012. In particular, the sovereign debt and
financial sector problems, together with recession in the UK
and some Euro zone countries and reduced growth rate in
the US continue to affect China, India and Brazil’s exportdriven growth. This has necessitated a downward revision of
the projected global output growth for 2012 by the IMF in
the July 2012 WEO Update. While the effort to fix banks and

sovereign balance sheets by the European Central Bank
using long term refinancing operations eased funding
constraints and broadly rallied the assets markets, these
gains were short-lived due to the intensification of policy
uncertainty after the Greek and French elections, strong
dampening effects of the financial fragility in the Euro Area
peripheral
states
and
public
resistance
of
austerity
measures. In the advanced economies, the weakness in
the labor and housing market, the elevated debt level of
the households and the need to fix the encumbered
balance sheets of banks are likely to continue to constrain
growth prospects. Consequently, the growth forecast in the
advanced countries was downgraded by 0.2 percentage
points to 1.4 per cent in 2012 relative to the April WEO
estimates.
In the United States, reduced retail sales and investment,
growth rate concerns about public debt and
the
uncertainty over domestic fiscal plans due to failure to
reach an agreement on near-term tax and spending
policies constitute severe threats to economic recovery.
Thus, output growth in the US for 2012 was revised slightly

downward to 2.0 per cent from 2.1 per cent by the IMF in
the July 2012 WEO.
In the Euro area, Real GDP growth is expected to contract
from an annual rate of about 1.4 per cent in 2011 to -0.3 per
cent in 2012 with France, Italy and Spain leading the
contraction in growth. The revised growth rate of 1.0 per
cent for Germany in July is an improvement of 0.4 per cent
over the April 2012 IMF growth projections. The risk to
growth in the euro area is amplified by geopolitical
uncertainties and the risk of stagnation and long-term
damage to potential growth as unemployed workers lose
skills and new entrants find it difficult to join the active labor
force.
In the UK, despite the Bank of England’s monetary measures
to stimulate growth, the effect of the Treasury’s fiscal
consolidation for reducing the budgetary risk remains
strong, leading to weak business and consumer confidence.
Thus, real GDP growth was projected at 0.2 per cent against
the initial projection of a contraction of 0.4 per cent.
Spain’s latest round of austerity measures failed to reassure

investors and markets, as the country’s borrowing costs
continued to rise.
In emerging economies, the lag effect of past policy
tightening has continued to weaken internal and external
demand thereby limiting growth. In China, real GDP growth
slowed to 7.6 per cent year on year in the second quarter of
2012, compared with 8.9 per cent in the fourth quarter of
2011, due mainly to weak external conditions, particularly
sluggish demand from the euro area. Real GDP growth
forecast for 2012 has been reduced to 8.0 per cent from
earlier forecast of 8.2 per cent. India’s real GDP growth
moderated to 5.3 per cent, year on year, in the first quarter
of 2012 compared with 6.2 per cent in the fourth quarter of
2011, with the projection for 2012 put at 6.1 per cent
compared with 7.1 per cent in 2011.
Output performance in Sub-Saharan Africa is projected at
5.4 per cent in 2012. While exports to Europe have
dropped, strong terms of trade and increased trade
diversification towards emerging markets have helped
support growth in the region. A major issue in the region,
however, is that inflationary pressures and reduced fiscal

space present limited flexible policy options for manoeuver,
especially if downside risks materialize.
Overall, the slowdown in global economic activities would
have serious implications for the Nigerian economy in the
following respects: A softening in the demand for oil and
consequent decline in oil revenues; reduction in foreign
exchange earnings which would impair the build-up of
external reserves and consequently exert pressures on the
exchange rate; increased budget deficit as government
would not be able to realize its revenue projections; and
increased public sector borrowing to finance expenditure
outlays.
Key Domestic Macroeconomic and Financial Developments
Output and Prices
The revised GDP growth rate projected by the National
Bureau of Statistics (NBS) for the Q2 2012 at 6.37 per cent
was higher than Q1 2012 level of 6.17 per cent, indicating
increased momentum in the economy. Overall, GDP growth
for 2012 was projected at 6.38 per cent, down from the
realized growth rate of 7.74 per cent in 2011. The projected

decline in GDP growth for 2012 is attributable to a number
of factors including: the estimated loss of about N207.41
billion in national output during the nation-wide strike in
January; the dampening effects of low crude oil demand
from major trading partners notably the US, Euro area, and
China; falling oil prices, and weak aggregate domestic
demand following rising prices across major segments of the
economy; as well as the prevailing security concerns.
The non-oil sector remained the major driver of growth
recording 7.52 per cent increase in contrast to the oil sector
which contracted by 0.24 per cent during the period. The
Committee noted the sustained slowdown in the growth in
agricultural output of 4.08% in the second quarter
compared with 4.15% in the first quarter, traceable to the
continued security challenges which affected a large part
of the farming population in the northern parts of the
country during the period. The Committee also expressed
serious concerns over the continued decline in the
contribution of oil to GDP, which became apparent from
the second half of 2011, and intensified through Q1 and Q2,
2012. Its contribution to growth, declined by 0.40 per cent

apiece in the third and fourth quarters of 2011, and
declined to 0.40 and 0.04 per cent in Q1, 2012 and Q2 2012,
respectively. There are serious concerns over continuing
fiscal leakages, bunkering and oil theft in the Niger-Delta
area.
This notwithstanding, the Committee was pleased to note
that the growth projections were against the backdrop of
severe weaknesses in the global economy. Thus, domestic
output growth was anchored by the positive impact of the
banking sector reforms as well as the initiatives by
government to stimulate the real economy such as
improvement in national electricity generation which rose to
2,900 MW/h as a result of increased gas supply to the
thermal stations, increased water level at the hydro stations,
and the resuscitation of some dormant generating stations.
The Committee noted significant downside risks to growth in
the near-term, in particular the fall in the average spot price
of Nigeria’s reference crude, the Bonny Light, from
US$121.10 in the first quarter of 2012 to US$109.32 in the
second quarter, and the current security challenges which
continue to pose a threat to agriculture and manufacturing.

Prices
The Committee noted the threat of Inflationary pressure
which has re-emerged since the beginning of 2012. The
year-on-year headline inflation rose to 12.9 per cent in June,
2012 against the 12.7 per cent in May 2012. Core inflation
rose to 15.2 per cent in June, 2012 from the 14.9 per cent
level in May, though food inflation, declined from 12.7 per
cent in May to 12.0 per cent in June 2012. The major drivers
of headline inflation during the period were food and nonalcoholic beverages and housing, water, electricity, gas
and other fuels. The acceleration in core inflation in the
second quarter was traced to increases in the contributions
of processed food and housing, water, electricity/gas and
other fuels.
The Committee noted that in addition to the lag effects of
the partial removal of petroleum subsidy in January, other
factors fuelling the upside risk to inflation in the near-term
include borrowing by government to cover large fiscal
deficits in the 2012 budget, and the upward review of
electricity tariffs and import Duty on wheat and rice in July
2012.

