CBN Monetary Policy Review

CHAPTER ONE

1.0
OVERVIEW

n the first half of 2015, the Bank‘s
monetary policy was shaped largely
by continuing market expectations
of the normalization of US monetary
policy, weak global growth and falling
crude oil prices in the international
market with its negative impact on
foreign exchange reserves and the
exchange
rates,
as
well
as
the
heightened
risks
from
geopolitical
tensions in some part of the world. The
fall in the level of external reserves and
the depreciation of the exchange
rate, as well as the liquidity impact of
election-related
and
post-election
spending, put immense pressure on the
domestic price level, despite the tight
monetary policy stance of the Bank.
Consequently, headline inflation rose
to 9.20 per cent in June 2015 from 8.0
per cent in December 2014. The price
of food remained the major driver of
headline inflation in the first half of
2015. Other factors included the prices
of housing; water; electricity; transport;
clothing and foot wear.

The lower oil prices in the international
market,
coupled
with
reduced
demand for Nigeria‘s crude oil abroad
led to reduced accretion to the
foreign
reserves.
The
sustained
demand
pressure
on
the
foreign
exchange
market
following
the
reversals of capital flows from the
normalization of US monetary policy,
despite the increased funding of the
market, led to the depreciation of the
exchange rate. Data from the National
Bureau of Statistics (NBS) showed that
the Gross Domestic Product (GDP)
moderated to 2.35 per cent (year-onyear) in the second quarter of 2015,
from 3.96 per cent and 6.54 per cent in
the
preceding
and
corresponding
quarters of 2014, respectively. The
development was partly attributed to
reduced public spending due to lower
crude oil prices and receipts. The
sectoral contributors to the second
quarter GDP growth were services,
agriculture and trade with 1.61, 0.73
and
0.85
percentage
points,
respectively.

There was intense pressure on the
exchange rate in all segments of the
foreign exchange market during the
review period as a result of the crash of
oil prices in the international market,
lower demand for Nigeria‘s crude
abroad,
depletion
of
the
foreign
exchange reserves, and expectation
of monetary policy normalization in the
US. Consequently, the Bank in its effort
to stem speculative activities, closed
the official foreign exchange window
but continued to intervene at the
interbank foreign exchange market.
This
was
followed
up
with
administrative restrictions on access to
foreign exchange for the importation
I


CBN Monetary Policy Review

of a list some items, which could easily
be produced domestically.

The Nigerian financial landscape was
significantly
influenced
by
global
economic developments, such as the
gradual
normalization
of
the
US
monetary policy, and the declining oil
prices
prompted
by
weak
global
economic growth as well as glut in
crude oil supply at the international
market. The tapering of QE3 and its
conclusion in October 2014, led to a
redirection of global capital flows out
of emerging and developing markets,
owing largely to rising sovereign risk in
these countries, and the prospect of
improved interest rate regime in the
U.S.

The
choice
of
monetary
policy
instruments in the review period was
guided by the objectives of price
stability and overall health of the
macroeconomy.
The
Bank,
accordingly, deployed a range of
monetary policy instruments including:
the monetary policy rate (MPR), Cash
Reserve Ratio (CRR), Open Market
Operations
(OMO)
and
Discount
window operations. During the period,
the MPR was kept unchanged at 13
per cent with the symmetric corridor of
+/- 200 basis points. The Monetary
Policy Committee (MPC) harmonized
the CRR on both private and public
sector deposits at 31.0 per cent to
improve the efficacy of monetary
policy, curtail abuses, stem moral
hazards
and
the
tendency
of
overheating
the
economy.
The
Liquidity
Ratio
was
also
kept
unchanged at 30.0 per cent to address
liquidity surfeit in the banking system.

OMO remained the key tool of liquidity
management in the review period.
Actual
OMO
sales
amounted
to
N4,261.72
billion,
compared
with
N3,937.76 billion in the second half of
2014, and N4,484.94 billion in the
corresponding period of 2014. As a
complement to OMO, the CRR was
also used to manage liquidity in the
system in order to reduce volatility and
pressure on the exchange rate. The
performance of monetary aggregates
in the first half of 2015 was weaker than
projected, partly due to the sustained
tight monetary policy stance and
lower fiscal injections arising from
falling crude oil prices. Also, there was
a significant increase in credit to
government, invariably crowding out
private sector credit.

The money market remained active
with transactions in CBN bills and
government securities in the first half of
2015. Money market interest rates were
largely influenced by changes in the
CRR, FAAC statutory disbursements
and NTB maturities/auctions. The OBB
segment witnessed greater activity
relative to the interbank call segment,
due to enhanced confidence of DMBs
in the collaterized segment of the
market from the migration to the new


CBN Monetary Policy Review

RTGS and Scripless Security Settlement
System (S4). Nigeria‘s reference rate,
the NIBOR, was relatively stable across
tenors in the review period.

The performance of the capital market
weakened in the review period when
compared with the second and the
corresponding halves of 2014. The allShare Index (ASI) decreased by 3.46
per cent to 33,456.83 at end-June
2015, from its level of 34,657.15 at endDecember 2014, and by 21.25 per
cent, year-on-year. The decline was
attributable
to
uncertainties
surrounding the global and domestic
economy as well as the outcome of
the 2015 general elections, lower oil
prices, and weak corporate earnings.

The Federal Government of Nigeria
(FGN) bonds continued to dominate
the fixed income securities market in
Nigeria. Sub-national government and
corporate
bonds
witnessed
some
activities, with the corporate bonds
segment having the least share by
market volume. The yield on the 10year
dollar-denominated
bond
decreased to 5.91 per cent at endJune 2015, from 6.23 per cent at endDecember 2014 but was 4.80 per cent
at end-June 2014. The development
was attributed to improved investor
confidence
following
a
successful
transition
programme
to
a
new
government in the country.

Headline
Inflation
remained
within
single digit in the first half of 2015. It has
been in single digit for thirty (30)
consecutive months since January
2013, reaffirming the effectiveness of
the sustained tight monetary policy
stance.
Headline
inflation
was,
however, projected to accelerate to
9.6 per cent in 2015 and 10.7 per cent
in 2016 (IMF). Staff estimates project a
rise in year-on-year headline inflation
to
9.3,
9.8
and
10.0
per
cent,
respectively in August, September, and
October,
respectively,
which
may
decline to 9.9 per cent in December
2015.

Output growth slowed to 2.35 per cent
in the second quarter of 2015 from 3.96
and 6.54 per cent in the preceding
and corresponding quarters of 2014,
respectively. Overall, the economy is
projected to grow by 5.5 per cent in
2015 (FGN 2015 Budget), which is
broadly consistent with the African
Development
Bank
(AFDB)
growth
forecast of 5 per cent. The IMF and
World Bank, however, have a more
subdued growth forecast of 4.5 and 5.0
per
cent
in

and
2016,
respectively, due to weaker growth
outlook of the global economy and oilprice volatility. Staff estimates suggest
that growth may regain momentum in
the third quarter of 2015 with the onset
of the rainy season that could boost
agricultural
production.
Further,
improvement in growth outlook would
be hinged on stronger fiscal outlook,


CBN Monetary Policy Review

effort to stabilize the economy, address
security challenges and support the
non-oil sector.


CBN Monetary Policy Review

CHAPTER 2

2.0
OUTPUT IN THE DOMESTIC
ECONOMY

rowth
in
the
Nigerian
economy
continued
to
moderate in the first half of

in
response
to
global
developments, notably the continuing
weakness in oil and other commodity
prices. Real GDP growth declined by
1.98 percentage points to 3.96 per
cent (year-on-year) in the first quarter
of 2015, from 5.94 per cent in the
preceding quarter and 6.22 per cent in
the corresponding period of 2014. The
decrease was partly attributed to
reduced fiscal receipts arising from
lower crude oil prices. The key drivers
of the GDP growth were services,
agriculture and trade with 2.49, 0.92
and
1.12
percentage
points,
respectively. The drag on growth was
from
the
industrial
sector,
which
contracted by 1.02 percentage points
in
the
review
period.
Within
the
industrial sector, crude petroleum &
natural gas and manufacturing subsectors contracted by 0.96 and 0.07
percentage point, respectively. The
relative shares of the major sectors in
the
GDP
were
services
(37.28%),
industry (20.81%), agriculture (19.79%)
and trade (17.77%).


Figure 2.1
Real GDP Growth (%) 2014 Q1 – 2015Q2


In the second quarter of 2015, real GDP
growth weakened further by 1.61
percentage points to 2.35 per cent
(year-on-year), from 3.96 per cent in
the preceding quarter and 6.54 per
cent in the corresponding period of
2014.
The
industrial
sector,
which
contracted further by 1.11 percentage
points, accounted for the slowdown.
The development was largely due to
crude petroleum & natural gas and
manufacturing
sub-sectors
that
contracted
by
0.73
and
0.39
percentage point, respectively. The
key drivers of the GDP growth during
the quarter were services, agriculture
and trade, contributing 1.61, 0.73 and
0.85 percentage points, respectively.
The relative shares of the major sectors
in the GDP were services (37.66%),
industry (19.50%), agriculture (21.12%)
and trade (17.22%).

2.1
Domestic Economic Activity

Activities
in
the
non-oil
sector
remained the major driver of growth in
the first half of 2015, as weakness in the

Q1-2014 Q2-2014 Q3-2014 Q4-2014 Q1-2015 Q2-2015
Per cent
G


CBN Monetary Policy Review

oil sector persisted. The non-oil real
GDP growth, however, moderated to
5.59 per cent in the first quarter of 2015,
from
8.21
per
cent
in
the
corresponding
quarter
of
2014,
representing
a
decline
of
2.62
percentage points. It also declined by
0.85 percentage point compared with
6.44 per cent in the preceding quarter.
Growth in the non-oil sector was largely
driven by activities in information &
communication
(1.17%),
crop
production
(0.87%),
finance
&
insurance
(0.34%)
and
accommodation
&
food
services
(0.31%). This compares with 0.64, 0.82,
0.23, and 0.12 percentage points,
respectively, in the fourth quarter of
2014.

In the second quarter, the non-oil real
GDP also slowed to 3.46 per cent from
5.59 per cent in the preceding quarter
of 2015. Compared with the 6.71 per
cent recorded in the corresponding
quarter of 2014, it declined by 3.25
percentage points. At this rate, growth
in the non-oil sector was largely driven
by
activities
in
information
&
communication
(0.83%),
crop
production (0.67%), real estate (0.26%),
and finance & insurance (0.23%). This
compares with 1.17, 0.87, 0.24, and
0.34 percentage points, respectively, in
the first quarter of 2015.
The oil sector GDP contracted by 8.15
per cent in the first quarter of 2015,
representing a further decline of 1.55
percentage points compared with -
6.60 per cent in the first quarter of 2014.
It, however, grew by 1.18 per cent in
the preceding quarter. The contraction
in the oil sector was due to production
challenges and depressed global oil
prices, which lowered the average
daily production to 2.17 million barrels
per day (mbpd) from 2.26mbpd in the
corresponding quarter of 2014. As a
percentage of total real GDP, oil
contributed
10.45
per
cent,
representing
a
decline
of
1.38
percentage points from 11.83 per cent
recorded in the corresponding quarter
of 2014. In the second quarter of 2015,
the oil sector GDP shrank by 6.79 per
cent compared with 8.15 per cent in
the first quarter, and 5.14 per cent in
the corresponding period of 2014.
Figure 2.2
Non-oil Sector Performance 2014Q1 - 2015Q2


Figure 2:3
Performance of the oil sector 2014Q1 – 2015Q2


2014 Q1
2014Q2
2014Q3
2014Q4
2015Q1
2015Q2

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015
Per cent


CBN Monetary Policy Review

2.2
Sectoral Analysis

The sectoral performance of the
economy is analysed in this section
taking
into
consideration
key
institutional factors that shaped output
growth in the review period.

2.2.1
Agriculture


2.2.1.1 Agricultural Output

Real agricultural output decreased by
1.21 percentage points to 3.49 per
cent (year-on-year) in the second
quarter, from 4.70 per cent in the first
quarter of 2015. It also decreased by
0.19
percentage
point
when
compared with 3.68 per cent in the
corresponding quarter of 2014.
Activity in the livestock sub-sector was
the main driver of agricultural growth in
the second quarter of 2015, as it grew
by 6.20 per cent, while fishing, forestry
and crop production grew by 5.53,
4.01 and 3.20 per cent, respectively.
This compares with 4.54, 4.89, 5.04 and
3.56 per cent in the corresponding
period of 2014 for livestock, fishing,
forestry,
and
crop
production,
respectively. The percentage share of
agriculture in real GDP was 21.12 per
cent in the second quarter of 2015,
compared with 19.79 per cent in the
first quarter and 20.89 per cent in the
corresponding quarter of 2014.
Real agricultural output decreased by
0.83 percentage point to 4.70 per cent
(year-on-year) in the first quarter of
2015 from
5.53 per cent in the
corresponding quarter of 2014. It,
however, increased by 1.06 per cent
when compared with 3.64 per cent in
the fourth quarter of 2014. At 6.97 per
cent, activity in the fishing sub-sector
was the main driver of agricultural
growth
in
the
first
quarter
2015.
Livestock, crop production and forestry
also grew by 6.44, 4.46 and 4.33 per
cent, respectively. This compares with
8.40, 5.61, 5.42 and 6.53 per cent in the
corresponding
period
of

for
fishing, livestock, crop production and
forestry, respectively. Thus, apart from
livestock, the growth rates of the other
sub-sectors were lower in the review
quarter. The percentage share of
agriculture in real GDP was 19.79 per
cent in the first quarter of 2015,
compared with 23.86 per cent in the
fourth quarter of 2014 and 19.65 per
cent in the corresponding quarter of
2014.
Figure 2.4
Quarterly growth rates of Agricultural Sector
Activity in 2015

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015
Per cent
Crop Production
Livestock
Forestry
Fishing


CBN Monetary Policy Review

2.2.1.2 Agricultural Policies and
Institutional Support
The sector continued to benefit from a
number
of
policies,
reforms
and
institutional support such as:


The
Agricultural
Credit
and
Guarantee Scheme (ACGS)
In the first half of 2015, a total of 28,702
loans valued at N5.44 billion were
guaranteed under the ACG scheme,
compared with 35,413 loans valued at
N5.93 billion in the corresponding
period
of
2014.
The
total
loans
guaranteed were distributed across
food crops (66.17%), livestock (14.6%),
mixed crops (6.86%), fisheries (3.95%),
cash crops (3.96%) and others (4.47%).