Monetary, Credit and Financial Market Developments
Broad money supply (M2) grew by 1.35 per cent in June
2012 over the level at end-December, 2011, translating to
annualized 2.70 per cent growth, which was lower than the
growth rate of 10.77 per cent year-on-year. Relative to
December 2011, aggregate domestic credit (net) declined
by 2.73 per cent in June 2012, annualized to a decline of
5.46 per cent. The decline contrasted sharply with the
growth of 49.76 per cent year-on-year. Although overall
credit to the private sector increased by 3.60 per cent, the
Committee
noted
that
credit
to
state
and
local
governments grew by 14.23 per cent or 28.46 per cent. On
annualized basis, credit to core private sector grew by 3.2
per cent or 6.4 per cent when annualised. Consequently,
the Committee reiterated its earlier advice that the CBN
should put in place appropriate measures that would
enhance the flow of credit to the core private sector, and
fix the transmission mechanism.
The Committee noted that rates in all segments of the
money market trended upward between May 21 and July
11, 2012. Inter-bank call and OBB rates which opened at

14.61 and 14.43 per cent, closed at 15.55 and 15.50 per
cent, respectively. The increase in the rates was a reflection
of the tight liquidity in the banking system traceable to the
aggressive open market operations, given that the MPR
remained unchanged during the period.
Retail lending rates remained high in June 2012 as the
average maximum lending rate remained unchanged at
23.44 per cent in June 2012. On the other hand, the
consolidated deposit rate fell marginally from 3.83 per cent
in May to 3.82 per cent in June. In view of these
developments, the Committee reiterated its earlier call to
put in place an appropriate mechanism for reducing the
interest rate spread, while stabilizing interbank rates to
sustain liquidity and facilitate intermediation in the banking
system.
External Sector Developments
Gross external reserves as at July 19, 2012 stood at US$37.16
billion, representing an increase of US$ 0.33 billion over the
level of US$36.83 billion at end-May 2012. The exchange
rate at the wDAS-SPT opened at N157.26/US$ on May 21
and closed at N157.43/US$ on 12th July 2012, representing

N0.17k or 0.11 per cent depreciation during the period. At
the interbank segment, the selling rate opened at
N158.80/US$ and closed at N161.20/US$, with a period
average of N161.60/US$, representing a depreciation of
N2.40k or 1.51 per cent. At the BDC segment of the market,
the selling rate opened at N160.00/US$ and closed at
N163.00/US$, representing a depreciation of N3.00k or 1.87
per cent for the period. During the period, the naira
weakened to as low as N163.00/US$ due to developments
in the external economy and the CBN had to intervene
significantly in the interbank market to restore stability. The
Committee
expressed
concern
about
the
declining
accretion to external reserves. The Committee noted that
the premia between the rates at the wDAS and the
interbank and between the wDAS and the BDCs narrowed
towards the end of the review period, and therefore urged
the Bank to sustain the existing measures to discourage
speculative demand in the market.
The Committee’s Considerations
Against the backdrop of the foregoing review of the global
and domestic economic and financial environments, the

Committee observed that monetary policy faces a difficult
task in terms of delivering price stability. Domestic conditions
indicate rising unemployment, poverty, declining growth
and rising inflation. Consequently, the money and foreign
exchange markets appeared to be operating at suboptimal levels. It noted that with the weakened global
outlook underpinned by the slowdown in economic
activities in the US, and major emerging economies like
Brazil, China and India, contraction in output in the Euro
area along with the persisting debt crisis which is proving
difficult to resolve, lower demand for crude oil and lower
crude oil prices, coupled with the lower domestic output
growth, build-up of inflationary pressures, slowdown in the
accretion to external reserves and the attendant pressures
on the exchange rate as well as possible shortfall in the
projected revenue for 2012, the ominous signs for the
domestic economy are evident. In this regard, therefore,
monetary policy is faced with very difficult choices, as
whatever policy action taken must be weighed against the
possible
trade-off(s)
and
implications
for
the
wider
economy.

The Committee further noted that the inflation environment
remained uncertain with the possible pressures coming from
the core component in the medium term. Domestic
inflation has maintained its upward trend, and is expected
to remain within that region over the six month forecast
period. More so, the Committee observed that since its
meeting in May 2012, growth prospects continued to be
threatened by developments in Europe, China, India and
the US, as well as the very slow progress in structural reforms
and poor implementation of the capital budget for 2012.
The Committee observed further that during 2008-2009
when oil prices declined sharply and the domestic currency
came under intense pressure, the CBN was able to defend
the Naira because the nation had buffers, having
accumulated substantial foreign exchange reserves when
oil prices were high, but that this time around that luxury
does not exist, as the excess crude account has largely
been depleted, and is still being depleted by the tiers of
government.

The Committee also noted that the upside pressure could
be further exacerbated by pressures in the foreign
exchange market in view of the high demand in the market
and the likely impact of the decline in international oil prices
in recent weeks on the country’s external reserves. Bonny
light crude oil prices have not rebounded from their recent
lows of around US$97 per barrel in June, partly due to the
crisis in the Euro area, a major export destination of Nigeria’s
crude oil.

The Committee, therefore, identified a number of key
concerns that it was confronted with:
i. Stemming the inflationary pressures arising from both
domestic and external sources;
ii. Sustaining a stable exchange rate for the naira;
iii. Creating a buffer for the external reserves; and
iv. Mitigating the impact of the continued slowdown in
global economic activities, particularly, in the US,
Europe and China on the Nigerian economy.

In the Committee’s view, these challenges would persist in
the medium-to-long term with the attendant consequences
on oil receipts. The Committee noted the fears about
Europe’s debt crisis which flared recently as concerns
intensified that Spain would be next in line for a government
bailout. It noted that the potential cost of a Spanish bailout
far exceeds what is available in existing emergency funds.
Already, the European decline has taken its toll on oil
demand and exports. The rising global uncertainty and
weaker external demand are causing headwinds for exportdependent economies. The unfavorable outlook is further
strengthened by the fragile domestic conditions. The MPC is
of the view that growth could further decline during the rest
of the year.
Thus, the MPC is confronted with basically three choices:
first, lower the MPR in the face of sustained slowing domestic
output
growth
and
concerns
about
global
growth
prospects. The MPC viewed that a lowering of the rates in
the face of sustained slower growth of output and global
growth prospects could further weaken the exchange rate
and adversely affect reserves at a time when the country

needs to build up buffers against external shocks. It also
reiterated its view that the growth challenge is a result of
poor record of implementation of structural reforms and the
capital budget.
Second, to leave the MPR unchanged. This is against the
background of upward trending inflation figures and the
precarious picture painted by the six months inflation
forecast of the Bank, revised upwards since the MPC
meetings of May, 2012. Inflation is expected to average
12.0 per cent during the next six months with core and food
inflation being much higher. The forecast is mainly due to
the increase in electricity tariffs and the tariff on imported
rice and wheat.
The Committee recognized that a logical response to the
increasing inflationary outlook would be an increase in the
MPR, especially considering the impact of sustained liquidity
in the banking system on exchange rates. It was, however,
conscious of the impact of higher interest rates on small
businesses and the potential for higher non-performing loans
on the books of banks. In addition, it is important to leave

room and flexibility for further tightening should conditions so
warrant in the near future.
However, it is important to note that the significant liquidity
on the books of banks has not led to intermediation and
lending to the real economy. Banks have continued to take
advantage of high yields on government securities to direct
credit away from the core private sector. In addition, the
liquidity has provided ammunition for speculative activity in
the
foreign
exchange
market
with
implications
for
inflationary expectation.

Against the foregoing, therefore, the MPC reiterated the
need to choose a policy trajectory that would have the
least negative impact on the wider economy, to the extent
that the longer-term benefits to the economy far outweigh
the short-term costs. It was therefore, imperative to reduce
the liquidity in the banking system and minimize the upward
movement in MPR.

The Committee’s Decisions
In view of the foregoing, the Committee, decided as
follows:
(i)
Retain the Monetary Policy Rate (MPR) at 12.00 per
cent with symmetric corridor of +/-200 basis points by a
vote of 10 to 1. One member voted to reduce MPR by
25 basis points to 11.75 per cent.
(ii)
Voted by a decision of 10 to 1 to increase the Cash
Reserve Requirement (CRR) from 8.0 per cent to 12.0
per cent with effect from July 25th. One person voted
to retain the CRR at 8.0 per cent.
(iii) Unanimously agreed to reduce the Net foreign
exchange Open Position (NOP) to 1.0 per cent from 3.0
per cent with immediate effect.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria

24th July 2012

PERSONAL STATEMENTS BY MPC MEMBERS:

1.0 ALADE, SARAH
Headline inflation edged up to 12.9 percent in June from 12.7 percent recorded in
the previous month. In the international scene, growth prospects remain fragile
and weak. The contraction in the euro area is expected to be more protracted than
previously anticipated and in emerging markets such as China and India growth is
slowing with overarching consequences to the world economy. On the domestic
front, the anticipated easing of oil prices in the international market on the back
of declining global growth point to greater uncertainty about the future. These
developments, call for a cautious approach to monetary policy to mitigate some of
the risks coming from the global economy while addressing domestic concerns.
Based on this, I will support a no change in monetary policy rate and an increase
in Cash Reserve Requirement (CRR).

Headline inflation edged up to 12.9 percent in June from the 12.7 percent
recorded in the previous month. While this modest increase can be explained by
the usual seasonal effect of the planting season, the spillover effect of the recent
increase in electricity tariff which took effect in June cannot be discounted.
Despite this explanation, inflationary threat remains elevated for the remainder
of the year especially if oil prices remain dampened and the drought in the USA
and other regions threaten global food security. In addition, outlook for inflation
for the next two months is expected to remain elevated for headline, core and
food inflation. Headline inflation is expected to further increase in July from 12.9
percent recorded in June.

Gross Domestic Product (GDP) is projected to grow by 6.38 percent in 2012.
First quarter GDP growth remained at 6.17 percent, down from 7.13 percent
recorded in the corresponding period of 2011. The revised growth rate was,
however, higher than the earlier estimate of 5.34 percent, an indication of some
level of resilience in the economy. The National Bureau of statistics (NBS) is
projecting a growth rate of 6.37 percent for the second quarter of 2012. The nonoil sector remained the major driver of growth recording 7.53 per cent increase in
contrast to the oil sector which contracted by 0.24 per cent during the period. The
growth drivers among the non-oil sector remained agriculture, wholesale and
retail trade, and services, although the contribution of agriculture declined to 4.08
percent in the second quarter from 4.15 percent in the first quarter of 2012 due
to continued security challenges affecting a large part of the farming population
in the northern part of the country.

In the money market, rates increased during the period under review. Interbank call and OBB rates averaged 15.55 and 15.50 percent, respectively, during
the period under review. The increase in the OBB and inter-bank rates can be
attributed more to market segmentation rather than the level of liquidity in the
banking system. In the Nigerian stock exchange, activities remain mixed; while
foreign investors are patronizing the market, domestic confidence and
participation still remain low. The exchange recorded some milestones, including
positive performance for six straight weeks and the All Share Index reaching
23,000 points during this period.

The risk of fiscal expansion in the next two months is very likely. There is
pressure to increase the speed of implement of the budget by the legislative arm
of the government in the third quarter. Additionally, there is a real likelihood that
excess crude will be monetized and shared by the three tiers of government. This
will put upward pressure on both inflation and exchange rate. Therefore all
efforts should be made to ensure that excess liquidity in the system that is not
channeled into productive activities should be sterilized.

Global economic outlook has become more uncertain since the last MPC
meeting in May 2012. Economic and political stress in the euro area has been
rising, with fears growing that one or more countries may leave the currency
union. This, along with a slew of weaker than expected economic data in Europe
and America, has seen the global outlook deteriorate. Major bond yields, global
equity and commodity prices such as oil have been on the decline. Investor
preference towards lower risk assets has driven government bond yields in many
countries to fresh lows, including in the United States, and government bond
yields for troubled nations like Italy and Spain have risen sharply. Signs of stress
have re-emerged in some funding markets, solidifying the global market
sentiment. The lack of meaningful progress towards the resolution of the
Eurozone crisis continues to be a source of instability for the world economy.

The Continued global slowdown will have an impact on the Nigerian economy. If
the slowdown in growth of Nigeria’s main trading partners persists, this could
lead to a softening in demand for and price of oil with negative impact for
Nigeria's oil revenues. The fallout will be the weakening of the naira, reduction in

foreign exchange earnings, and pressure on exchange rate. This is may further
lead to increase budget deficit and public sector borrowing to finance the
expenditure outlays.

Although looming inflationary threat would suggest a hike in monetary policy
rate, the need to support growth with lower interest rate will require a mixture of
options. I am inclined to tilt my decision this time to balance both global risk and
national vulnerabilities. Consequently, I will support a no increase in monetary
policy rate and a 400 basis points increase in Cash Reserve Requirement (CRR).


2.0 BARAU, SULEIMAN
a.
Context Setting
This is clearly a very difficult meeting of the Monetary Policy Committee for
the following reasons:
1.1
There is very clearly huge resurgence of inflationary threat. While Year on
Year (YoY) Headline Inflation (HI) at 12.9% in June was at the same level
compared to April, it is a marginal increase over May level of 12.7%.
Besides, and more significantly, the YoY Core Inflation (CI) measure spiked
to 15.20%, substantially higher than the three year average of 10.97%.
Food Inflation however trended marginally down to 12%. These
developments occurred, inspite of the successful tightening stance in
monetary policy. The inflation outlook particularly for the Core Inflation
(CI) measure is also disturbing.
1.2
There is also evidence of high liquidity in the banking system.
Unfortunately, the bulk of this liquidity is largely invested in government
securities leading to the crowding out of the private sector where the
liquidity should be channeled to generate the much needed growth.

1.3
While there has recently been huge build-up of demand for foreign
exchange the spike in demand at the WDAS window, which peaked for
this year at $4.6 billion in June, 2012, is a particular cause for concern.
Consequently our foreign reserves and the Naira/USD exchange rate has
come under pressure. Inspite of the increase in foreign reserves to $37.16
billion as at July 19, 2012, which is higher than the month end levels in the
preceding one year, it is clear that the outlook for reserves would be a
decline due to the recent increase in demand for foreign exchange if this
trend is not quickly reversed.
1.4
The threat posed by the mild depreciation in the Naira/USD exchange rate
in the three segments of our foreign exchange market is remarkable.
While the premium between WDAS rate of N157.26/USD and N161.24/USD
on May, 18 2.97% is within tolerable level, we have clearly burst the upper
limit for the interbank market rate of N160/USD, with the interbank rate
closing at 161.24/USD during the same period.
1.5
Gross Domestic Product (GDP) growth estimate of 6.37% for the second
quarter shows further decline when compared with GDP growth rates of
6.96%, 7.98% and 7.74% recorded in 2009, 2010 and 2011, respectively.
This has led to a review of year end growth projection to 6.38%.
1.6
In the international arena, there has been sustained negative signal. The
IMF recently reviewed downward the global growth estimate as a result of
the continued downside risks to growth emerging from sovereign debt and
financial sector crises in the Euro Zone countries and slower growth rates in
China, Brazil and India. This development would continue to exert
downward pressure on oil price. This may in turn impact negatively on
government revenues, foreign reserves and ultimately the exchange rate.
b.
Discussion
2.1
After a review of the above and other developments in the economy, the
question is firstly, whether to maintain or change stance in policy? Given

the huge downside risks, I have no doubt that the argument in favour of
maintaining the tightening stance is compelling. The second question is,
should we further tighten? The current spike in Core Inflation (CI), the
pressure on the exchange rate and the declining foreign reserves driven
by the liquidity in the banking system make a compelling case for further
tightening.
2.2
I am, however, aware of the impact of further tightening on financial
stability and growth. In consideration of the impact on financial stability, it
is clear that the regulatory and supervisory framework put in place and the
conclusion of significant aspects of the banking reforms have ensured that
the issue of the huge mark to market and the other major risks faced by
banks have been identified and measures are being put in place to resolve
them. However, in further tightening, I will recommend the use of
monetary policy tools that will not exacerbate systemic risks. On the
impact of further tightening on growth, given the recent slowing down, I
doubt that our past strong GDP growth is largely due to the impact of bank
lending. It is true that bank lending is critical to growth but what is more
important now is structural reform that would create viable borrowers and
elicit desirable private sector credit growth.
2.3
The third question is how do we further tighten? Liquidity in the banking
sector is what we should aim to reduce. The necessary measures to reduce
pressure on exchange rate including the reduction in Net Open Position
limit (NOP) of banks would increase the Naira holdings of the banks.
Liquidity mop up will carry short term pains but the ultimate benefit is that
this would impact positively on inflation and stem the pass through effect
on inflation of any further decline in the value of the Naira. The most
effective way of targeting liquidity, is in my view, through desirable
adjustment in the Cash Reserve Ratio, while maintaining the Monetary
Policy Rate (MRR) given that any upward adjustment of MPR would directly
impact negatively on lending rates and to a limited extent, on growth.
Leaving the MPR unchanged will enable us to retain the fire power in our

war chest to be deployed towards maintaining inflation at a desirable level
in due course.
c.
Recommendation
In view of the foregoing, I recommend as follows:
Maintain Monetary Policy Rate (MPR) at 12%
Maintain the symmetric corridor at plus and minus 2% around the MPR
for Standing Lending and Standing Deposit facilities, respectively
Increase the Cash Reserve Ratio (CRR) from the current level of 8% to
12%
Reduce the Net Open Position (NOP) Limit from 3% to 1%