The
N200
Billion
Commercial
Agriculture Credit Scheme (CACS)
In the review period, the sum of N24.46
billion was released to 25 private
projects
and
one
(1)
state
government.
The
distribution
of
projects financed by value chain were:
production
(65.92%),
processing
(26.43%) and input supplies (7.69%).


The
N200
Billion
SME
Credit
Guarantee Scheme (SMECGS)
In the first half of 2015, loans for two (2)
projects valued at N140.0 million were
guaranteed
under
the
SMECGS,
compared with loans for four (4)
projects valued at N155.23 million in
the corresponding period of 2014.

The Nigeria Incentive-Based Risk
Sharing
System
for
Agricultural
Lending (NIRSAL)
In the review period, six (6) credit risk
guarantees (CRG), valued at N700.46
million were executed in favour of
various counter parties. In addition, the
sum of N50.45 million was paid as
Interest Drawback (IDB) claims to 14
projects.
2.2.2
Industry


2.2.2.1 Industrial Output

In the second quarter of 2015, the
industrial sector output contracted by
5.27 per cent in contrast to a growth of
9.34 per cent in the corresponding
period of 2014. It decelerated by 0.76
percentage point when compared
with a decline of 4.51 per cent in the
preceding quarter of 2015. At -6.79 per
cent, crude petroleum and natural gas
largely accounted for the dwindling in
the
sector,
followed
by
the
manufacturing
sub-sector,
which
contracted by 3.82 per cent. Solid
minerals, however, grew by 7.09 per
cent. Relative to the corresponding
period of 2014, the crude petroleum &
natural gas, manufacturing and solid
minerals sub-sectors grew by 5.14,
14.01 and 20.95 per cent, respectively.
During the first quarter, the industrial
sector output contracted by 4.51 per
cent, in contrast to a growth of 2.76
per cent in the corresponding period


CBN Monetary Policy Review

of 2014 and 7.13 per cent in the
preceding quarter. The development
was
largely
attributed
to
crude
petroleum
&
natural
gas,
which
contracted by 8.15 per cent. The
manufacturing
sub-sector
also
declined marginally by 0.70 per cent,
while solid minerals grew by 11.28 per
cent.
When
compared
with
the
corresponding period of 2014, the
crude petroleum & natural gas subsector contracted by 6.60 per cent,
while the manufacturing and solid
minerals sub-sectors grew by 15.41 and
14.14 per cent, respectively.
Figure 2.5
Quarterly Growth Rates of Industrial Sector
Activity in 2015


2.2.2.2 The
Industrial
Policy
and
Institutional support:

During the review period, the sector
benefited
from
ongoing
reforms,
initiatives and incentives such as:


The N300 Billion Power and Airline
Intervention Fund (PAIF)
In the first half of 2015, the sum of
N13.26 billion was disbursed to two
projects namely, power (N9.924 billion)
and airline (N3.335 billion).


N213
billion
Nigerian
Electricity
Market
Stabilization
Facility
(NEMSF)
Disbursements under the facility began
in February, 2015 and by the end of the
review period, the sum of N64.75 billion
had
been
released
to
refinance
eighteen (18) participants.

The
N200
Billion
SME
Restructuring/Refinancing
Fund
(RRF)
Under the RRF scheme, N23 billion was
released to the Bank of Industry (BOI)
for disbursement between January
and June, 2015, compared with N17
billion released in the corresponding
period of 2014.

2.2.3 Construction

The growth in the construction sector
slowed to 6.42 per cent in the second
quarter of 2015 from 10.70 and 11.17
per cent in the corresponding and
preceding
quarters,
respectively,
representing declines of 4.28 and 4.75
percentage points. The development
was attributed largely to the decline in
government capital expenditure from
N331.214 billion in the preceding half of
2014, to N274.526 billion in the first half
of
2015,
due
to
dwindling
fiscal
revenues.
The sector grew by 11.17 per cent in
the first quarter of 2015 down from
-10
-5

Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Per cent
Crude Petroleum & Natural Gas
Solid Minerals
Manufacturing


CBN Monetary Policy Review

17.88 and 12.66 per cent in the
corresponding and previous quarters,
respectively, representing declines of
6.71 and 1.49 percentage points.
2.2.4
Trade Sector

In the second quarter of 2015, the
growth in the trade sector moderated
to 5.07 per cent down from 5.15 and
6.47 per cent in the corresponding
quarter of 2014 and preceding quarter,
respectively, representing decreases of
0.08 and 1.4 percentage points.
The sector grew by 6.47 per cent in first
quarter of 2015, up from 6.28 and 5.32
per cent in the corresponding quarter
of

and
preceding
quarter,
respectively, representing increases of
0.19 and 1.15 percentage points.
2.2.5
Services Sector

The services sector grew by 4.35 per
cent in the second quarter of 2015
compared with 6.82 per cent in the
corresponding quarter of 2014. This
represented
a
declined
of
2.50
percentage
points
below
the
preceding quarter growth of 6.85 per
cent. The major drivers of growth in the
sector
were
Education
(7.27%),
Finance and Insurance (6.41%), and
Arts, Entertainment and Recreation
(6.30%).

In the first quarter of 2015, the sector
grew by 6.85 per cent down from 7.62
per cent in the corresponding quarter
of 2014. Compared with the preceding
quarter figure of 6.52 per cent, the
sector grew by 0.33 percentage point.
The major drivers of growth in the
sector
were
accommodation
and
food services (26.66%), entertainment
and recreation (18.19%), information &
communication (9.49%) and education
(6.94%).
Figure 2.6
Quarterly Growth Rates of Services Activity in

2.2.6
Oil Sector

The weakness in the oil sector persisted
in the first half of 2015. Average crude
oil production in the second quarter
declined to 2.05 mbpd from 2.21 and
2.17
mbpd
in
the
corresponding
quarter of 2014 and the preceding
quarter,
respectively.
In
the
first
quarter, average crude oil production
declined to 2.17 mbpd from 2.26 and
2.21
mbpd
in
the
corresponding
quarter of 2014 and the preceding
quarter, respectively.

-30
-20
-10

Per cent
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015


CBN Monetary Policy Review

Figure 2.7
Quarterly oil production in 2015

Developments in the international oil
market
during
the
review
period
indicated a gradual recovery in global
oil prices. The price of Bonny Light (370
API), rose steadily from US$48.81 per
barrel in January to US$65.08 per barrel
in May 2015 but declined slightly in
June 2015 to an average of US$58.03
per
barrel.
The
gradual
increase
witnessed between January and May
was
attributed
to
significant
divestments in the US shale oil industry,
signaling the bottoming-out of the oil
price decline. The subsequent decline
in June 2015, came on the heels of
increased supplies from some OPEC
countries including Saudi Arabia, Iraq,
Nigeria and the U.A.E. In addition, a
bearish sentiment pervaded the oil
market due to the impending nuclear
deal between Iran and the P5+1(the
five permanent members of the UN
Security Council). However, average
oil price remained above the Federal
Government budget benchmark price
of US$53.00 per barrel in the review
period.
Figure 2.8
Monthly bonny light oil price July 2014 - June

1.9
1.95


Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015
Million Barrels Per Day

Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
US$


CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER 3

3.0
PRICE DEVELOPMENTS

nflationary pressures in the domestic
economy intensified in the first half of
2015 despite the Bank‘s sustained
tight monetary policy stance. Headline
inflation
trended
upwards
and
exceeded the Bank‘s inflation band of
6-9 per cent towards the end of the
review period. Both core and food
inflation rates displayed an upward
trajectory, suggesting that the driving
factors were both from the supply and
demand sides.

In the foreign exchange market, the
naira witnessed significant volatility
during
the
review
period.
The
exchange
rate
continued
to
depreciate substantially in all segments
of
the
foreign
exchange
market,
leading to the closure of the official
foreign exchange window on February
18, 2015. As a further measure to
moderate
the
foreign
exchange
demand pressure, the Bank restricted
access to foreign exchange for some
41 import items. The depreciation has
been largely driven by reduced supply
of foreign exchange, due to lower
accretion to reserves from falling oil
prices, as well as demand pressures
arising from capital reversals, and the
expected normalization of the US
monetary policy.

In the money market, the Inter-Bank
Call and Open Buy Back (OBB) rates
fluctuated remarkably, with a wide
range around the standing facilities
corridor, indicating liquidity swings in
the banking system during the period.

3.1
Trends in Inflation

All measures of inflation increased
throughout the review period, despite
the
Bank‘s
tight
monetary
policy
stance. The core and food measures of
CPI inflation increased progressively
between January and June 2015, from
163.70 and 169.80 in January to 170.60
and 178.10 in June 2015. Food inflation
(year-on-year) increased from 9.20 per
cent in January to 10.00 per cent in
June 2015. Core inflation (year-onyear) rose significantly from 6.80 to 8.40
per cent during the same period. As a
result, headline inflation increased to
9.20 per cent in June 2015 from 8.20
per cent in January 2015. Both in terms
of the weight of food in the consumer
basket and its price level, the food
component remained the major driver
of headline inflation, even though the
pressure of the core component in the
review period has become significant.
The major components that drove
core prices included processed foods,
housing; water; electricity; transport;
and clothing & foot wear (Table 3.1
and figures 3.1 and 3.2).


I


CBN Monetary Policy Review

Table 3.1
Inflation Rates, July 2014 – June 2015

Figure 3.1
Headline, Core and Food Inflation Rates
(January – June 2015)

In
the
first
half
of
2015,
most
components
of
core
inflation
experienced
major
increases
compared with a general decrease in
the second half of 2014. Processed
food component exerted the most
pressure on core inflation, rising by 0.58
percentage point to 3.08 per cent in
June from 2.48 per cent in January
2015. Prices of other components of
core inflation also increased, namely
housing, water, electricity, gas & other
fuels (0.28 percentage point); transport
(0.19 percentage point) and clothing
& footwear (0.15 percentage point)
(Table 3.6).
Figure 3.2
CPI Headline, Core and Food (January - June
2015)

3.1.2
Headline Inflation

The uptick in the major components
of headline inflation was reflected in
the upward trend in domestic prices
during the first half of 2015. Food &
non-alcoholic
beverages,
which
continued
to
exert
the
greatest
influence
on
headline
inflation,
increased to 5.27 per cent in June from
4.82 per cent in January 2015. This was
followed by housing, water, electricity,
gas and other fuels, which increased
to 1.29 from 1.12 per cent over the
same period (Table 3.2 and Figure 3.3).

Figure 3.3
Major Components of Headline Inflation
(Y-on-Y), January-June 2015

Headline Inflation
Core Inflation
Food Inflation
Year/Mon
CPI
Y-on-Y
12MMA
CPI
Y-on-Y
12MMA
CPI
Y-on-Y
12MMA
Jul-14

Aug-14

Sep-14

Oct-14

Nov-14

Dec-14

Jan-15

Feb-15

Mar-15

Apr-15

May-15

Jun-15


CBN Monetary Policy Review

In general, headline inflation increased
as a result of the combined effects of
the rise in the price of food and nonalcoholic beverages; housing; water,
electricity,
gas
and
other
fuels;
transport and clothing & foot wear.

Inflationary pressures witnessed during
the period, despite the tight monetary
policy
stance
of
the
Bank
were
attributable to several factors including
the pass-through to domestic prices
from the depreciation of the exchange
rate; disruptions to the distribution
chain due to continuing insurgency in
the north east region of the country;
the
liquidity
impact
of
election
spending as well as shortages of
petroleum products arising from the
stand-off between oil marketers and
the government on subsidy payments.

Table 3.2
Major Components of Headline Inflation
(Y-on-Y), January-June 2015


On a month-on-month basis, headline
inflation fluctuated upwards during the
period under review in contrast to the
year-on-year
rates.
It
fluctuated
between 0.70 per cent in February and
1.10 per cent in May, 2015, but
however, maintained an upward trend
from 0.81 per cent in January to 0.90
per
cent
in
June.
The
major
components that accounted for the
fluctuation were the prices of food and
non-alcoholic beverages that ranged
from 0.39 to 0.57 per cent; and
housing, water, electricity, gas & other
fuels, from 0.10 to 0.20 per cent (Table
3.3 and Figure 3.4).

Table 3.3
Major Components of Headline Inflation
(M-on-M), January-June 2015


Figure 3.4
Major Components of Headline Inflation
(M-on-M), January-June 2015


3.1.2
Food Inflation

Food inflation (year-on-year) trended
upwards from 9.21 per cent in January
Date Headline
Food &
Non-
Alcoholic
Bev
Housing,
Water,
Elect.
Gas &
Other
Fuel
Clothing
&
footwea
Transpor
Furnishings,


Household
Equip
& HH
Maint
Education
Jan -15 8.20

Feb-15

Mar-15

Apr-15 8.70

May-15

Jun -15

Date Headline
Food &
NonAlcoholic
Bev
Housing,
Water,
Elect.
Gas &
Other
Fuel
Clothing
&
footwea
Transport
Furnishings,
Household
Equip
& HH
Maint
Education

Jan-15

Feb-15

Mar-15

Apr-15

May-15

Jun-15


CBN Monetary Policy Review

to 10.04 per cent in June 2015 due to
increases
in
the
prices
of
its
components, mainly processed food
and farm produce. The price of
processed food increased from 4.38 to
4.81 per cent, and farm produce from
4.83 to 5.23 per cent. Of the 0.83
percentage point increase in food
inflation, processed food contributed a
larger share of 0.43 percentage point,
while farm produce contributed 0.40
percentage point. The key drivers of
the increase in the processed food
category were fish and sea food,
which increased by 0.17 percentage
point;
and
garri
yellow
by
0.15
percentage point. This was due to
rain-related delay in harvests and hike
in transport costs during the period
(Table 3.4 and Figure 3.5).