3.0 GARBA, ABDUL-GANIYU
At the last MPC, the main concerns were
1. The growth in GDP had been declining since the first quarter of 2010.
2. Inflation Pressures were observed in core inflation.
3. The growth in public debt was crowding out private investments, and the
debt service on government borrowing is rising and crowding-out non-debt
expenditure particularly capital expenditure.
4. The Deposit Money Banks had unacceptably high exposures to government
securities and to vulnerable economic sectors.
5. Expected Supply shocks in the second quarter of 2012 in the form of
expected increase in electricity tariff in June and possible increase in the
prices of petroleum products would have stagflationary effects worsening
already precarious socio-economic conditions.

6. There were possibilities of external shocks – (1) commodity price shocks
linked to the low demand season and possible decline in global demand
linked to possible persistence in global economic vulnerabilities and (2) the
potential risks of financial shocks given current exposures to hot money and
the heightened global risks and uncertainties linked to the Euro-zone Crisis
and political changes in key Euro-zone countries and the US elections.
Since the last MPC the state of the economy has been weighed down by:
1. Slowing growth; high unemployment (about 24% with youth
unemployment in excess of 50%) and poverty rates exceeding 70%
2. Unequal gains of tightening: (a) growth in bank profit by 90% in First
Half of 2012 compared to First Half of 2011; (c) persistent net loss of
jobs in the banking industry since 2009; and (b) average 4.4% growth in
sales of top 17 real sector quoted firms; 21.2% growth in sales costs and
only 4.9% growth in capital formation in First Quarter of 2012 compared
to first Quarter of 2011.
3. A growing disconnect between financial sector and the real sector:
much of the profit in the financial sector not dependent on new credit
to the real sector and, credit to the real sector being crowded-out by
lending to government through investments in FGN Bonds and in
Treasury Bills.
4. Inconsistencies between on the one hand, positive trade and financial
balances and, continuing pressures on the Naira on the other. This
inconsistency draws attention to the dangers of hot financial flows when
money markets are malfunctioning and the urgent need to creatively

and smartly alter the incentive system against speculating activities and
speculators (Nigerian and foreign). One of the enduring lessons of the
global financial crisis is that monetary authorities must be smarter and
innovative in by passing malfunctioning markets that is, market driven
by perverse incentives that cause them to react rationally in ways that
optimize rent at the expense of optimal market driven allocation of
credit, growth in private sector investments, employment, growth and
price stability.
5. Inconsistencies between on one hand, excess liquidity in the books of
DMBs and, negative or low growth in monetary aggregates (Base Money
declined on average by 1.62%, M1 declined on average by 2.6% and M2
rose on average by 0.94% in the first half of 2012). These numbers are
indicative of systemic destruction of money through a shut-down in the
credit market as stock of liquid assets are built up to take advantage of
arbitrage opportunities. In the process, financial intermediation is
arrested. The size of spread between savings and lending rates and
between savings and treasury bills rates and the widening of that spread
since tightening started in third Quarter of 2010 is indicative of a
progressive deterioration in the allocative efficiency of the money
market a fact that is indicated by the structure of the loan book relative
to the structure of the GDP.
6. Inefficiencies caused by perverse incentives in money market (credit,
treasury bills and SLF) which gave DMBs greater incentives to exploit
arbitrage opportunities between SLF and Treasury Bills markets rather

than create money by lending to sectors that are, the growth drivers in
the economy.
7. Unsustainable growth in public debt, expansions in FGN Bonds and
Treasury Bills and rising debt service. Overall, fiscal operations remain
expansionary and government debt has risen from NGR4.92Trillion in
the third Quarter of 2010 to NGR6.9Trillion in the first quarter of 2012.
This means in just six quarters, the public debt has risen by 40%! This is
incredible and portends medium to long term problems particularly in
the light of the slow-down in the global economy. The idea of a
borrowing threshold of 40% is meaningless and unwise for a nation that
was misled by the same “marketing sophistry” in 1978 causing the
nation great cost in terms of development and capacity for clear headed
economic policy making until the exit from Paris Club in 2006. Also,
because wise economic decisions are taken on the margin and with due
considerations to the principles of trade-off; opportunity costs and costbenefit analysis.
8. Weaknesses in the nexus between government fiscal operations and the
money and bond markets is a major weakness also, in the nexus
between the money, capital and bond markets on one hand, and the
real sector on the other. It is important to change the existing nexus to a
virtuous one. Sooner rather than later. It is also, important to alter
incentive systems against speculative activities that undermine the
efficient functioning of markets and their capacities to generate output
and productivity growths, innovations and jobs.

The goal of monetary policy is to deliver price stability conducive to growth. This
implies stable domestic prices, stable exchange rates and a growing economy.
While it is true that the three objectives conflict, available evidence from
empirical analysis indicates that exchange rate has strong pass through effects on
prices and, on growth in Nigeria. Further, that monetary policy does impact prices
and exchange rate through interest rates and monetary aggregates. Also, that
harmony between fiscal and monetary policies amplifies the impact of monetary
policy on prices and growth while a discordant fiscal policy weakens the
effectiveness of monetary policy. Discordant fiscal policy thus, causes monetary
policy to be necessarily aggressive in targeting price stability. In addition,
discordant fiscal policy undermines incentive systems in the money and bond
markets and destabilizes system liquidity turning markets into a hunting ground
for rational forward looking agents to exploit the perverse incentives in ways that
undermine financial sector and economy-wide efficiency. These actions (fiscal and
market) make price stability, exchange rate stability and economic growth more
difficult to achieve.
It is clear from available evidence that the key financial markets (money, capital,
bond and FX) are inefficient and that they are not producing private and public
reaction functions conducive to efficient prices (interest rates and yields) and,
price stability (domestic prices and exchange rate stability) with growth.
Furthermore, tightening has had the unintended result of conducing speculative
activities particularly in the money, bond and FX markets that seem to be
reinforcing. The “party” for speculators has to end if the economy is to resume
growth, create jobs and address the massive challenges it faces. It is highly

desirable that government fiscal operations complement the monetary
authorities to help government achieve its macroeconomic objectives. However,
the monetary authorities have responsibilities and do have the tools and mandate
to correct market failures to ensure that the market, market intermediaries and
market infrastructures deliver a sound fiscal system. It is recognized globally that
no financial system could be stable and sound if it does not support innovation,
output and productivity growth, employment and price stability.
Given the current state of the macroeconomy (real and financial) and the failures
in the money, bond and FX markets to efficiently allocate resources in the
Nigerian economy, there are compelling reasons not to increase the MPR despite
the rise in inflation numbers released by the NBS. It is clear that domestic and
foreign speculators do not desire a rate cut. Yet, a rate cut is required to support
growth and job creation also, to discourage speculators who have been exploiting
the stated commitment to exchange rate stability and tightening regime to
undermine the efficiency of the markets. The issue of inflation threshold has
raised the question of how much growth and employment and welfare can the
economy sacrifice to maintain price stability? Also, how strong is the effect of
MPR increases on inflation given the supply shocks of January 1 2012 and the rise
in prices of electricity on June 1 2012?
Given the declining growth since first Quarter of 2010, the high level of
unemployment (excess of 23.9% national and more than 50% for youths), high
level of poverty (over 69%), weak performance of the real economy and the
growing security challenges, the cost is already too high. It is of course, axiomatic
that insecurity raises transaction costs and lowers competitiveness because

insecurity increases uncertainties and risks. Moreover, the evidence shows very
clearly that speculative activities have thrived most under a regime of higher MPR
as indicated by the asset structure of the DMBs, interest rate spreads, profit
structures in the economy and, the sustained speculative attacks on the Naira. It
is important that we do not forget that because the malfunctions of the global
financial markets threatened stability of the major economies in Europe, North
America and Asia, their Central Banks by-passed the financial markets to target
the effects of the malfunctioning markets. This has been causal to the unlocking
of credit markets and the resumption of growth.
Strategically, what is required therefore; is a creative mix of policies and
incentives changing actions to change the financial games to ones in which the
rational game in town is one that produces rational reaction functions that (1)
enhance the efficiencies of the money, bond and FX markets; (2) deploy liquidity
to create rather than destroy money by lending to sectors and activity with
highest contributions to output and productivity growth and jobs instead of
holding as war chest for speculative opportunities and attacks and; (3) enhances
the effective management of liquidity at firm level and economy-wide. The
“creative mix” is necessary to (1) limit the capacity of speculative and rent seeking
players and activities to damage the Nigerian financial system and economy and
(2) empower efficiency driven economic agents and activities.
My vote therefore is to:
1. Reduce MPR by 25 Basis Points;
2. Increase CRR from 8% to 12% from July 25, 2012; and

3. Reduce the Net Foreign Exchange Open Position (NOP) from 3% to 1% with
effect from July 24th, 2012.

4.0 KIFASI, DANLADI
The high crude oil prices in the international market during the first quarter of
2012 have started weakening in recent months owing to the slowdown in the
economies of major trading partners including US, Europe and China, with
adverse implications for government finances, external reserves and foreign
portfolio flows.
Inflation concerns remain largely elevated in response to the partial removal of
fuel subsidy, increase in electricity tariff, and the recently announced tariff
measures on importation of wheat flour/wheat grain/rice. The year-on- year
headline inflation rate increased to 12.9% in June, 2012 from 12.7% in May, 2012.
Projections of inflation performance in the next 6 months indicate that the yearon-year headline inflation would increase to 13.7% in July, reflecting largely the
expected acceleration in food inflation during the month. However, the headline
inflation forecast is expected to decline to 13% in August and 11.7% in October
and then inch up to 12.7% in November before moderating to 11.9% in
December, 2012.
The emerging risk to global growth appears to be the sluggish recovery of the US
economy, the debt crisis-induced recession and fiscal austerity in the Euro zone
and the slowdown of the Chinese economy due to efforts to contain its housing
bubble. The weakness in the labour and housing markets in major advanced
economies as well as the need to fix balance sheets of banks are likely to continue

to act as impediment to the pace of growth in the global economy. Global output
growth was 3.9% in 2011 and the prospects for higher growth in 2012 appear
slim. This is due to the weak growth expected from Europe, notwithstanding the
proactive policies adopted by the European Central Bank to reduce vulnerabilities.
In emerging economies, growth has been moderating because of past policy
tightening and weaker internal and external demand, but it remains solid overall,
thereby contributing significantly to global economic growth.
The NBS projected a growth rate of 6.37% for the Nigerian economy during the
second quarter of 2012. Overall, real GDP growth for 2012 is projected at 6.5%
down from 7.36% in 2011. The projected decline in GDP growth is attributable to
expected drop in the volume of trade with our major trading partners whose
economies are currently experiencing recession and weak recovery as well as
inflationary threats in the domestic economy. However, the various intervention
programmes by the Government would help to generate employment as well as
moderate the adverse impact of global economic developments on growth in the
economy.
The Federal Government fiscal operation is oil-based and the 2012 budget is
based on oil benchmark price of US$72 per barrel, with production quantity of
2.48 mpbd. In the unfolding scenario, where oil prices are falling sharply from
US$128 per barrel in March to US$98 per barrel in June and the production level
is also not met due to operational challenges and insecurity, this would have far
reaching implications on the Nigerian economy, if the trend continues.

Relative stability was achieved in the foreign exchange market in the first half of
2012 with substantial injection of autonomous funds into the market. The
exchange rate witnessed modest depreciation in all the segments of the foreign
exchange market. The premium between the rates at the WDAS and inter-bank
market and that between the rates at WDAS and the BDCs narrowed in July 2012,
suggesting the need to sustain and complement existing measures to discourage
speculative pressures in the market.
In view of the above, there is need to sustain the current tight monetary policy
stance. This would assist in moderating inflation as well as sustain the relative
stability achieved thus far in the foreign exchange market. Consequently, the
current level of MPR at 12% with the symmetric corridor of +/-200 basis points
should be retained for the next two months when another review will be due for
consideration. The cash reserve requirement (CRR) could, however, be increased
from 8% to 12% to address banking system liquidity concerns.

5.0 LEMO, TUNDE
The challenges confronting the domestic economy have continued to intensify
since the last MPC meeting in May 2012. The latest information released by the
National Bureau of Statistics revealed the persistence of inflationary pressure as
headline inflation rose to 12.9 per cent by Q2 of 2012 from 12.1 per cent at the
end of Q1. A more disturbing development is that core inflation which used to be
lowest has significantly increased above other inflation metrics since February
2012, rising to 15.2 per cent by June 2012, against a 3-year average of 10.97 per
cent. The major drivers, however, are imported food items and administered

prices, which may be a little bit difficult to manage except through a significant
reduction in aggregate demand. Although the revised real GDP for Q1 at 6.17 per
cent was higher than the earlier estimates of 5.34 per cent, it is still significantly
below the 3-year average of 7.43 per cent.
Considerations
The policy decision in this meeting is much more complex than earlier expected
given the prevailing macroeconomic outcomes in the face of the current stance of
monetary policy. The reasons to hold the current stance of monetary policy are as
convincing as the reasons to tighten further. The performance of credit to the
private sector should naturally be a source of concern to the monetary authority
given that it is a leading indicator of economic activities in most economies. Since
the beginning of the year, credit to the private sector has been following a dismal
performance with credit to the core private sector in particular showing a sluggish
growth. The level of broad money supply (M2) is another area of concern. At the
least, M2 growth should equal growth in nominal GDP even in an economy with
full employment of resources. Actual M2 growth at the end of the first half has
been estimated at 1.35 per cent or 2.70 per cent on annualized basis, compared
to a 3-year average of 13.30 per cent. Given that growth in real GDP has been
projected at 6.50 per cent for 2012, the current level of money supply is lower
than equilibrium level. Furthermore, the imminent decline in oil revenue as a
result of the prevailing global crisis should make it compelling for the monetary
authority to rebalance the economy by stimulating investment and external
demand.

The arguments presented above support the policy option of maintaining the
status quo. My reservation, however, as pointed out in my previous statement, is
that the issue of weak growth could be better addressed by complimentary
structural reforms that deal with the obvious bottlenecks to production. Relaxing
monetary policy in the face of structural rigidities in the economy could further
filter into higher price level.
In view of the fact that the subsisting stance of monetary policy has been in place
since the third quarter of 2011, it may be in order to examine whether we are
comfortable with the current macroeconomic outcomes as well as the likely
outcomes in the near term. Core inflation at 15.2 per cent at the end of first half is
unacceptable to rational economic agents, particularly for an economy that is
highly desirous of foreign direct investment to stimulate growth and by extension
alleviate poverty. More worrisome is the fact that the real interest rate is still
negative, leading to a further reduction in the competitiveness of the economy
for foreign investment. In addition, the upside risks to inflation in the medium
term remain very strong, including: the lag effects of the partial removal of
subsidy on the PMS; the effect of the upward review of electricity tariffs; upward
review of tariff on import of wheat and rice; and the possibility of a
supplementary budget to utilize subsidy savings.
Another major pressure point is the weakening external demand arising from the
global financial and economic crisis. The current weakening of the international
oil market has led to a fall in the average spot price of Nigeria’s reference crude
oil, the Bonny Light (370 API), from US$121.10 in the first quarter of 2012 to
US$97.19 by the end of the second quarter. This represents a decline of about 20