Table 3.4
Major Components of Food Inflation (Y-on-Y),
Jan - Jun 2015
Jan.15
Feb.15
Mar.15
Apr.15
May.15
Jun.15
Change
Jan -
June

FOOD

Processed Food

Farm Produce

Yams, Potatoes & Other Tubers

Meat

Vegetables

Fish & Sea Food


Figure 3.5
Major Components of Food Inflation
(Y-on-Y), Jan - Jun 2015


On a month-on-month basis, food
inflation increased from 0.90 per cent
in January to 1.06 per cent in June
2015, similar to its year-on-year trend.
The price of processed food increased
to 0.48 from 0.40 per cent and farm
produce to 0.57 from 0.50 per cent
during the review period. Accordingly,
the 0.16 percentage point increase in
food
inflation
was
due
to
both
components. The key drivers of the
increase were fish & sea food and
vegetable,
which
rose
by
0.06
percentage points apiece (Table 3.5
and Figure 3.6).


Jan.15
Feb.15
Mar.15
Apr.15
May.15
Jun.15
Processed Food
Farm Produce
Yams, Potatoes & Other Tubers
Meat
Vegetables
Fish & Sea Food


CBN Monetary Policy Review

Table 3.5
Major Components of Food Inflation (M-on-M),
Jan-Jun 2015
Jan.15
Feb.15
Mar.15
Apr.15
May.15
Jun.15
Change
Jan -
June

FOOD

Processed Food

Farm Produce

Yams, Potatoes & Other Tubers

Meat

Vegetables

Fish & Sea Food


Figure 3.6
Major Components of Food Inflation (M-on-M),
Jan - Jun 2015


3.1.3
Core Inflation

Core inflation (year-on-year) rose by
1.60 percentage points from 6.80 per
cent in January to 8.40 per cent in
June 2015. Of the 1.60 percentage
point
increase
in
core
inflation,
processed food contributed the largest
share
of
0.58
percentage
point,
followed by housing, water, electricity,
gas and other fuels (0.28 percentage
point); and transport (0.19 percentage
point). Thus, the major contributors to
the increase in core inflation were
processed food (2.48 to 3.10 per cent
point); housing, water, electricity, gas
and other fuel (1.48 to 1.76 per cent);
transport (0.56 to 0.75 per cent)
clothing and footwear (0.77 to 0.93 per
cent); and (Table 3.6).

In the processed food category, the
key drivers of the increase were meat,
which rose from 0.57 to 0.65 per cent,
fish & sea foods (0.60 to 0.76 per cent),
milk, cheese & egg (0.10 to 0.13 per
cent), and oil & fats (0.32 to 0.39 per
cent). The increase in core inflation
during
the
period
was
mainly
traceable
to
the
effects
of
the
shortage of petroleum products and
the pass-through to domestic prices
from the depreciation of the naira.

Table 3.6
Major Components of Core Inflation (Y-on-Y)
January-June 2015


Jan.15
Feb.15
Mar.15
Apr.15
May.15
Jun.15
Processed Food
Farm Produce
Yams, Potatoes & Other Tubers
YEAR-ON-YEAR (CORE)
Weights
J an'15
Feb'15
Mar'15
Apr'15
May'15
June'15
Change btw Jan. to
Jun. 2015
ALL ITEMS LESS FARM
PRODUCE CPI

Processed Food

Milk,Cheese & Eggs

Sugar,Jam,Honey,etc

Non-Alcoholic Beverages

Alcoholic Bev. Tobacco & Kola

Clothing & footwear

Housing,Water, Elect.Gas &
Other Fuel

Furnishings, Household Equip
&HH Maint.

Health

Transport

Communication

Recreation & culture

Education

Restaurant & Hotels

Miscellaneous Goods &
Services


CBN Monetary Policy Review

Figure 3.7
Major Components of Core Inflation (Y-on-Y)
January-June 2015


The month-on-month analysis showed
that core inflation rose from 0.73 per
cent in January to 0.80 per cent in
June 2015. Processed food remained
the major driver of core inflation,
increasing from 0.25 to 0.30 per cent in
the review period. Other drivers were:
housing, water, electricity, gas & other
fuels which increased from 0.16 to 0.17
per cent; transport (0.06 to 0.09 per
cent) and miscellaneous goods &
services (0.01 to 0.02 per cent) (Table
3.7 and Figure 3.8).
Table 3.7
Major Components of Core Inflation (M-on-M)
January-June 2015

Figure 3.8
Major Components of Core Inflation (M-on-M)
January-June 2015


3.1.5
Seasonally-Adjusted Inflation

During the review period, both actual
and seasonally-adjusted measures of
headline inflation maintained upward
trajectory, in continuation of the trends
witnessed during the last quarter of
2014 (Table 3.8 and Figure 3.14). Actual
headline inflation rate continued to
trend upwards in the first half of 2015,
reflecting the general price levels in
the economy. It trended below the
seasonally-adjusted headline inflation
during the first quarter and above it in
the second quarter of 2015. The
development indicated that seasonal
effects attenuated inflation during the
first quarter, and accentuated it during
the second quarter of 2015. The
general upward trend in both actual
and seasonally-adjusted measures of
inflation were attributable to increased
spending during the 2015 elections,
scarcity of petroleum products that
MONTH-ON-MONTH (CORE)
Weight
J an'15
Feb'15
Mar'15
Apr'15
May'15
June'15
Change btw Jan. to
Jun. 2015
ALL ITEMS LESS FARM
PRODUCE CPI

Processed Food

Milk,Cheese & Eggs

Sugar,Jam,Honey,etc

Non-Alcoholic Beverages

Alcoholic Bev. Tobacco & Kola

Clothing & footwear

Housing,Water, Elect.Gas &
Other Fuel

Furnishings, Household Equip
&HH Maint.

Health

Transport

Communication

Recreation & culture

Education

Restaurant & Hotels

Miscellaneous Goods &
Services


CBN Monetary Policy Review

resulted in increased energy and
transport costs; as well as imported
inflation due to significant depreciation
of the naira during the period. The
uptick
in
June,
however,
largely
resulted
increase
in
consumption
spending
associated
with
Islamic
festivities, coupled with energy supply
shock which affected retail prices.

Table 3.8
Actual and Seasonally Adjusted Headline
Inflation Jan -June 2015
Date
Inflation
S-A Inflation
Jan-15
8.20
8.41
Feb-15
8.40
8.44
Mar-15
8.50
8.57
Apr-15
8.70
8.64
May-15
9.00
8.81
Jun-15
9.20
8.91


Figure 3.9
Actual and Seasonally Adjusted Headline
Inflation January - June 2015


3.3
Key Factors that Influenced
Domestic Prices

The upward trend in the general price
level observed in the first half of 2015
was due to both supply and demand
factors. Both core and food inflation
rates (year-on-year) maintained an
upward
trajectory,
suggesting
the
impact of structural and demand
forces on aggregate price levels. This
occurred
despite
the
moderating
effect of the sustained tight monetary
policy stance of the Bank to rein-in
liquidity surfeit in the banking system.
The factors included the pass-through
to
domestic
prices
from
the
depreciation of the exchange rate;
disruptions to the distribution chain due
to continuing insurgency in the north
east region of the country; the liquidity
impact of election spending and
shortages
of
petroleum
products
witnessed during the period.

3.3.1
Demand-side Factors

The election spending, coupled with
excess liquidity in the banking system,
exerted pressure on the exchange
rate. This was in addition to the
depreciation of the exchange rate,
which
stemmed
from
reversals
of
capital
flows
and
the
expected
normalization of the US monetary
policy
during
the
period.
The
development was accentuated by
declining
accretion
to
external
reserves
arising
from
lower
fiscal
7.6
7.8


9.2
9.4
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Per cent
Actual Inflation
S-A Inflation


CBN Monetary Policy Review

receipts occasioned by the sustained
drop in crude oil prices. The overall
effect of these developments was a
substantial depreciation of the naira
exchange rate from N168/US$ (rDAS)
at
end-January
to
N196.95/US$
(Interbank) at end-June 2015, following
the closure of the rDAS segment of the
market on February 18, 2015.

3.3.2
Supply-side Factors

A number of supply side factors
affected the domestic price level
during the review period. These factors
were primarily related to production
and distribution activities. Aggregate
output growth declined to 3.96 per
cent in the first quarter of 2015,
compared with 5.53 and 5.94 per cent
in the corresponding and preceding
quarters of 2014, respectively. In the
second
quarter,
growth
further
declined to 2.35 per cent. Production
and
distribution
activities
were
hampered
by
the
late
commencement of rain, cattle rustling,
the displacement of farmers due to
insurgency as well as the shortage of
petroleum products, leading to high
transport cost and disruption to supply
of goods and services. Other costrelated
challenges
were
the
depreciation of the naira exchange
rate,
resulting
in
higher
cost
of
imported inputs and low level of
electricity
supply
caused
by
inadequate gas-to-power.

3.3.3
Moderating Factors

A combination of factors moderated
the rise in the general price level during
the
period.
These
included
the
continued decline in global inflation,
low oil receipts and late passage of
the 2015 budget which slowed down
public spending. Others were the nonpayment of workers‘ salary in many
states of the federation, which partly
accounted for a slowdown in private
demand,
and
moderation
in
economic
activities
as
economic
agents awaited a transition to the new
government. In addition, the sustained
liquidity
management
and
tight
monetary policy stance of the Bank
moderated inflationary pressures.


CBN Monetary Policy Review

CHAPTER FOUR

4.0
MONETARY
POLICY
AND
LIQUIDITY MANAGEMENT

onetary policy in the first half
of 2015 took cognizance of
key
developments
in
the
global economy, including uncertainty
about the expected commencement
of
the
US
monetary
policy
normalization,
the
expanded
quantitative easing by the European
Central Bank (ECB) as well as the
protracted Greek debt crisis. Other
factors were the geopolitical tensions
in Ukraine and the Middle East, crude
oil supply glut, sluggish growth in the
Euro Area as well as low commodity
prices. These developments affected
government revenues, accretion to
reserves, and the stability of exchange
rates
of
emerging
markets
and
developing economies.

In the domestic economy, the key
challenges to monetary policy were
the continuing liquidity surfeit in the
banking system and the associated
cost
of
liquidity
management,
sustained
pressure
on
the
naira
exchange rate leading to divergence
between the interbank and Bureau de
change (BDC) rates, increasing risk of
currency
substitution
as
well
as
activities and spending in the run-up to
the 2015 general elections. These
developments were accentuated by
continued security challenges in some
parts of the country, thereby impacting
on
investor
confidence.
These
considerations, and the need to sustain
the
achievement
of
the
Bank‘s
mandate of price and exchange rate
stability, provided the context for
monetary policy decisions in the review
period.

4.1
Decisions
of
the
Monetary
Policy Committee (MPC)

The
Monetary
Policy
Committee
(MPC) decisions in the first half of 2015
were influenced by key global and
domestic developments. Primarily, the
issues of concern on the domestic front
included:
liquidity
injections
from
electoral spending, liquidity surfeit in
the banking system, the rising risk of
currency
substitution,
declining
external
reserves
and
government
revenues occasioned by low oil prices,
insurgency activities in key agricultural
regions,
reemergence
of
demand
pressure
in
the
foreign
exchange
market, creeping inflationary pressure
and rising credit to government. The
considerations on the global front
included: uneven and tepid recovery,
divergence
in
monetary
policy
between the US and the Euro Area, the
pace of US recovery and expected
normalization of the US monetary
policy, capital flow reversals leading to
depreciation
of
emerging
market
exchange rates, declining commodity
prices as well as the lingering Greek
debt crisis.
M


CBN Monetary Policy Review

4.1.1
January 2015 MPC Meeting

In January 2015, the MPC reviewed
developments in the monetary policy
environment,
and
expressed
satisfaction with the economic growth
performance and the outcome of
inflation in 2014. The MPC noted the
impact
of
security
challenges
on
agricultural and associated activities
and the continued decline in oil GDP.
The
impact
of
sustained
banking
system liquidity surfeit on inflation and
exchange rate was emphasized, along
with the implications of capital flow
reversals on the depreciation of the
exchange
rate.
The
external
environment
was
challenging
with
weak recovery in the Euro Area and
Japan, and slowdown in emerging
market economies. Although the IMF
projected global growth in 2015 at 3.5
per cent, the MPC recognized high
unemployment
and
debt
levels,
geopolitical tensions and declining
commodity
prices
as
significant
downside risks to the projection. In
addition, the devastating impact of
the Ebola epidemic was a further
source of risk in the West African subregion. Monetary policy in the Euro
Area
and
Japan
remained
accommodative as opposed to the
US,
while
emerging
market
and
developing
economies
generally
maintained a tight monetary policy
stance.

The key concerns were the adverse
impact
of
security
challenges
on
growth, the declining contribution of
the oil sector to GDP growth and the
sustained bearish condition of the
capital market. The Committee noted
that insurgency contributed to food
supply bottlenecks in key agricultural
zones. In addition, the challenge of
excess liquidity in the banking system,
the complications arising from capital
reversals and demand pressures on the
foreign exchange market, as well as
the
possible
effects
of
expected
normalization of US monetary policy
were considered.

In the light of these developments, and
recognizing the need to allow previous
policy measures to work through the
real
economy,
the
Committee
decided to retain the Monetary Policy
Rate (MPR) at 13.0 per cent, with a
symmetric corridor of +/- 200 basis
points
around
the
midpoint.
The
Liquidity Ratio, the Cash Reserve Ratio
(CRR) on private sector deposits and
the CRR on public sector deposits,
were also retained at 30.0, 20.0 and
75.0 per cent, respectively.

4.1.2
March 2015 MPC Meeting

A t the March 2015 meeting, the MPC
reviewed developments in the global
and domestic economy and financial
markets, and noted the slow and
uneven pace of global economic
recovery, low commodity prices, and


CBN Monetary Policy Review

expectation of the normalization of US
monetary policy fuelling speculations
about the possible increase in US shortterm rates. The Committee further
observed the sluggish growth in oil
exporting and developing economies,
which stemmed from decreased oil
receipts and low accretion to reserves,
leading
to
capital
reversals
and
weakening of their currencies. Other
developments,
which
posed
a
downside risk to global growth were
weak economic performance in the
Euro
Area,
geopolitical
tensions,
structural
factors,
unfavourable
weather
conditions,
poor
external
demand and moderate growth in
emerging
market
and
developing
economies. The Committee noted that
global
inflation
remained
benign,
although emerging and developing
economies were expected to face
imported inflationary pressures caused
by currency depreciations. In view of
these, global monetary policy stance
remained largely accommodative.