per cent. Although, the price has inched up to about US$103/barrel in early July
2012, the current global economic reality points to the fact, it is not sustainable
over a medium term period. The average exchange rate has started to depreciate
in all segments of the foreign exchange market coupled with the widening of the
premia between WDAS window and the other windows of the foreign exchange
market. This is clearly an indication of resurgence of speculative demand in the
foreign exchange market. To complicate this position, there is high possibility that
there may be significant liquidity injection in the second half of the year from the
fiscal authority as a result of improvement in the implementation of the capital
budget.
In the light of the foregoing, the major risks to the economy in the short to
medium term are inflation and depreciation of exchange rate. At the current
level of the MPR, a further increase in the rate to address inflation concerns may
impose a lot of burden on the end users of fund particularly the manufacturing
sector. In as much as we may be willing to trade off the inflationary risk in order
to give some breathing space to end users of fund, the necessity to address the
speculative demand in the foreign exchange market should be given utmost
priority. This is against the backdrop of building a strong buffer in terms of foreign
reserves to withstand the likely downturn in global financial and economic
environment.
Consequently, I vote for a retention of the MPR at the present rate of 12 per
cent and maintenance of the symmetric corridor. In addition, I propose an
upward review of the CRR from the present level of 8 per cent to 12 per cent.

6.0 MOGHALU, KINGSLEY CHIEDU
The choice before this meeting of the Monetary Policy Committee is one between
the implications of monetary policy decisions such as interest rate hikes on the
wider economy giving continuing inflationary pressures and the choice of first
principles, which is to say, the core mandates of the Central Bank of Nigeria,
including the maintenance of price stability. That choice, in my view, should be
exercised within two important contexts. The first context is that the situation,
regrettably, is that Nigeria does not have a productive economy today in any real
sense, which results in a disproportionate dominance of the financial sector or the
“financial economy” that is disconnected from the real economy. Structural
economic reforms to reduce dependence on oil as the overwhelming revenue
earner and kick-start domestic production have not yet taken place. In this
context, the economic logic that drives and should drive the monetary policy
decisions of a central bank appears to many to be harmful to the real economy
and sometimes even to the intermediation function of the banking sector.
The second context is that, accepting then that the maintenance of price stability
is a core mandate of the CBN, the central bank must keep its eye on the ball of its
primary mandate, accept in effect that the economy it co-superintends along with
the fiscal authorities is one marked far more by financial dominance than by the
real sector, and take the necessary decisions that will ensure price stability. This is
because the implication of the absence of a substantial real economy is that,
whilst monetary policy decisions can be perceived as creating difficulties for
intermediation to small and medium scale enterprises (which difficulties in reality
are due far more to the lack of structural reforms than to monetary policy), a

collapse of price stability would have far more serious consequences. Such a
scenario would be a real train wreck. Nevertheless, one is mindful of the
importance of economic growth and the need to avoid, to the extent possible,
monetary policy that impedes growth.
What is the state of monetary aggregates that the MPC is confronted with today,
and how does the foregoing contextual backdrop provide guidance?
A number of factors are obvious. The most important one is that inflationary
trends continue, and may increase if we fail to take appropriate action. As at June
2012, headline inflation increased to 12.9%, core inflation increased to 15.2% but
food inflation reduced to 12%. The main drivers of the inflationary pressures
include the recent partial removal of fuel subsidy and, I believe, the inflation
expectation created by the possibility of the removal of the remaining fuel
subsidy, as well as the increase in electricity and import tariffs on wheat and rice.
Fiscal expenditures such as releases from the excess crude account and budget
implementation pressures, in particular the large portion of the budget devoted
to recurrent expenditure, also play a significant role in increasing liquidity in the
banking system.
The second major factor is that of the prevailing global trends and their
implications for the Nigerian economy, in particular the external reserves and the
exchange rate stability of the Naira. Although there has been a reversal in the
recent downward trend of the price of crude oil, the economic recession in
Europe, sluggish economic recovery in the USA, and the slowing down of
economic growth in emerging markets such as China suggest that global demand

for oil is likely to dwindle in the medium term. Crude oil demand from the USA
faces a longer term trajectory of decline as the country opens up new oil fields
and pursues a strategic policy of promoting alternative sources of energy.
Moreover, security and operational challenges mean that Nigeria’s crude oil
production is not meeting projected levels.
All of these will lead to reduced revenues from oil and a strong adverse impact on
the level of external reserves that are needed as a buffer in a negative global
environment that is likely to be sustained. These factors will also have an adverse
impact on the exchange rate.
Against this background, the broad choices are to hold the Monetary Policy Rate
steady, increase the MPR or adopt additional or alternative measures to rein in
inflation. In this context it is relevant to consider which or what instrument will
address inflation concerns while inflicting as little damage as possible on (a) the
banking system, which is only just recovering from a bout of instability owing to
reform measures by the CBN but which could build up large non-performing loans
if the MPR continuous an unrelenting upward trajectory, and (b) the real sector.
This policy conundrum requires the MPC to choose carefully the anti-inflation
instrument to utilize at this time, and to keep in reserve the option of further rate
hikes to be deployed only as and at when necessary. Thus, it is important to
address what is at this time, the real McCoy: the liquidity surfeit in the system
that encourages Nigerian banks towards arbitrage opportunities in Federal
Government of Nigeria (FGN) securities rather than intermediation, as well as

speculative behavior in the foreign exchange market which consistently puts the
Naira under pressure.
For these reasons, I vote to:
(a) Hold the MPR and its corridor steady at 12% and +/- 2% respectively;
(b) Increase the Cash Reserve Ratio (CRR) from its present 8% to 12%;
(c) Decrease the Net Open Position (NOP) of banks from 3% of shareholders’
funds to 1%.


7.0 OLOFIN, SAM
Some major developments have occurred in the domestic economy since our last
meeting that warrant attention from a policy adjustment perspective. As at the
end of second quarter in 2012 (Q2 2012) staff reports show that the downward
trend in overall growth performance of the economy had not been significantly
reversed. Real GDP growth rate is projected at 6.37 percent compared with 7.45
percent in 2011. Manufacturing sector growth estimate has declined from 7.59
percent in 2011 to 5.15 percent, and so has overall industrial production,
declining from 1.30 percent in 2011 to 0.65. There is strong evidence of growing
inflationary pressure with headline inflation remaining at 12.90 percent, food
inflation at 12.0 percent and worrisomely core inflation put at 15. 2 percent
compared with 10.80 percent in 2011 and a three year average (2011-2009) figure
of 10.97 percent. Federal Government fiscal operations from Jan – May 2012
show a slight reduction in the budget deficit to N73.53 Bill compared with

N488.84 over the same period in 2011. While this represents a positive
development, any further decline in oil prices is likely to have significant impact
on fiscal revenues and possibly widen the fiscal deficit. Similarly, the non-full
resolution of fuel subsidy removal remains a pressure point on inflation; so does
the hike in electricity tariffs, and the likely fiscal injections from oil subsidy savings
in Q3 &Q4 2012..
Exchange rates of the Naira have depreciated due to demand pressure and
concerns over the decline in international crude oil prices. The rate at the WDAS
has depreciated by 11 percent from N157.26 in May 2012 to N157.43 as at July
20, 2012; interbank rate and BDC rates have similarly depreciated by 1.6 percent
and 2.5 percent respectively over the same period. The weakening of the Naira
may have abated slightly and stability in the foreign exchange market restored,
following recent major market intervention by the Bank to the tune of $4 billion
plus. This has resulted in a marginal drop in the level of foreign reserves which
prior to the intervention witnessed an increase from US$32.64 bill. as at end of
Dec. 2011 to US. $ 37.16 as at July 19 2012. This represents a rise of about 13.85
percent; this increase notwithstanding, the rate of accretion is still lower than
may be required to beef up buffers, necessary for hedging against likely major
external shock to oil prices.
The foregoing developments in the domestic economy notwithstanding, they are
not as worrisome as the developments in the global economy, capable of having
potentially destabilizing effects on the domestic economy. The rumblings in the
Euro market zone with their contagion effects on the U.S and emerging market
economies are beginning to indicate a further weakening of a fragile and sluggish

recovery. The euro zone crisis and the resulting global economic consequences
could result in further decline in net capital inflows and lowering of oil prices.
These would put further pressure on the foreign exchange market and the level of
external reserves. The fall in oil prices would significantly reduce government
revenues and widen the fiscal deficit. These are highly significant potential
developments for a highly import dependent economy in which structural
constraints continue to limit the extent to which the real sector can be expected
to pick up any slacks resulting from external shocks. Consequently major policy
challenges before us at this meeting leave us with very difficult trade-offs
between easing the cost of borrowing to stimulate growth, and the need for
further tightening in the face of growing inflationary pressures. There is also the
challenge of weakening the Naira to ease the pressure on the foreign exchange
market without compensating gains in export earnings to bolster reserves as well
as reduce domestic and imported inflationary pressures.
On balance, our overriding concern should be on how to continue to ensure
satiability in the economy, as efforts are made to address the structural
imbalances inhibiting growth in the real sector. We should also pay attention to
building adequate buffers to sustain the economy through any major shocks that
may result from anticipated developments in the economies of the country’s
major trading partners. I would therefore vote for the retention of the MPR at 12
percent and its existing corridors, to signal the need to continue to encourage
growth particularly in SMEs, and raising the CRR from 8 to 12 percent to tackle
the excess liquidity that continues to serve as major source for financing
speculative demand at the foreign exchange market. Furthermore it would be

necessary for existing administrative measures to be strengthened, and new ones
explored to enhance the rate of accretion to foreign reserves as necessary buffers
for tackling anticipated external shocks.

8.0 OSHILAJA, JOHN
The vote I cast today formed a part of the majority of members on the MPC, who
voted to increase the Cash Reserve Ratio (CRR) imposed by the CBN, on all banks,
from 8% to 12% of deposits. There was also the decision taken to lower the
permissible Net Open Position Limit (NOL) from 3% to 1% of capital, for which the
voting was unanimous. The CRR is the portion of lendable funds (i.e. customer
deposits) each bank is required to maintain on deposit at all times with the
Central Bank. The adoption of these measures is consistent with the current tightpolicy stance of the Committee.
The increase in CRR drains the banking system of surplus funds, with the potential
of contracting the size of banking balance sheets. The reduction in NOL lowers
the amount of foreign currency banks may hold in “inventory”, i.e. for their own
account and general corporate purposes by roughly, N 48-60 billion. Given total
banking deposits of approximately N 12,000 billion, today’s decision effectively
immobilizes an additional N 480 billion in excess bank liquidity, roughly 10% of
which will likely be off-set by sales of foreign currency for NGN.
When largely driven by consumption-oriented government operations, and not
effectively recycled for productive real sector development purposes, surplus
banking liquidity can present significant threats to price stability – in the Nigerian
context, weakening the currency and thereby fuelling inflation. Evidence

presented to the Committee, over much of the first half of this year seems to
suggest that, when not parked in government securities and high grade corporate
credits, excess banking system liquidity invariably ends up exerting pressure on
foreign exchange rates for the Naira – largely through disinvestment activities.
Naira weakness becomes particularly worrisome when this plays a determinant
role in adverse price-levels changes. The measures decided upon today, may be
therefore viewed as a form of direct intervention by the monetary authorities,
intended to curb excess disinvestment from fundamentally Naira-based positions.


9.0 SALAMI, ADEDOYIN
On the face of it, a rise in inflation from 12.7 percent to 12.9 percent may not
warrant significant attention. After all, the figures for headline inflation remain
well within the 14.5percent which Staff estimates had projected at the beginning
of the year. A closer look at the figures does create room for concern. Specifically,
core inflation, supposedly the primary target of Monetary Policy, continues to
surge ‐ 15.2 percent in June 2012. An important element in explaining rising Core
inflation is the changes in the regime of Administered prices – especially of
utilities!

Beyond inflation, circumstances surrounding both the global and domestic
economic environments afford cause for concern. Since the last meeting of the
MPC, there has been no fundamental improvement in the international
environment. The downside risks to global economic activity remain dominant.
Notwithstanding the recent rally in spot market prices for crude oil and

indications from futures markets, market fundamentals continue to indicate
greater likelihood of weaker crude prices. Lower prices imply that oil based forex
inflows are likely to ease with potential adverse consequences for reserve
accumulation but especially for the exchange rates. Beyond oil, the drought in the
USA and its likely implications for the price of grains is worthy of some attention.
While the government has announced the first steps in a programme designed to
reduce wheat and rice imports, the effects of the measures announced cannot
ameliorate the impact of higher prices on Nigeria.

There is increasingly more evidence in support of slowing domestic activity.
Provisional figures, announced by the National Bureau of Statistics (NBS) had
indicated 6.17percent growth in GDP for Q1 2012. Its projection for Q2 2012 is
6.37 percent. Both of these numbers are significantly lower than for
corresponding period a year earlier. Indeed, the full year projection for output
growth is 6.5percent –lower than either the 7.98percent or 7.45percent achieved
in 2010 and 2011 respectively. Evidence from corporate performance also
provides further support for slowing activity.

Sluggish growth in monetary and credit aggregates – Year‐to‐date growth of
1.35percent for M2 and 3.6percent for Credit to the private sector – indicates
limited intermediation by the financial system. Unsurprisingly, high levels of
liquidity continue to characterize the banking system. The puzzle of sharply higher
banking profitability in the face of limited credit growth is resolved when we note
that the current high interest regime, significant government borrowing coupled
with low deposit rates afford financial intermediaries low risk high return

opportunities. In contrast, profitability of non‐finance sector corporates is under
pressure.

Staff projections for inflation for the rest of the year continue to show Headline
inflation in double digits for the rest of the year. It is expected to peak at
13.7percent in July and decline to 11.9percent in December – it is anticipated that
the pattern of easing inflationary pressure after July will be disrupted in
November, when inflation is projected to rise to 12.7 percent.

My thinking suggests that external influences and structural factors are likely to
play dominant role in the determination of inflationary pressure. From the
external side, impact of drought in the US on food prices and the strengthening of
the US$ as the flight to safety continues will be key. Domestically, structural
factors expected to stoke inflationary pressure revolve around rising administered
prices – there is a strengthening likelihood that fuel prices may have to be
adjusted to keep the budget within parameters set. In this scenario, the best that
monetary policy can do is to minimize that damage which the factors identified
can do to the management of inflation. Monetary policy, in this situation, focuses
on keeping adverse exchange rate fluctuations.

Banking system liquidity is perhaps the biggest threat to exchange rate stability
and inflation management. Raising the policy rate simply affords banks an
opportunity to raise lending rates, more than proportionately! In other words, it is
another opportunity for the rising banking system profitability. Rising lending
rates also portend challenges for financial system stability as loan repayment

ability is impaired and the losses on the portfolio of bonds held by banks –
estimated at slightly over NGN210bn ‐ worsen. The Cash Reserve Ratio (CRR)
affords a ‘blunt’ instrument to deal with the massing banking system liquidity. It is
clear that higher CRR will inflict higher cost on banks and may translate into
higher lending rates, the imperative of diffusing the potential pressure on the
exchange rate cannot be overemphasized. Indeed, a successful effort at keeping
the exchange rate stable will also serve to reduce the rate of foreign exchange
reserve depletion. Most importantly however, it is likely to keep inflation from
spiraling out of control.