On the domestic front, economic
growth slowed in the last quarter of
2014 due to moderation in the non-oil
sector.
Headline
inflation
trended
upwards but remained within the
acceptable band of the CBN. The
depreciation of the naira and its passthrough to domestic prices contributed
to the observed increase in headline
inflation. Developments in the money
market indicated that on the average,
short-term rates were stable despite
episodes of sporadic volatility. The
Committee noted with satisfaction the
stability
in
the
foreign
exchange
market
due
to
recent
measures,
including the closure of the official
window, to improve transparency and
moderate arbitrage.

Arising from these developments, the
Committee
raised
a
number
of
concerns,
including
the
negative
impact of global commodity price
declines, expected US monetary policy
normalization, rising exchange rate
premium
between
the
BDC
and
interbank segments of the market,
increasing risk of currency substitution,
low oil prices and the adverse impact
on accretion to reserves, government
revenue,
and
capital
flows.
The
Committee was also concerned about
the moderate pace of economic
growth and its near-term outlook as
well as the gradual increase in yearon-year headline inflation, partly driven
by the 2015 election spending, high
import prices and adverse shocks to
food supply. In addition, it was worried
about the bearish state of the capital
market.

Reflecting
on
both
global
and
domestic
developments,
the
Committee was of the view that the
impact of existing monetary policy and
subsequent administrative measures
would require more time to fully
permeate
the
economy.
Consequently,
the
Committee


CBN Monetary Policy Review

decided to maintain the MPR at 13.0
per cent, with a symmetric corridor of
+/-

basis
points
around
the
midpoint. The Committee also retained
the Liquidity Ratio at 30.0 per cent, CRR
on public sector deposits at 75.0 per
cent and CRR on private sector
deposits at 20.0 per cent.

4.1.3
May 2015 MPC Meeting

At the May 2015 meeting, the MPC
observed
that
global
economic
recovery continued at a modest but
uneven pace, with global growth in
2015 projected at 3.5 per cent by the
IMF.
Low
commodity
prices,
particularly oil, contributed to the
growth of oil importing countries but
dampened prospects in oil exporting
countries.
In
the
Euro
Area,
the
Committee observed that the massive
quantitative easing of the ECB opened
a new growth vista that may halt the
slide in output and engender a more
solid recovery. At 5.8 per cent in 2015,
growth
in
emerging
market
and
developing
economies
was
dampened by structural and cyclical
factors, monetary tightening, political
tensions and currency depreciation.
Global
inflation was expected to
remain subdued in 2015 due to the
effects of the sharp drop in crude oil
prices,
excess
capacity
and
appreciation of currencies of key
advanced
economies.
However,
emerging
market
and
developing
economies faced an upside risk to
inflation
due
to
depreciating
exchange rates.

On
the
domestic
scene,
the
deceleration
in
growth,
which
commenced in the third quarter of
2014 intensified in the first quarter of
2015 partly on account of weaker oil
receipts. The Committee noted the
build-up of inflationary pressures, which
it considered transient and attributable
to the shortage of petroleum products,
rising food prices and the pass-through
to prices from the depreciation of the
exchange
rate.
Short-term
interest
rates were relatively volatile, reflecting
fluctuations in banking system liquidity.
The
capital
market
showed
slight
improvements,
as
both
market
capitalization and the All Share Index
(ASI) increased. The naira exchange
rate was relatively stable in the two
segments of the foreign exchange
market, largely due to measures taken
to calm the market and stabilize the
exchange rate.

The above developments created a
number of concerns for the Committee
notably:
slow
global
economic
recovery, downside risks to the external
sector
due
to
the
expected
normalization of US monetary policy
and anticipated increase in short-term
rates, worsening effects of capital
reversals,
tighter
financial
market
conditions and low oil prices. Other
concerns were the decline in trade
balance evidenced in low accretion


CBN Monetary Policy Review

to
external
reserves,
as
well
as
declining government revenue leading
to growth in credit to government and
its crowding out effect on private
sector investments. The Committee
was worried about the upward trend in
inflation rates for four consecutive
months
to
April
2015.
The
MPC
considered
that
the
current
discriminatory CRR on private and
public sector deposits, could constrain
policy space, and inspire moral hazard
by market participants.

The
Committee
was,
however,
optimistic
about
near
term
improvement in economic conditions,
as
progress
was
being
made
in
resolving insecurity challenges, and the
emergence of a conducive investment
environment following the successful
conclusion
of
the

general
elections.

In
the
light
of
the
above
considerations,
the
Committee
decided to maintain the MPR at 13.0
per cent, with the symmetric corridor of
+/-

basis
points
around
the
midpoint and to retain the Liquidity
Ratio at 30.0 per cent. The Cash
Reserve Ratio (CRR) on public and
private sector deposits were, however,
harmonized at 31.0 per cent.


4.2.0
Instruments
of
Liquidity
Management

In line with the Bank‘s objectives of
price stability and macroeconomic
management, arrays of instruments
were deployed in the conduct of
monetary policy during the period
under review. These included; the MPR,
the CRR, Open Market Operations
(OMO)
and
Discount
Window
Operations.

4.2.1
Monetary Policy Rate (MPR)

The Monetary Policy Rate (MPR)
remained the prime instrument for
monetary policy management. The
MPR was retained at 13.0 per cent
throughout the review period with the
symmetric corridor of +/-200 basis
points around the midpoint. This was
mainly to help rein-in inflation and
manage the liquidity surfeit in the
banking system. With the MPR at 13.0
per cent and headline inflation rate of
9.2 per cent at end-June 2015, the real
interest
rate
was
positive,
which
encouraged
capital
inflow
and
accretion to external reserves.

4.2.2
Open
Market
Operations
(OMO)

The Bank continued to rely on Open
Market Operations (OMO) as the main
tool for managing banking system
liquidity in the first half of 2015. Actual
OMO sales amounted to N4,261.72


CBN Monetary Policy Review

billion compared with N3,937.76 billion
and N4,484.94 billion recorded in the
preceding and corresponding periods
of 2014, respectively. This represented
a decrease of 4.98 below the level in
the first half of 2014 but an increase of
8.23 per cent above the level in the
second half of 2014 (Table 4.1).

Table 4.1
OMO Bills Auction (January 2014 – June 2015)
(N’million)
Date

% Change
Jan
1,091.49
1,295.88

Feb
307.40
217.33

Mar
714.80
543.86

Apr
285.94
933.74

May
905.99
524.54

Jun
1,179.54
746.37

1st Half
4,485.17
4,261.72
-4.98
Jul
810.92


Aug
654.53


Sep
989.58


Oct
652.50


Nov
830.23


Dec
0.00


2nd Half
3,937.76


Cumulative
Figure
8,422.93
4,261.72


4.3.3
Reserve Requirements

The
Cash
Reserve
Ratio
(CRR)
continued
to
be
employed
to
complement the MPR, OMO and other
macroprudential instruments in liquidity
management.
During
the
review
period, the MPC harmonized the CRR
on private sector deposits of 20.0 per
cent and public sector deposits of 75.0
per cent to 31.0 per cent of total
reservable deposits. This led to the
improvement
in
the
efficacy
of
monetary
policy
transmission,
effectiveness of liquidity management
and curtailed abuses.

4.2.4
Standing Facilities

The Bank‘s standing facilities window
(lending/deposit) remained open, and
was accessed by Deposit Money Banks
(DMBs) and discount houses (DH) to
meet their daily liquidity requirements
in the first half of 2015. The request for
Standing
Lending
Facility
(SLF),
increased by 51.14 per cent from
N1,664.00 billion in the second half of
2014 to N2,515.05 billion in the first half
of 2015. The volume of SLF at end-June
2015 represented an increase of 24.43
per
cent
compared
with
the
corresponding period of 2014 (Table
4.2). At the Standing Deposit Facility
(SDF) window, the volume decreased
significantly during the period. The
cumulative volume of deposits stood
at N9,257.46 billion, representing 68.52
per
cent
decrease
below
the
N29,410.97 billion recorded in the
second half of 2014. Similarly, the endJune 2015 figure represented 80.09 per
cent decrease below the N46,496.63
billion recorded in the corresponding
period of 2014 (see Table 4.3). The
combination of liquidity management
instruments deployed by the Bank in
the period under review, effectively
moderated the liquidity surfeit within
the banking system. This resulted in
increased lending at the SLF window
and decreased deposit at the SDF
window.
Also,
lower
Federation


CBN Monetary Policy Review

Accounts
Allocation
Committee
(FAAC) distributions to the three tiers of
government moderated liquidity in the
banking system.

Table 4.2
CBN Standing Lending Facility (January 2014 –
June 2015) (N’billion)
Date

%
Change
Jan
615.59
104.75

Feb
653.74
922.28

Mar
560.27
541.13

Apr
50.29
529.77

May
44.88
229.36

Jun
96.42
187.76

1st Half
2,021.19
2,515.05
24.43
Jul
96.42


Aug
55.46


Sep
133.80


Oct
23.84


Nov
224.59


Dec
1,129.89


2nd Half
1,664.00


Total
3,685.19
2,515.05


Table 4.3
CBN Standing Deposit Facility (January 2014 –
June 2015) (N’billion)
Date

% Change over
the Preceding/
Corresponding
Period
Jan
13,543.87
2,562.15
-81.1
Feb
4,953.72
862.15
-82.6
Mar
5,844.76
1,298.46
-77.8
Apr
8,190.69
864.11
-89.5
May
8,061.09
1,958.72
-75.7
Jun
5,902.5
1,711.87
-71.0
1st
Half
46,496.63
9,257.46
-79.6
Jul
7,049.30


Aug
4,309.30


Sep
6,734.45


Oct
7,436.35


Nov
2,804.84


Dec
1,076.73


2nd
Half
29,410.97


Total
75,907.60
9,257.46


4.3.5
Foreign Exchange Intervention

The Bank continued to intervene in
the
foreign
exchange
market
to
stabilize the naira exchange rate in the
review period. Total supply of foreign
exchange declined to US$13,974.27
million in the first half of 2015 from
US$20,752.01
million
in
the
corresponding
period
of
2014,
representing
a
32.66
per
cent
reduction.
When
compared
with
US$16,263.03 million in the second half
of 2014, it declined by US$2,288.76
million or 14.07 per cent (Table 4.4).

The
reduced
supply
of
foreign
exchange reflected the efficacy of the
implementation of the administrative
measures introduced. This moderated
speculative demand in the foreign
exchange market, limited arbitrage
opportunities and the rate of depletion
of foreign reserves. The administrative
measures included the closure of the
official window (rDAS) of the foreign
exchange
market,
lower
limit
on
weekly
sales
to
BDCs
and
new
directives
on
the
monitoring,
repatriation of export proceeds.


CBN Monetary Policy Review

Table 4.4
Foreign Exchange Supply by the CBN (US$
Million)
Date
Sales to
rDAS
Sales to
BDC
Total Supply
(RDAS +
BDC)
Sales to
rDAS
Sales to
interbank
Sales to
BDC
Total Supply
(rDAS+inter
bank + BDC)
Jan
2,989.43

556.30

3,545.73

1,987.40

N/a
184.70

2,172.10

Feb
3,101.87

567.05

3,668.92

1,197.10

2,334.90

371.40

3,903.40

Mar
3,151.59

560.95

3,712.54

1,866.10

301.60

2167.7
Apr
2,663.92

712.80

3,376.72

1,375.70

370.40

1746.1
May
2,928.49

619.84

3,548.33

1,856.60

309.90

2166.5
Jun
2,398.55

501.22

2,899.77

1,448.50

369.97

1818.47
1st Half
17,233.85

3,518.16

20,752.01

3,184.50

8,881.80

1,907.97

13,974.27

Jul
2,494.76

184.94

2,679.70

-

Aug
3,201.10

169.08

3,370.18

-

Sep
2,598.45

143.24

2,741.69

-

Oct
3,498.48

178.86

3,677.34

-

Nov
2,296.93

145.71

2,442.64

-

Dec
1,241.13

110.35

1,351.48

-

2nd Half
15,330.85

932.18

16,263.03

-

-

-

Total
32,564.70

4,450.34

37,015.04

3,184.50

1,907.97

13,974.27

4.3
Developments
in
Monetary
Aggregates

The
performance
of
monetary
aggregates in the first half of 2015 was
weaker than projected: this could be
explained by the maintenance of a
tight monetary policy stance and
lower fiscal injections into the system
due to low public sector revenues.
Further analysis revealed that credit to
the public sector increased in the
review period, thus crowding out the
private sector.

4.3.1
Broad Money (M2)

Broad Money (M2) declined by 0.61
per cent to N18,811.64 billion at endJune 2015 from N18,927.79 billion at
end-December 2014. Compared with
the end-June 2014 level of N17,576.64
billion, M2 increased by 7.03 per cent.
The decline in M2 as at end-June 2015,
when
annualized,
indicated
a
contraction
of
1.22
per
cent,
in
contrast
to
the
indicative
growth
target of 15.24 per cent.

Figure 4.1
Money Supply (M1) and (M2) (Dec 2014 – June
2015)
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Broad Money (M2)

Narrow Money (M1)

N'Billion
Money Supply (M1) & (M2) (December 2014 - June 2015)
Broad Money (M2)
Narrow Money (M1)

Figure 4.2
Growth in Money Supply (M1) and (M2) (Dec
2014 – Jun 2015)

Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Percentage
Growth in Money Supple (M1) & (M2) (December 2014 - June 2015)
M2 Growth (%)
M1 Growth (%)

4.3.2
Narrow Money (M1)

Narrow Money (M1) decreased by
5.45 per cent to N6,542.60 billion at
end-June 2015 from N6,919.55 billion at
end-December 2014. Compared with


CBN Monetary Policy Review

the end-June 2014 figure of N7,096.44
billion, M1 declined by 7.80 per cent.
The growth rate of M1 as at end-June
2015, when annualized, indicated a
decline of 10.90 per cent, in contrast to
the indicative growth target of 9.91 per
cent (Figures 4.1 and 4.2).

4.3.3
Net Foreign Assets (NFA)

Net Foreign Assets (NFA) decreased
by 16.15 per cent to N5,951.45 billion at
end-June 2015 from N7,098.10 billion at
end-December 2014. Compared with
the end-June 2014 figure of N7,673.10
billion, NFA declined by 22.44 per cent.
The growth rate of NFA as at end-June
2015, when annualized, indicated a
decline of 32.30 per cent, in contrast to
the indicative growth target of 10.60
per
cent.
The
continued
weak
performance of NFA was attributed to
declining oil receipt due to a fall in oil
prices, capital flow reversals due to
improvements in some industrialized
economies such as the US and the UK,
and investor‘s anxiety about the 2015
general elections.


Figure 4.3
Net Domestic Asset (NDA) (Dec 2014 – Jun 2015)
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Net Domestic Assets

N'Billions
Net Domestic Assets (December 2014 -June 2015)
Net Domestic Assets

Figure 4.4
NDA, NDC and Other Assets (net) (Dec 2014 –
Jun 2015)

N'Billion
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Net Domestic Assets

Net Domestic Credit

Other Assets (Net)

NDA, NDC and Other Assets (net) (December 2014 -June 2015)

4.4.3
Credit to the Government (Cg)

Credit to government (Cg) grew by
231.72 per cent to N2,512.5 billion at
end-June 2015 from N757.53 billion at
end-December 2014. When compared
with the end-June 2014 figure of
negative N236.09 billion. The growth
rate of Cg as at end-June 2015, when
annualized, indicated an increase of
463.44 per cent, which was well above
the indicative growth target of 36.05
per cent. In effect, the government
sector moved from being a net


CBN Monetary Policy Review

creditor to the banking system to a net
debtor, owing to a massive drop in
revenues occasioned by the decline in
crude oil prices in the international
market.

4.4.4
Credit to the Private Sector (Cp)

Credit to the private sector (Cp)
increased
by
4.32
per
cent
to
N18,897.31 billion at end-June 2015
from
N18,115.21
billion
at
endDecember 2014. Compared with the
end-June 2014 figure of N16,925.58
billion, Cp rose by 8.31 per cent. The
growth rate of Cp as at end-June 2015,
when
annualized,
indicated
an
increase of 8.64 per cent, which was
below the indicative growth target of
26.06 per cent for 2015.

Figure 4.5
Domestic Credit to Private Sector (Dec 2013 –
June 2015)
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Credit to Private Sector 18,115.21

N'Billion
Credit to Private Sector (December 2014 -June 2015)

4.4.5
Reserve Money (RM)

Reserve Money (RM), at N5,945.80
billion increased by 0.25 per cent at
end-June 2015 from N5,930.90 billion at
end-December 2014. Provisional figures
showed that when annualized, RM as
at end-June 2015 was below the 2015
indicative target of N7,095.49 billion.
The
increase
in
RM
over
the
corresponding period of 2014 was due
to the effects of the discriminatory CRR
on private and public sector deposits,
up to May when it was harmonized at
31 per cent. The marginal decline in
CRR during the review period was
partly due to the effect of the
harmonization of the CRR, and active
liquidity mop-up in the system through
OMO. Table 4.5 below is a summary of
the major monetary aggregates and
provisional outcome as at end-June
2015.

Table 4.5
Monetary Aggregates Outcomes (Growth in %
except otherwise stated)


Change
in
H1

Actual
Actual
Actual
Bench
mark
Devi
ation
(N'b)
Actual
June
Dec
June

M2
(N'b)


M2

M1
(N'b)
7,096.

6,919.

6,542.60
9,480.


M1

RM
(N'b)
4,786.

5,964.

5,945.97
7,095.


RM

NDC
(N'b)


CBN Monetary Policy Review

NDC

Cg
(N'b)

Cg


85.98
Cp
(N'b)


Cp

NFA
(N'b)
7,673.

7,098.


NFA


CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER FIVE

5.0
DEVELOPMENTS
IN
THE
FINANCIAL MARKETS

he Nigerian financial environment
was shaped largely by global
economic developments notably:
the
weak
commodity
market
particularly the continued decline in
crude oil prices, heightened risks in
the euro area following the Greek debt
crisis, and continued slowdown in
China.
These
required
a
broadly
accommodative
monetary
environment, which was provided by
the expansion of the ECB quantitative
easing
programme,
and
the
quantitative and qualitative monetary
easing by the Bank of Japan (BoJ).
There was, however, a trend towards
monetary policy divergence in the
advanced
economies
following
expectations about the prospects of
US
monetary
policy
normalization.
These were compounded by the
continued appreciation of the US
dollar, as well as the depreciation of
emerging market currencies, leading
to capital flow reversals from emerging
and developing markets, including
Nigeria.

The money market remained active
with fluctuations in banking system
liquidity towards the later part of the
review
period,
reflecting
relative
volatility in money market interest rates.
In the foreign exchange market, the
heightened
demand
for
foreign
exchange led to further depreciation
of the naira, and in a bid to stem
further
depletion
of
the
external
reserves, the Bank closed the official
foreign
exchange
window.
This
moderated the demand pressure and
reversal of capital flows. As a result,
the capital market witnessed a modest
decline.

5.1
The Money Market

There were significant developments
in the money market, which reflected
active transactions in CBN bills and
government securities in the first half of
2015. The observable fluctuations in
banking system liquidity in the later
part of the period under review,
reflected
the
relative
volatility
in
money market interest rates. Market
activities
along
with
substantial
demand
pressure
in
the
foreign
exchange
market
were
impacted
notably by the fluctuations in banking
system liquidity. During the review
period, the interbank and OBB rates
occasionally soared above the MPR
corridor of MPR +/-200 basis points.
Market activities were dominated by
persistent rebound of activities in the
uncollateralized
segment
of
the
market, and frequent transactions in
OMO/NTB
deployed
to
regulate
liquidity surfeits due to FAAC injections.
More importantly, to further address
the liquidity conditions in in the banking
system, CRR on public and private
T


CBN Monetary Policy Review

sector deposits were harmonized at
31.0 per cent, and the MPR was
retained at 13.0 per cent with a
corridor of +/- 200 basis points around
the
midpoint.
The
low
level
of
transactions previously recorded in the
repo segment of the market, remained
unchanged during the period.

5.1.1
Short-term
Interest
Rate
Developments

During the review period, money
market interest rates largely reflected
the liquidity levels in the banking
system
and
were
influenced
by
statutory
FAAC
disbursement,
NTB
maturities/auctions
and
the
harmonization of the CRR for both
private and public sector deposits. The
MPR, however, was maintained at 13.0
per cent with the corridor of +/- 200
basis
points
to
guide
liquidity
intervention in the system. Accordingly,
a number of OMO auctions were
conducted by the Bank to moderate
the effects of liquidity surge associated
with FAAC disbursements, and maturity
of treasury securities. Various tightening
measures were adopted in response to
the liquidity surfeit, caused by AMCON
Bond redemption in the last quarter of
2014. As a result, there was preference
for collateralized financing by lenders,
following the migration to the new Real
Time Gross Settlement (RTGS) system
and Scrippless Securities Settlement
System
(S4),
which
were
more
transparent. Consequently, the OBB
rate was higher than the interbank call
rate for most of the period (table 5.1).
The
average
OBB
rate
ranged
between 8.65 and 28.52 per cent,
while the interbank call rate ranged
between 7.49 and 24.24 per cent. The
30-day NIBOR was between 14.67 and
16.99 per cent.

Table 5.1
Weighted Average Money Market Interest Rates
(December 2014 – June 2015)

Figure 5.1
Weighted Average Money Market Interest Rates
(December 2014 – June 2015)


CBN Monetary Policy Review

(i)
The Interbank Call Rate

In the review period, activity in the
interbank market increased as the call
rate rose from 6.99 per cent in January
to 12.7 per cent in March 2015. The
rate, further, increased significantly by
1155 basis points to 24.25 per cent in
April 2015. The development in April
was attributed to the reduction in net
liquidity in the banking system, due to
sale of CBN Bills and NTBs worth N61.37
billion and N95.00 billion on March 12,
2015 (Figure 5.2).

Figure 5.2
Interbank Call Rate (December 2014 – June
2015)


(ii)
The Open Buy Back Rate

The weighted average OBB rate
fluctuated between 8.69 and 27.19 per
cent to an average of 15.95 per cent
in the first half of 2015. It decreased
from 23.20 per cent in April to 11.69
and 10.64 per cent in May and June,
2015, respectively. The relative stability
in the OBB rate in the later part of the
review
period,
was
due
to
the
harmonization of CRR on both private
and public sector deposits at the MPC
meeting of May 18 – 19, 2015 (Figure
5.3). Transactions in the OBB segment
remained active in the review period.
As in the interbank call segment, the
spikes in the OBB rate were also due to
low level of liquidity in the banking
system, arising from the sale of CBN Bills
and NTBs worth N61.37 billion and
N95.00 billion on March 12, 2015. The
improved
activities
at
the
OBB
segment were largely traceable to
availability of funds within the system
from OMO and NTB maturities. There
was also enhanced confidence by
DMBs in the collateralized segment of
the market, resulting from the migration
to
the
new
RTGS
and
Scrippless
Security Settlement System (S4), which
encouraged
transparency
in
the
settlement of secured transactions.

Figure 5.3
Open Buy Back Rate (December 2014 – June
2015)


CBN Monetary Policy Review

(iii)
The Nigeria Interbank Offered
Rate (NIBOR)

The reference rate in the Nigerian
money market, the NIBOR, maintained
relative stability across tenors during
the
review
period.
The
weighted
average 30-day NIBOR, rose from 13.7
per cent in January to 15.89 per cent in
March 2015. It however declined to
14.61 per cent in May, owing largely to
the harmonization of CRR on private
and
public
sector
deposits
but
subsequently closed at 15.45 per cent
in June 2015 (Table 5.1).

5.2
Foreign Exchange Market

The Bank‘s policy of maintaining an
official exchange rate, mid-point of
N168/US$, with a widened intervention
corridor of +/-5.0 per cent, became
unsustainable in the face of increasing
pressure on the naira. Consequently,
the Bank closed the official foreign
exchange window on February 18,
2015 and only intervened at the
interbank foreign exchange market
implying a further depreciation of the
exchange rate to N197/US$. The further
depreciation was targeted at halting
the dwindling reserves occasioned by
falling oil prices and capital reversals as
well
as
curbing
the
heightened
demand for foreign exchange in the
market. The interbank exchange rate
closed at N196.95/US$ at end-June,
2015.

Figure 5.4
Daily Naira-US Dollar Exchange Rate (Jan - June
2015)


5.2.1
Average Exchange Rates

The Interbank foreign exchange rate
at
an
average
of
N194.04/US$ depreciated by 16.05 per
cent to an in the first half of 2015 from
N167.21/US$, in the second half of
2014. The BDC rate also depreciated
by 23.16 per cent to an average of
N213.58/US$ from N173.41/US$, over
the same period (Table 5.2).


Rates
Daily Foreign Exchange Rates Naira/US$
Interbank


CBN Monetary Policy Review

Table 5.2
Average Monthly Spot Exchange Rates (July
2014 – June 2015) (N/US$)


5.2.2
End-Period (Month) Exchange
Rates

The naira depreciated in the two
segments of the foreign exchange
market at end-June 2015, compared
with
end-December
2014.
At
the
interbank foreign exchange market,
the naira depreciated by 9.42 per cent
to N196.95/US$ at end-June 2015 from
N180.00/US$ at end-December 2014. In
the BDC segment, the naira also
depreciated by 17.75 per cent to
N225.50/US$ at end-June 2015 from
N191.50/US$ at end-December 2014
(Figure 5.5 and Table 5.3).


Table 5.3
End-Month Exchange Rates (July 2014 – June
2015) (N/US$)

Figure 5.5
End-Month Exchange Rates (July 2014-June
2015) (N/U$$)


Month/Year
Interbank Rate
BDC 'B' Rate
2014: Jul
162.25
167.71
Aug
161.99
170.36
Sep
162.93
168.64
Oct
164.64
169.43
Nov
171.10
175.85
Dec
180.33
188.45
Average
167.21
173.41
2015: Jan
181.78
196.13
Feb
194.47
213.18
Mar
197.07
222.93
Apr
197.00
210.70
May
197.00
219.55
Jun
196.92
218.98
Average
194.04
213.58
Month/Year
Interbank Rate
BDC 'B' Rate
2014: Jul
161.90
167.00
Aug
162.40
169.00
Sep
163.70
169.00
Oct
165.55
170.00
Nov
176.80
182.50
Dec
180.00
191.50
Average
168.39
174.83
2015: Jan
185.20
207.50
Feb
198.00
224.00
Mar
197.00
214.50
Apr
197.00
221.00
May
197.00
216.00
Jun
196.95
225.50
Average
195.19
218.08


CBN Monetary Policy Review

5.2.3
Nominal
and
Real
Effective
Exchange Rates

The Nominal Effective Exchange Rate
(NEER) depreciated by 9.23 per cent to
104.90 in the first half of 2015 from 95.22
in the second half of 2014. It also
depreciated by 8.56 per cent when
compared with the corresponding
period of 2014. The Real Effective
Exchange Rate (REER) depreciated by
5.60 per cent from 58.62 in the second
half of 2014 to 62.10 in the first half
2015. When compared with the
corresponding period of 2014, the
average
REER
depreciated
moderately by 2.25 per cent (Table
5.4). Therefore, there was significant
depreciation of the naira in both
nominal and real terms relative to the
currencies of Nigeria‘s major trading
partners (table 5.4 and figure 5.6).