10.0 UCHE, CHIBUIKE
I am of the opinion that the most important ingredient in achieving sustainable
economic development is growing the real sector. Inflation targeting and its
attendant price stability objective can therefore only be useful if it helps to
achieve the above goal. Unfortunately, in a rentier economy, where fiscal
dominance and sub optimal fiscal policies reign supreme, the above goal is
difficult to achieve under an inflation targeting regime. In such a scenario, it is
always temping to interpret the meaning of price stability out of context by
assuming that the attainment of a single digit inflation rate is the supreme
objective of monetary policy. I personally do not agree with such a view. One
argument usually canvassed by the proponents of the above view is that keeping
inflation low at whatever cost helps to attract foreign investments. This may well
be true on the surface. The question to ask however is what kind of foreign
investment can we attract under such a regime? The evidence suggests that

under such a scenario one is likely to attract mainly speculative capital. Such FDI
which contribute nothing to growing the real sector has the potential to cause
more harm than good to our national economy.
Another important point to consider is the implication of further tightening on the
stability of our financial system. Although the distress resolution scheme of the
current CBN leadership has greatly ameliorated the instability in the financial
system, it is clear serious systemic risks which at least in part are being fuelled by
the pursuit of monetary policy where containing inflation is the primary objective
are beginning to emerge. The high interest rates that have emerged from this
regime and the fiscal behaviour of government have led to increased government
borrowings from the financial system. Arguably the most disturbing part of such
borrowing is the long term debt instruments backed by recurrent rent income
streams. As is now understood within the Central Bank, rising interest rates have
ensured that any attempt to mark such government bonds to market prices even
at the present time would cause serious problems for financial system stability.
Furthermore, it has been established that there is a clear relationship between
increase in interest rates and non-performing loans of banks. The question
therefore is: at what level will continued tightening of interest rates trigger
another banking crisis? In my view therefore, Inflation targeting has doubtful
utility in a rentier economy.
Admittedly, it has been rightly argued that historically in Nigeria, single digit MPRs
do not have a strong positive relationship with the growth in real sector credit
and thus have never really benefitted that sector which no doubt has a plethora
of other problems to contend with. While I concede this point, I am of the view

that operators in the real sector should be seen as victims of the structure of the
Nigerian economy rather than villains. More important however is the fact that
since it is extremely difficult to meaningfully grow our economy without growing
the real sector, monetary policy has no choice but to explore novel ways of
supporting this important sector. At the very least, we need to remove
impediments to the growth of this important sector. In this direction, for instance,
it is troubling that in the past, increasing interest rates have only led to increased
margins between deposit and lending rates. This is no doubt the classic scenario
in an oligopolistic market where collusion thrives. A margin of almost 20 percent
between savings and borrowing rates is clearly not supportive to both savings and
growing the real sector. The role of banks in the intermediation process can be
likened to the role of establishments that buy and sell goods in the market with
mark-ups of almost one thousand percent. Clearly, this cannot be healthy or
acceptable in any economy. We therefore need to consider putting in place some
kind of controls on the intermediation margins of Nigerian banks. Another
innovative way that can help reduce the margins associated with intermediation
is to design policies that can help promote the activities of profit and loss banks.
On the balance, I am also of the opinion that the current high intermediation
margins cannot be in the long term interest of Nigerian banks. It is also
remarkable that jobs in the Nigerian banking sector have shrunk consistently in
the past three years. The two possible outcomes from the above policy choices:
reduction in lending rates or increase in savings rates would be of great benefit to
our economy. Adopting market prices for securities without doing same for
savings distorts development by encouraging the outflow of local savings and the
inflow of speculative FDI. The growing portfolio of domiciliary accounts in

Nigerian banks is a clear pointer to this. Low interest rates on savings, is no doubt
positively correlated with capital flight.
Finally, I am of the view that while an MPR hike may look attractive given the
current increase in inflation rates and especially in a situation where price stability
is seen as an end in itself, it is of doubtful utility in our current circumstance. This
is so because such a hike will negatively impact on real sector credit; encourage
inflow of speculative FDIs; and discourage local savings. I have therefore carefully
come to the conclusion that our best chance to impact positively on real sector
economic development is to maintain the status quo. I therefore vote as follows:
(1) to retain MPR at 12 percent and the interest rate corridor of +/- 200 basis
points; (2) to retain CRR at 8 percent; and (3) to retain Liquidity Ratio at 30
percent.


11.0 SANUSI, LAMIDO SANUSI
Governor of the Central Bank of Nigeria and Chairman of the Monetary Policy
Committee
Recent developments in the Nigerian economy coupled with the continued global
economic crisis have posed some challenges for the achievements of monetary
policy goals. Generally the economic environment has witnessed with significant
pressures on both domestic prices and the foreign exchange rate. Inflationary
pressure has not abated, threatening price stability objectives. As at June 2012
headline inflation rate rose to 12.9 in June, 2012 from 12.7% in May, 2012, while
core inflation rose to 15.2% in June 2012, of which imported food inflation rose to

18.5%. Real GDP growth rate also slowed and was estimated at 6.37% in Q2 2012
compared to 7.45% as at end of 2011. Growth in Industrial production has
declined from 5.82% in 2010 to 1.30% in 2011 and 0.65% as at Q1 2012 while
manufacturing output growth declined from 7.59% in 2011 to 5.15% in Q1 2012.
Agricultural output growth has not performed better, rising marginally from 5.7%
in 2011 to 5.71% in Q1 2012.
The monetary sector has been awash with significant liquidity in the banking subsector without significant expansion in credit to the real sector or a decline in
lending rate. The spread between the deposit and maximum lending rate has
remained very wide discouraging mobilization of domestic savings. The spread
between the average maximum lending rate and the consolidated deposit rate
widened to 19.62% as at June 2012. The exchange rate weakened in between
MPC meetings due to external shocks in the forms of declining crude oil prices but
recovered recently as oil markets strengthened a bit. At the interbank market, the
naira exchange rate has depreciated to N161.24 as at 20th July, 2012 from
N158.60 - representing 1.66% depreciation, while at the BDC the rate depreciated
to N164 from N160 – representing 2.5%
The global scene has remained uncertain with further escalation in the financial
crisis of the euro area periphery and slow growth in emerging market economies.
The fragile and weaker external environment suggests decline in export growth as
global demand shrinks and volatility in commodity prices persist
Given this scenario, there are indeed serious concerns about domestic prices,
particularly inflation, declining international oil prices, external reserve depletion,

weakening of Naira exchange rate and decline in real output growth rate.
Certainly a large proportion of these concerns can best be curtailed by addressing
the structural rigidities bedevilling the economy, which is beyond the policy space
of monetary policy.
It is clear to me that there is strong evidence to suggest a significant correlation
between interest rate and GDP growth rate. It is also clear to me that the current
slowdown in GDP growth rate is not necessarily due to the high cost of fund or
freeze in credit to the real sector. This suggests the need for caution in the
expectation of the efficacy of using of interest rate as a tool for stimulating real
sector growth or general economic activities. Focusing on the core mandate of
the MPC Committee of price stability conducive for growth, I am compelled to
lean more towards addressing the immediate impact of the rising inflation rate
and depreciation of the naira. The policy choices are quite limited and the tradeoffs are complex given the weak inter linkages of the economic sectors.
While a hike in the policy rate is not necessarily an unavoidable option, the need
to address the liquidity excesses of DMBs in order to curtail the demand pressures
in the forex market and build external reserves buffers against the threat of
future revenue decline is very clear to me. In order to effectively sterilize the
excessive liquidity in the banking system, the need to adjust the CRR is inevitable.
My initial interest is also for an increase in the MPR in order to send a clear signal
of our commitment to the primary goal of price stability. However, I am not
totally in disagreement with the sound view of the majority that a MPR hike may
also show insensitivity to the plight of the real sector borrowers. For this reason, I

will join the majority and vote for a hold in MPR at current bands subject to
increasing CRR.
It is extremely important to reiterate that price stability (or stability in general). Is
not everything Growth and development have to happen and this requires
structural reforms and a better record of implementation of the Budget.
However, although stability is not everything, without stability there is nothing.
The dark clouds on the global horizon mean we have to prepare the economy
against external shocks and build the right buffers. The costs to the borrowers
and to the banks are known but unavoidable.
For the above reasons, I vote for:
1.
Retention of MPR at 12 per cent (+/- 2 per cent)
2.
Increase in CRR from 8 per cent to 12 per cent and
3.
Reduction in NOP from 3 per cent to 1 per cent.