Figure 5.6
Nominal and Real Effective Exchange Rates
Indices (July 2014 – January 2015)


Table 5.4
Nominal and Real Effective Exchange Rates
Indices (Jan 2014 – Jan 2015)

5.2.5
Foreign
Exchange
Flows
through the CBN

Foreign exchange inflows through the
CBN on a gross basis, significantly
declined
by
35.59
per
cent
to
US$15,283.00 million in the first half of
2015, from US$23,728.32 million in the
second half of 2014. It also dropped by
33.23
per
cent
compared
with
US$22,888.75
million
in
the
corresponding period of 2014. Similarly,
gross
foreign
exchange
outflows
Months
NEER
REER
14-Jan
94.96
60.43
14-Feb
95.84
60.93
14-Mar
96.26
61.06
14-Apr
96.37
61.02
14-May
96.08
60.53
14-Jun
96.00
60.20
2014: H1 Average
95.92
60.70
14-Jul
95.23
59.47
14-Aug
94.84
58.96
14-Sep
92.68
57.32
14-Oct
92.75
57.07
14-Nov
97.70
59.62
14-Dec
98.10
59.27
2014: H2 Average
95.22
58.62
15-Jan
96.53
57.69
15-Feb
95.77
57.09
15-Mar
108.55
64.52
15-Apr
110.20
65.25
15-May
108.88
64.04
15-Jun
109.45
64.03
2015: H1 Average
104.90
62.10


CBN Monetary Policy Review

decreased by 19.97 per cent to
US$21,070.36 million in the first half of
2015, from US$26,327.84 million in the
second half of 2014. When compared
with
US$28,501.98
million
in
the
corresponding period of 2014, it further
decreased by 26.18 per cent. Thus, in
the review period, there was a net
outflow
of
US$5,787.40
million,
compared with US$2,599.52 million and
US$5,613.24 million in the preceding
and corresponding halves of 2014 (see
Table 5.5 and Figure 5.7).

Table 5.5
Monthly Foreign Exchange Flows through the
CBN (Jan 2014 – June 2015)

* Provisional figure is used for the month of
June, 2015


Figure 5.7
Monthly Foreign Exchange Flows through the
CBN (Jan 2014 – June 2015)


5.2.6
Foreign Exchange Flow through
the Economy

Gross foreign exchange inflow to the
economy
declined
significantly
by
33.43 per cent to US$52,172.80 million in
the first half of 2015, from US$78,372.49
million in the second half of 2014. It also
decreased by 31.32 per cent when
compared with US$75,966.99 million in
the corresponding period of 2014.
Similarly,
gross
foreign
exchange
outflow declined by 19.60 per cent to
US$21,837.20 million in the first half of
2015, from US$27,161.04 million in the
second half of 2014. When compared
with US$29,092.92 million in the first half
of 2014, it declined significantly by
24.94 per cent.

Thus, during the review period, the
total foreign exchange flows through
the economy resulted in a lower net
inflow
of
US$30,335.60
million,
compared with US$51,238.62 million in
Dates
Total Inflow
Total Outflow
Net Flow
Jan-14
2,543.55
4,652.19
-2,108.65
Feb-14
2,797.57
6,612.99
-3,815.41
Mar-14
4,880.32
4,430.48
449.83
Apr-14
3,779.45
4,155.76
-376.31
May-14
3,171.28
4,819.22
-1,647.94
Jun-14
5,716.58
3,831.34
1,885.24
2014: H1 Total
22,888.75
28,501.98
-5,613.24
Jul-14
5,103.82
3,299.90
1,803.92
Aug-14
3,760.04
4,254.45
-494.41
Sep-14
4,230.38
4,250.56
-20.17
Oct-14
3,228.46
5,298.36
-2,069.90
Nov-14
4,120.82
5,060.15
-939.34
Dec-14
3,284.80
4,164.42
-879.62
2014: H2 Total
23,728.32
26,327.84
-2,599.52
Jan-15
2,442.00
4,108.06
-1666.1
Feb-15
2,554.50
5,338.00
-2783.5
Mar-15
3,310.50
3,429.70
-119.2
Apr-15
2,859.50
2,569.10
290.3
May-15
1,744.50
2,916.40
-1171.8
Jun-15
2,372.00
2,709.10
-337.10
2015: H1 Total
15,283.00
21,070.36
-5,787.40


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the
preceding
period,
and
US$46,874.06
million
in
the
corresponding period of 2014. This
represented decreases of 40.80 and
35.28 per cent in the preceding and
corresponding periods, respectively.
The lower net inflow during the period
reflected the impact of decreased
earnings from oil, due largely to falling
oil prices in the international market
coupled with the decline in invisible
inflows through autonomous sources
(Table 5.6 and Figure 5.8).

Table 5.6
Monthly Foreign Exchange Flows through the
Economy (Jan 2014 – Jun 2015) (US$ Million)


Figure 5.8
Monthly Foreign Exchange Flows through the
Economy (Jan 2014 – Jun 2015)
(US$ Million


U.S$' Millions

Net Flow
Total Inflow
Total Outflow


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BOX 1
THE MANAGED-FLOATING EXCHANGE RATE REGIME IN NIGERIA
An exchange rate is theoretically defined as the value of a country‘s currency
relative to another currency such as the U.S. dollar. Exchange rate regimes are
broadly classified into two, namely fixed and floating regimes. Under the fixed
regime, the reference currency has a fixed exchange value in relation to another
currency. This is called a fixed peg. A variant of this regime is the crawling peg,
which allows the fixed position to depreciate or appreciate periodically by a preagreed percentage.
In floating regimes, the forces of demand and supply of foreign exchange are
allowed to determine the value of a currency in relation to another. There are
three forms of floating, namely: pure floating, independent floating, and
managed floating. In a pure float regime, the exchange rate is market
determined with no foreign exchange market intervention by the monetary
authority. In the independent float regime, the exchange rate is also market
determined and any foreign exchange market intervention is aimed at
moderating the rate of change to prevent undue fluctuations in the rate instead
of setting a level for it. In other words, some intervention may be required from the
monetary authority to pull the rate back towards a desired level, if it strays far
away from the level considered optimal for macroeconomic stability.
In a managed float, the monetary authority allows the market forces to operate
while actively intervening to influence the movement of the exchange rate
without specifying, or pre-committing to, a pre-announced path. A variation of this
managed float system is one where the monetary authority announces a midpoint with a floating band around the mid-point, that could range from a
minimum of 1.0 per cent to a maximum of15.0 per cent on either side of the midpoint. This band operates like a filter, shielding the economy from transitory shocks.
It provides the exchange rate, the flexibility to accommodate short-term
fluctuations in the foreign exchange market, as well as transitory shocks associated
with fluctuations in external demand.
The broad consensus among economists suggests that purely floating or
completely fixed exchange rates are only practicable among few countries. The
intermediate regimes, among which is the managed-float have found relevance,
especially in a number of emerging market and developing economies,
considering the fact that their financial systems lack depth, liquidity and maturity


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(Bordo, 2003)1. Another rationale for the adoption of the managed float regime is
the lack of a stable relationship between macroeconomic fundamentals and the
exchange rate (Bofinger and Wollmershauser, 2003)2.
In Nigeria, the central bank has experimented with various frameworks of
exchange rate management since independence, ranging first, from a fixed
targeting regime, to a single currency and later to a basket of currencies, in the
1960s and 1970, to the managed floating regime. Under the regime, while the CBN
does not fix the exchange rate of the naira, it has over the years, actively
intervened in the foreign exchange market through various strategies. These
included: the Second-Tier Foreign Exchange Market (SFEM), First Tier Foreign
Exchange Market (IFEM), Wholesale Dutch Auction System (wDAS), and Retail
Dutch Auction System (rDAS). The objective of the Bank‘s intervention has been to
smoothen short-term fluctuations in the exchange rate. The exchange rate band
provides a mechanism that defines the conditions for intervention and flexibility in
the exchange rate. It is reviewed as the need arises to ensure that it remains
consistent with the underlying fundamentals of the economy. The current band of
+/- 5 per cent around the mid-point of N197/US$ was widened from an earlier
band of +/-3% to make room for more flexibility in the exchange rate and to
reduce the frequency of intervention by the Bank.
Any exchange rate framework adopted needs to be supported by vibrant
institutions as well as strong and complementary policy measures. Accordingly,
when the exchange rate came under severe pressure from speculative activities,
the Bank closed the official foreign exchange window, and followed it up by
increasing the list of import items not eligible for accessing foreign exchange
funding from formal sources.

1 Bordo, M.D. (2003) ̳‘Exchange Rate Choice in Historical Perspective‖, IMF Working Paper, WP/03/160,
August
2 Bofinger, P. and Wollmershauser, T. (2003) ―Managed Floating as a Monetary Policy Strategy‖.
Presentation at BOFIT Workshop on Transition Economics, Helsinki, April.


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5.3
Capital Market

The decline in the capital market
continued in the first half of 2015. This
was
traceable
to
domestic
and
external factors, including: (i) low
crude oil prices and accretion to
external reserves; (ii) foreign portfolio
capital
reversals
and
significant
depreciation of the exchange rate; (iii)
continued insurgency in the NorthEastern part of the country; and (iv)
uncertainty
surrounding
the

general elections. In particular, the
level of uncertainty in the Nigerian
capital market in the first half of 2015
was a major source of concern to
global investors, leading to increase in
capital outflows.

5.3.1
Equities Market

The All-Share Index (ASI) declined by
3.46 per cent to 33,456.83 at end-June
2015, from its level of 34,657.15 at endDecember 2014, and by 21.25 per cent
compared with 42,482.48 at end-June
2014. Market Capitalization (MC) of
equities also declined by 0.52 per cent
to N11.42 trillion at end-June 2015, from
N11.48 trillion at end-December 2014,
and
by
18.60
per
cent
when
compared with N14.03 trillion at endJune 2014 (Table 4.8 and Figure 4.9).

The ASI‘s 21.25 per cent year-on-year
decrease was driven mainly by weak
performance in the Consumer Goods,
Insurance and Oil and Gas sectors,
which declined by 6.7, 4.0 and 3.0 per
cent, respectively, below their levels at
end-December 2014. The NSE Banking
index, however, grew by 4.8 per cent.
Table 5.7
NSE All-Share Index (ASI) and Market
Capitalization (MC) (June 2014 – June 2015)
Date
ASI
MC (Equities)
(N’ Trillion)
Jun-14
42,482.48
14.03
Jul-14
42,097.46
13.90
Aug-14
41,532.31
13.71
Sep-14
41,210.10
13.61
Oct-14
37,550.24
12.44
Nov-14
34,543.05
11.40
Dec-14
34,657.15
11.48
Jan-15
29,562.07
9.85
Feb-15
30,103.81
10.04
Mar-15
31,744.82
10.72
Apr-15
34,708.11
11.79
May-15
34,310.37
11.66
Jun-15
33,456.83
11.42
Source: NSE
Figure 5.9
NSE ASI and MC (June 2014 – June 2015)

MC
ASI
ASI
MC (Equities)
Source: NSE


CBN Monetary Policy Review

Figure 5.10
NSE ASI and MC (December 2014 – June 2015)
Source: NSE

5.3.2
Market Turnover
Aggregate stock market turnover in
the first half of 2015 decreased by 8.92
per cent to 50.72 billion shares, valued
at N557.00 billion, in 534,624 deals,
compared with 50.50 billion shares,
valued at N758.24 billion, in 591,755
deals in the second half of 2014.
Relative to the first half of 2014, market
turnover however, decreased by 3.87
per cent from 52.76 billion shares
valued at N579.30 billion, in 623,155
deals.
Foreign
portfolio
investment
outflows exceeded inflows by 18.19
billion in the first half of 2015. This can
be attributed to the continued fall in oil
prices and divestments due to the selloff pressure being encountered at the
stock market.
5.3.3
Sectoral Contribution to Equities
Market Capitalization

The construction sector remained the
most capitalized primarily due to the
valuation of the building materials subsector. The sub-sector‘s share in overall
market capitalization declined to 31.8
per cent at end-June 2015 from 32.7
per cent in the second half of 2014.
Other
leading
sub-sectors
were
banking,
breweries,
and
food
&
beverages, with respective market
shares of 22.1, 13.6 and 9.7 per cent, at
end-June 2015 (Figure 4.12).

Figure 5.11
NSE Market Capitalisation by Sector as at EndDecember 2014
Food and
Beverages
10.80%
Banking
20.62%
Insurance
1.38%
Breweries
14.24%
Conglomerates
1.75%
Oil and Gas
6.58%
Building Materials
32.65%
Other Sectors
11.97%
Source: NSE
Figure 5.12
NSE Market Capitalisation by Sector as at EndJune 2015
Breweries
13.6%
Banking
22.1%
Food &
Beverages
9.7%
Conglomerates
1.7%
Insurance
1.3%
Oil and Gas
6.9%
Building
Materials
31.8%
Other Sectors
12.9%
Source: NSE

MC (N'trillion)
ASI
ASI
MC (Equities)


CBN Monetary Policy Review

5.3.4
The Warren Buffett Valuation
Metric and Nigeria’s Equities
Market

The Warren Buffett valuation metric for
the Nigerian stock market stood at 69.0
per cent in the second quarter of 2015,
indicating an undervaluation, as it fell
below the threshold of 75.0 to 115.0 per
cent. The undervaluation can be
attributed
to
a
number
of
developments, including sell-off by
foreign
portfolio
investors,
capital
reversals and low crude oil prices
resulting in the depreciation of the
exchange rate, anxiety surrounding
the 2015 general elections, perceived
sovereign risk of the Nigerian economy
and improvements in the economy of
some advanced countries such as the
US and the UK. The undervaluation of
equities
provided
enormous
opportunities for investors to take
advantage of the Nigerian market.

Figure 5.13
Warren Buffet Valuation of Nigerian Equities
Market


5.3.5
Bond Market

The bond market was dominated by
Federal Government of Nigeria (FGN)
securities.
Sub-national
government
and corporate bonds recorded some
activities, with the corporate bonds
segment having the least share by
market volume.

5.3.5.1 FGN Eurobond

The yield on the 10-year dollardenominated bond decreased to 5.91
per cent at end-June 2015, from 6.23
per cent at end-December 2014,
largely
due
to
improved
investor
confidence in the economy following
the successful election and transition to
a new government. It was, however,
higher than the 4.80 per cent recorded
in the corresponding period of 2014
when election issues were not key risks
to stability (Figure 5.14).

Figure 5.14
10-Year U.S. Dollar-denominated Bond Yield for
Nigeria (June 30, 2014 – June 30, 2015)


Per cent

Yield (%)
Nigeria


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The FGN bond yield curve as at endJune 2015 trended downwards by 34
basis points to 11.33, compared with
11.67 at end- December 2014, and by
20 basis points compared with 11.53 at
end-June 2014 (Figure 5.15). At this
level, FGN bond yields were positive
and exceeded the June 2014 – June
2015 rates of inflation, reflecting the
sustained tight monetary policy stance
of the Bank.
Figure 5.15
FGN Bonds Yield Curves: end-Dec. 2014 vs. endMar. 2015 vs. end- Jun. 2015

5.3.5.2 State/Local Government Bonds

There was low activity in the subnational bonds market segment during
the review period. The total value of
outstanding state/local governments
bonds at end-June 2015 was N544.43
billion, compared with N524.67 billion
at end- December 2014 and N528.87
billion at end-June 2014.


5.3.5.3 Corporate Bonds

There was heightened activity in the
corporate bond segment in the review
period.
The
value
of
outstanding
corporate bonds at end-June 2015
was N220.39 billion, compared with
N144.96 billion at end-December 2014
and N169.90 billion at end-June 2014.
The surge in activities was due to
restored investor confidence, following
the
successful
political
transition
programme in the country and the
weak equities performance, which
encouraged
preference
for
fixed
income securities by the corporate
sector.

5.3.5.4 Overall Analysis of the Nigerian
Capital Market

The value of FGN bonds increased by
1.91 per cent to N4.79 trillion at end-
June 2015 from N4.70 trillion at endDecember 2014, and by 10.11 per cent
over the level at end-June 2014. FGN
bonds accounted for 28.2 per cent of
aggregate
capital
market
capitalization as at end-June 2015.
Also, the value of state/municipal
bonds,
corporate
bonds
and
supranational bonds were
N544.43
billion,
N220.39
billion
and
N24.95
billion, accounting for 3.2, 1.3 and 0.1
per
cent
of
aggregate
market
capitalization, respectively. The equity
market accounted for 67.2 per cent of
aggregate market capitalization at
end-June 2015, while the combined

Yield
Years to Maturity
FGN Bond Yield Curves: Dec 31, 2014 vs. Mar 31, 2015 vs. Jun 30, 2015
Jun 30, 2015
Mar 31, 2015
Dec 31, 2014


CBN Monetary Policy Review

shares of FGN bonds, state/municipal
bonds,
corporate
bonds
and
supranational bonds accounted for
the remaining 32.8 per cent (Figure
5.16).

Figure 5.16
Structure of the Nigerian Capital Market (June,
2015)


FGN Bonds
28.2%
State/Municipal bonds
3.2%
Corporate bonds
1.3%
Supranational
bonds
0.1%
Equities
67.2%


CBN Monetary Policy Review

Box 2
The Greek Debt Crisis
The global economic and financial crisis of 2007/08 triggered economic fragilities
in many regions of the world. The crisis accentuated the Greek debt problem and
heightened financial market risks in the euro area. The Greek Debt Crisis, which
started in late 2009 has persisted, becoming the first of five sovereign debt crises in
the Eurozone, collectively referred to as the European Debt Crisis.
The Greek Debt Crisis was accentuated by some structural weaknesses in the
country‘s economy. The weaknesses included lower GDP growth rates, huge fiscal
imbalances that developed during the years preceding the crisis, and escalating
government debt-level due to the higher than expected government deficit and
high debt-service costs. Others were poor budget compliance as well as gross
credibility problems in official statistics. Also, there was a sudden loss of confidence
among creditors as Greece failed to meet its debt obligations. This situation
worsened because of revelations about the inaccuracy of government data on
debt levels and deficits, leading to a further crisis of confidence. Consequently,
there was an unprecedented widening of bond yield spreads and increased cost
of risk insurance on credit default swaps compared with other Eurozone countries.
Due to the escalation in its debt-servicing costs, the country sought international
financial assistance and in April 2010, received its first loan of €110 billion (£79
billion) from the Eurozone and International Monetary Fund (IMF). The agreement
specified strict conditions on macroeconomic policy reforms, which were
designed to enhance the competitiveness of the Greek‘s economy. During the
crisis, the Greek Government could not meet its obligations to its international
creditors, including the IMF. As a result, Greece sought additional financial
assistance from the European Commission and the ECB, its major financiers. The
ECB offered Greece emergency funding, which was mainly used to support the
already weakened Greek banking system. In March 2012, the crisis intensified,
prompting the need for a second bail-out, of an even larger loan. In January 2015,
a total of €142.7 billion had been granted to Greece as part of the second bailout. Consequently, Greece‘s government debt became the second highest in the
world at over 175 per cent of GDP, or €317 billion (£226 billion). The majority of the
debts were owed the Eurozone and the IMF.
The latest round of financial assistance was prompted by Greece‘s inability to
meet its financial obligations. Given the nature of the austerity measures required


CBN Monetary Policy Review

and the unsustainability of Greek debts for the euro, the ECB and Euro Zone
offered a new set of terms for a loans-for-reforms deal. The government held a
referendum on the terms offered by creditors, and the Greek electorate decisively
backed its government and voted against the terms of the proposal. The other
Eurozone countries viewed this as Greece‘s reluctance to negotiate. In the
interim, funds for the second Eurozone bailout programme ceased, exacerbating
Greece‘s problems, culminating in its default on a €1.5 billion debt to the IMF at
the end of June, 2015. The European Central Bank froze its emergency funding of
Greece‘s banks, leading Greece to introduce capital controls on withdrawals from
its banks.
The Greek Debt Crisis has affected its economy, its people and the Eurozone.
Since the crisis began six years ago, Greece‘s economy has undergone severe
recession, with persistent contraction in economic activity until 2014, when growth
finally resumed. In all, Greece‘s real GDP has fallen by over 27 per cent. The fall in
output has led to plummeting living standards and worsening social conditions.
Greece unemployment rate increased from about 8 per cent in 2008 to 28 per
cent in mid-2013. The youth unemployment rate rose to nearly 60 per cent in 2013
and remained at about 53 per cent in mid-2015.

Consequently, Greek wages declined, resulting in poverty and deprivation. This
development has been largely blamed for the stringent conditions of the bail-outs
from the IMF, the European Commission and the ECB.
In addition, the Greek Debt crisis has reverberated through most of the euro area,
weakening its currency, the euro, which depreciated in relation to the dollar for
most of the crisis period. Recent escalation of the crisis indicates major implications
for the European Union, culminating in the debate on Greek‘s continued
membership of the Union.


CBN Monetary Policy Review

Nigeria is a major trading partner with the European Union countries, especially the
UK, Ireland and France. Developments in the Union would impact on Nigeria‘s
trade balance with these countries. European banks are highly exposed to Greek
sovereign debt, with Germany, France and the UK being the most vulnerable. In
the event of a Greece default, European banks may experience significant losses
and, could cut their credit lines to developing countries to restore their capital
adequacy ratios. Already, growing uncertainties in Greece, in the event of
default, are limiting bank liquidity in the euro area, thereby worsening developing
countries‘ access to credit lines.
In addition, the European stock markets suffered huge losses, with Germany, Italy
and France, being the most affected. The volatility of the stock markets in these
economies portend grave consequences for developing countries; sell-offs are
imminent and this may trigger withdrawals that may impact on emerging markets.
Also, the spate of austerity measures aimed at mitigating the debt crisis in several
European economies have slowed growth, with the attendant rise in
unemployment. The cuts in spending in these economies adversely affected aid
to developing countries, adding to concerns, as several European countries were
already struggling to meet aid targets after the global financial crisis. The
worsening unemployment problem in Europe would lead to reduced migrants‘
remittances, an important source of financing for developing countries.
The debt-induced exchange rate depreciation and volatility in Europe presents
opportunities and challenges for developing economies. Commodity exporters
may actually benefit from a weaker euro that makes their exports more
competitive in world markets. The economies that hold their reserves in euro would
suffer depreciation in real terms. Trade in services may also be affected by a
weaker euro, which is also likely to reduce the value of remittances originating
from Europe to the developing countries.
The Greek Debt Crisis still remains a waiting time bomb. Developing countries
should consider policies that limit their vulnerability to the Eurozone debt crisis and
encourage alternative drivers of growth. Policy options include fiscal consolidation
and macroeconomic stability, diversification with respect to trading partners and
products, increased capital buffers for banks, and effective management of
capital inflows.


CBN Monetary Policy Review

5.4
Global
Financial
Market
Developments

The global financial market remained
relatively
stable,
although
risks
heightened in the euro area, following
the Greek debt crisis and continuing
slowdown in China. Monetary policy
remained
broadly
accommodating
both in the developed and emerging
market economies. Liquidity concerns
were shaped by market expectations
about the prospects of US monetary
policy normalization, the expansion of
the
ECB
quantitative
easing
programme, continuing quantitative
and qualitative monetary easing by
the Bank of Japan (BoJ) as well as the
need to stimulate growth in emerging
market and developing economies.
The capital markets improved globally,
partly fuelled by capital reversals from
emerging
market
and
developing
economies and stronger performance
of the US economy. The weakness in
the commodity market persisted on
account of continuing appreciation of
the US dollar, weak demand and
ample supply.

5.4.1
Money
Market
and
Central
Bank Policy Rates

Liquidity
concerns
in
the
global
financial market were shaped by
market
expectations
about
the
prospects
of
US
monetary
policy
normalization,
and
the
ECB
quantitative
easing
programme
involving monthly injections of €60
billion over an 18 month period, as well
as
continuing
quantitative
and
qualitative monetary easing by the
Bank of Japan (BoJ). Accordingly,
monetary conditions in the advanced
economies
remained
broadly
accommodating, as the policy rates
were largely unchanged in the review
period. Most emerging market and
developing economies lowered their
policy rates to stimulate growth in
response to the dampening effect of
weak
external
demand
and
commodity
prices.
These
included
China, Russia and India, while South
Africa held rates constant throughout
the review period. A few countries,
including Brazil, Ghana and Kenya
raised their policy rates in response to
inflationary concerns and exchange
rate depreciation.

5.4.2
Capital Market

The performance of major world stock
markets improved during the review
period. Major European indices such as
French CAC 40, German DAX and
Russian MICEX indices increased by
12.1,
11.6
and
18.5
per
cent,
respectively. In the UK, the FTSE 100,
however, decreased marginally by 0.7
per cent. In North America, the S&P

and
Mexican
Bolsa
indices
increased by 0.2 and 4.4 per cent,
respectively,
while
the
Canadian
S&P/TSX Composite Index decreased
by 0.5 per cent.


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Major markets in Asia were bullish
during
the
review
period.
The
Japanese
Nikkei,
the
Chinese
Shanghai SE A and the Indian BSE
Sensex rose by 16.0, 32.0 and 1.0 per
cent, respectively.
In Africa, the Nigerian NSE ASI, Kenyan
NSE 20 and Egyptian EGX Case 30
indices decreased by 3.5, 4.0 and 6.2
per cent, respectively, while the South
African JSE and Ghanaian GSE All
Share Indices increased by 4.1 and 4.0
per cent, respectively.
Table 5.8
Selected International Stock Market Indices as at
June 30, 2015


5.4.3
Commodities

Globally,
most
commodity
prices
declined in the first half of 2015, due to
weak demand from the appreciation
of the US dollar, ample supply leading
to the buildup of inventory as well as
macroeconomic risks from Greece and
China. Crude oil prices, however,
rebounded in the later part of the
review period on stronger demand but
have since weakened owing to large
global
supply.
These
trends
are
expected to persist for the rest of the
year, with a modest recovery in 2016.
Energy prices rose by 17.89 per cent in
the first half of 2015, due to a 29.26 per
cent increase in oil prices, reflecting
stronger demand and expected slack
in supply. The increase in oil prices
more than offset continued declines in
natural gas and coal prices, due to
weak demand and excess supply.
Despite
higher
than
expected
demand, the oil market remained
oversupplied with large inventories,
especially in the United States. On a
year-on-year basis, however, crude oil
price fell from US$74.6 per barrel at
end-June 2014 to US$61.3 at end-June
of 2015, representing a decline of 17.83
per cent.
The FAO Food Price Index averaged
166.4 points in June 2015 from 185.8 in
December
2014,
representing
a
decline of 10.44 per cent. Compared
with 208.9 points in the corresponding
Index
End-June, 2014 End-Dec, 2014 End-June, 2015

% Change
Dec 14 - Jun 15

% Change Jun 14 -
Jun 15
ASI

JSE African AS

Nairobi NSE 20

EGX CSE 30

GSE All Share

S&P 500

S&P/TSX Composite

Mexico Bolsa (IPC)

Bovespa Stock

Merval

COLCAP

FTSE 100

CAC 40

DAX

MICEX

NIKKEI 225

Shanghai SE A

BSE Sensex


CBN Monetary Policy Review

period of 2014, it declined by 20.34 per
cent. All the sub-indices of meat,
cereals, vegetable oils and sugar
declined during the review period.
Metals prices declined by 10.42 per
cent to 133.2 at end-June 2015 from
148.7 at end-December 2014, and by
17.67 per cent compared with 161.8 in
the corresponding period of 2014. The
development
reflected
concerns
about weak demand in China, Greek
debt crisis and increases in supply.
Metal demand from China slowed in
the first half of the year due to
weaknesses in infrastructure spending,
construction,
manufacturing,
and
industrial sectors.
On
the
supply
side,
production
continued
to
rise
following
large
investments and high prices in earlier
years.
Figure 5.17
Indices of Primary Commodity Prices July 2014 –
June 2015 (2005=100 US$)

Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15
Commodities
Metal
Food
Energy
Source: IMF
5.4.4 Foreign Exchange market

Generally, most currencies across the
world continued to depreciate against
the US dollar in the period under
review.
This
was
largely
due
to
sustained improvements in the US
economy,
resulting
in
increased
investor
appetite
for
dollardenominated assets, fuelling capital
reversals
and
decline
in
global
commodity prices. In the advanced
economies, the Japanese yen, the
euro
and
the
Canadian
dollar
depreciated by 1.92, 7.78 and 4.13 per
cent, respectively.
In
the
emerging
markets
and
developing economies, the Brazilian
real recorded the highest depreciation
of 14.19 per cent. Other emerging
market
currencies,
including
the
Mexican peso, Indian rupee and South
African rand depreciated by 5.99, 0.96,
4.77 per cent, respectively. In subSaharan Africa, the Nigerian naira and
Kenyan shillings depreciated by 13.85
and 8.72 per cent, respectively, while
the Ghanaian cedi recorded the
largest depreciated of 25.98 per cent.


CBN Monetary Policy Review

Table 5.9
Exchange Rates of Selected Countries (Value in currency units to US$)


Currency
31-Dec-13
31-Dec-14
30-Jun-15
Dec 31,
2014 - June
30, 2015
%App/Dep
AFRICA
a
d
d
Nigeria
Naira

South Africa
Rand

Kenya
Shilling

Egypt
Pound

Ghana
Cedi

NORTH
AMERICA
Canada
Dollar

Mexico
Peso

SOUTH
AMERICA
Brazil
Real

Argentina
Peso

Colombia
Peso

EUROPE
UK
Pound

Euro Area
Euro

Russia
Ruble

ASIA
Japan
Yen

China
Yuan

India
Rupee

Source: bloomberg


CBN Monetary Policy Review

CHAPTER 6
ECONOMIC OUTLOOK

6.1
OVERVIEW

lobal
economic
growth
in
2015 was revised downwards
to 3.3 per cent from its earlier
projection of 3.5 per cent by the IMF
(WEO Update, July 2015). The revised
estimate was lower than the growth of
3.4 per cent recorded in 2014, due
mainly to the slowdown in activities in
North America in the first quarter of
2015. Nevertheless, the fundamental
drivers of growth in economic activity
in the advanced economies remained
intact.
The
downward
revision
to
global growth was traceable to the
dampening
effects
of
lower
commodity
prices,
tighter
external
financing conditions, and the ongoing
rebalancing of the Chinese economy.
Other factors that slowed growth,
despite the broadly accommodating
monetary policy in the review period
included weak investment and ageing
population
in
the
advanced
economies, structural bottlenecks and
geo-political tensions in Europe and
the Middle East.

In the advanced economies, growth
was projected at 2.1 per cent in 2015
up from 1.8 per cent in 2014 largely
due to acceleration in consumption
and investment in the US, driven by
improved labour market conditions,
easing financing conditions, lower fuel
prices as well as strengthening of the
housing market. In the United States,
growth was estimated at 2.5 per cent
in 2015, up from 2.4 per cent in 2014. In
the Euro area, growth was projected
at 1.5 per cent in 2015 from 0.8 per
cent in 2014, due to recovery in
domestic demand and increase in
inflation rates.

Growth in the emerging market and
developing economies was projected
to decline to 4.2 per cent in 2015 from
4.6 per cent in 2014. The projected
decline
was
attributed
to
the
dampening
impact
of
lower
commodity prices, tighter financial
environment, economic rebalancing in
China, structural bottlenecks as well as
economic distress caused by geopolitical
tensions
in
the
Commonwealth of Independent States
(CIS) and some countries in the MENA
region. Growth in China was projected
to decline to 6.8 per cent in 2015 from
7.4 per cent in 2014, with indications of
a further slowdown. In Russia, the yearon-year massive depreciation of the
ruble following the drop in oil prices as
well as continuing geopolitical tensions
weakened economic activity during
the review period. The contraction of
the Russian economy by 3.4 per cent in
2015 from 0.6 per cent in 2014,
affected the performance of other
economies in the Commonwealth of
Independent States (CIS).

In Sub-Saharan Africa (SSA), growth
was projected to slow to 4.4 per cent in
2015,
from
5.0
per
cent
in
the
G


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preceding year with lower commodity
prices and Ebola epidemic in affected
regions accounting for the weaker
performance. The Nigerian economy
slowed to 2.35 per cent in the second
quarter of 2015 from 6.22 per cent in
2014, and is projected to grow by 5.5
per cent in 2015 (FGN 2015 Budget).
The growth slowdown was due to the
continuing weakness in oil and other
commodity prices. In South Africa,
growth was projected to improve to
2.0 per cent in 2015 from 1.5 per cent in
2014, due to lower oil prices and more
competitive rand exchange rate.

6.2
Outlook for Global Output

Global growth forecasts for 2015 was
affected
by
a
number
of
developments in the global economy.
The weaker growth of 2.2 per cent in
the first quarter of 2015 fell short of the
3.0 per cent forecast in the April 2015
WEO as a result of output contraction
in the U.S, which had spillover effects
on Canada and Mexico, as well as
weak growth in output and domestic
demand in emerging market and
developing economies. Although oil
prices
rebounded
in
the
second
quarter
of
2015,
oil
inventories
remained high and this is expected to
result in reduction in oil investment.

Global economic growth was forecast
to rise to 3.3 per cent in 2015 and 3.8
per cent in 2016 from an annual rate of
3.4 per cent in 2014. Growth was
projected at 2.1 per cent in 2015 and
2.4 per cent in 2016 for the advanced
economies. In the emerging market
and developing economies (EMDEs),
growth was projected at 4.2 per cent
for 2015, while that of Sub-Saharan
Africa was 4.4 per cent (Table 6.1).
Despite the moderation in the outlook,
growth in 2015 is expected to be driven
by gradual acceleration in economic
activity in advanced economies on
account of easy financial condition,
lower fuel prices, more neutral fiscal
policy, and improving confidence and
labour market conditions.

In the US, growth is expected to rise
slightly to 2.5 per cent in 2015 and to
3.0 per cent in 2016. The underlying
drivers of acceleration in growth in the
U.S included, improvement in wage
growth and labour market conditions,
strengthening housing market, easy
financial conditions and lower fuel
prices. In the Euro Area, growth
projections for 2015 and 2016 are 1.5
and 1.7 per cent, respectively, up from
0.8 per cent in 2014. The improved
outlook came from the generally
robust recovery in domestic demand
and the gradual uptick in inflation.
However, the unfolding developments
in Greece are expected to continue to
weigh heavily on economic activities.
The forecast for the United Kingdom is
comparatively robust at 2.4 and 2.2
per
cent
in

and
2016,
respectively.
Growth
forecast
for
Japan is 0.8 and 1.2 per cent in 2015
and 2016, respectively. The improved
forecast was anchored on the stronger


CBN Monetary Policy Review

than expected performance in the first
quarter
of
2015.
However,
the
underlying momentum of real wages
and consumption spending, remained
weak.

In the EMDEs, growth was forecast at
4.2 per cent in 2015, down from 4.6 per
cent in 2014, owing to the negative
impact of lower commodity prices and
tighter external financing conditions,
especially
for
oil
exporters,
and
structural bottlenecks and economic
distress related to geopolitical factors
in the MENA and the CIS regions.
Growth for EMDEs was forecast at 4.7
per cent for 2016 on account of
expected improvement in economic
conditions in a number of countries,
including Russia and a number of
economies in the MENA region. For oil
importers, lower oil prices may reduce
inflation
pressure
and
external
vulnerabilities, and provide some fiscal
policy space. Oil exporters would have
to adjust to the terms-of-trade shocks
with
greater
fiscal
and
external
vulnerabilities. Growth in China was
forecast to moderate to 6.8 per cent in
2015, as the economy continues to
undergo a rebalancing towards a
growth pattern that is less reliant on
investment. The reforms, along-side
lower oil and commodity prices, are
expected to boost consumer-oriented
activities. However, slower growth in
China is expected to have implications
in much of emerging Asia. Brazil is
forecast to contract by 1.5 per cent in
2015,
owing
to
tighter
financial
conditions, as oil prices remain low and
weakness in business and consumer
confidence continues.

In
Sub-Saharan
Africa,
growth
is
projected at 4.4 per cent in 2015,
down from 5.0 per cent in 2014, as a
result of headwinds from declining
commodity prices and the epidemic in
Ebola-affected countries. Growth in
the oil-exporting economies in the
region will be severely affected by
lower oil prices, but the effect of that
on the region‘s growth prospect is
expected
to
be
offset
by
the
favourable impact of lower oil price on
oil importing countries in the region.
The region‘s growth projection for 2016
is 5.1 per cent, due largely to the
expected recovery, as headwinds to
growth wane. Growth in South Africa is
projected at 2.0 and 2.1 per cent in
2015 and 2016, respectively.

Growth in the Middle East and North
Africa (MENA) region is projected at
2.6 per cent in 2015, down from 2.7 per
cent in 2014. The downward revision
was accounted for by the region‘s oil
exporting economies, mostly as a result
of the decline in oil prices. Growth was,
however, projected at 3.8 per cent in
2016 as economic activity in the
region‘s oil importers is expected to
strengthen.


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6.3
Downside
Risks
to
Global
Outlook

The possibility of disruptive asset price
shifts and a further increase in financial
turmoil, remain a key risk to global
economic outlook in the near to
medium-term. This is because term and
risk premium on longer-term bonds
have continued to remain low, with the
possibility of markets reacting strongly
as accommodative monetary policies
in the major advanced economies
start changing in 2015. Such asset price
shifts also bear the risk of capital flow
reversals from emerging market and
developing economies.

In
advanced
economies,
oil
also
presents a downside risk, if prices rise
faster than expected, especially, if the
negative supply response to low oil
prices is strong. In that case, the
expected boost to global demand
from low oil price will be short-lived and
smaller. Other risks to output growth in
advanced economies include a low
return to full employment amid a very
low inflation.

In the Euro area, the recent increases
in sovereign bond yields in some
economies have reduced the upside
risks to economic activity in these
economies. There is also the risk of reemergence of financial stress in the
region. In the emerging market and
developing economies, the balance
sheet and fund risks remain, especially
if US dollar appreciation continues. This
is, in addition to the fiscal stress that oil
and
other
commodity
exporting
economies are already going through.
The risk of sharper slow-down in China,
reflecting the difficulty in transiting to a
new growth model, and still-lower
potential output growth in emerging
markets remain.

In sub-Saharan Africa, the downside
risks to output growth in the region
include the continuing plunge in oil
and other commodity prices, which
translate to low reserves and fiscal
revenue to finance capital budgets,
exchange
rate
pressure
and
risks
associated with capital reversals, as
market
conditions
in
advanced
economies improve. Others include
the disruption of farming and other
commercial activities and increase in
the number of internally displaced
persons, as a result of insurgency in
some parts of the region.

To overcome the downside risks, the
IMF
recommends
demand
management and structural reforms in
the advanced economies, in order to
tackle
crisis
legacies
and
raise
potential output. Similarly, advanced
economies
should
continue
to
implement accommodative monetary
policy to support economic activity
and lift inflation back to target. In
countries with fiscal space, increase in
infrastructure investment should be the
near-term objective.


CBN Monetary Policy Review

In emerging market and developing
economies, structural reforms should
also be a policy priority as investment
in infrastructure necessary to close
output gaps. Macroeconomic policy
space to support demand is generally
more limited, but should come from
fiscal policy rebalancing aimed at
boosting longer-term growth, through
tax
reform
and
spending
reprioritization.
For
oil
exporting
economies, adjusting public spending
to lower oil revenue will be necessary.
Exchange rate depreciation can help
to offset the demand impact of oilrelated
terms-of-trade
losses
in
countries with flexible exchange rate
regimes. In oil importing economies,
lower oil prices have reduced price
pressures and external vulnerabilities,
which
will
ease
the
burden
of
monetary policy. The situation presents
an opportunity for savings from low oil
prices to be ploughed into growthenhancing activities.

Table 6.1
Global Output and Inflation Outlook

A. World Output


World Output

Advanced
Economies

USA

Euro Area

Japan

UK

Canada

er Advanced Economies

Emerging &
Developing
Economies

Commonwealth of
Independent States

Latin America and
the Caribbean

Middle East and
North Africa

Sub-Saharan Africa

B. Commodity Prices
(US' Dollars)


Oil

Non-fuel

C. Consumer Prices


Advanced
Economies

Emerging &
Developing
Economies

Source: IMF WEO Update, July 2015

6.5
Global Inflation Outlook

Global
inflation
continued
to
be
subdued in the first half of 2015. This
reflected the decline in energy prices,
and weak global demand. The trend is
likely to continue, with the possibility of
a further fall in commodity prices as
demand slows.

In the US, falling oil prices and a
strengthening U.S. dollar have pushed
headline inflation temporarily below
zero in the first quarter of 2015. Core


CBN Monetary Policy Review

inflation is projected to stay below the
Fed‘s 2 percent target until the end of
2015, but gradually increase during
2016.
In the Euro area, inflation was negative
in the first half of 2015, but could edge
up to 1. 5 per cent as the effects of
lower energy prices dissipate and
monetary easing is stepped up. In
Japan, inflation, which has fallen close
to zero, is projected to begin rising in
the second half of 2015, reaching 1.5
per cent by end-2016.
In
the
emerging
and
developing
economies, inflation is projected to rise
to 5.4 per cent in 2015 from 5.1 per
cent in 2014. China‘s consumer-price
index rose 1.2 per cent in May, the
lowest in four months, and well within
China‘s target of keeping consumer
inflation below 3 per cent this year,
renewing concerns about deflationary
pressure in the world‘s second largest
economy. In India, inflation is projected
to drop to 6.3 percent in 2015 from 6.7
percent in 2014. The trend of lower
inflation
would
provide
further
headroom for monetary policy easing
to support growth.
In Sub-Saharan Africa (SSA), inflation is
forecast to marginally edge up to 6.6
per cent in 2015, up from 6.3 per cent
in 2014. This development reflects the
net effects of factors that serve to
exacerbate and attenuate inflationary
pressures in the region. On the one
hand,
dollar
appreciation
makes
imports more expensive in the region,
in addition to lower investment and
slowing growth, which fuel inflationary
pressures. On the other, low global
food and fuel prices, is expected to
contain inflation, albeit with a small
uptick in 2015.

Outlook for Domestic Output Growth
In real terms, Gross Domestic Product
(GDP) grew by 2.35 per cent (year-onyear) in the second quarter of 2015,
compared with 3.96 per cent in the
preceding quarter. The decline in
global oil prices as well as other
commodity
prices
was
in
part,
responsible for the slowdown in growth
across major sectors of the economy,
especially
the
oil
sector,
which
contracted significantly by 6.79 per
cent in the second quarter of 2015. The
non-oil sector, which grew by 3.46 per
cent in real terms compared with 6.71
per cent in the corresponding quarter
of 2014, continues to be the driver of
growth.

The outlook for growth for the rest of
2015,
according
to
the
Federal
Government Budget estimate, remains
at 5.5 per cent. This weaker outlook
when compared to 6.22 per cent
achieved
in
2014,
is
occasioned
primarily by the lower than anticipated
global
oil
prices.
The
African
Development
Bank
(AfDB)
has
projected output growth in 2015 at 5.0
per cent, which is close to the FGN
projection. The IMF, however, released
a moderate forecast of 4.5 and 5.0 per
cent in 2015 and 2016, respectively,
due to perceived vulnerabilities in the


CBN Monetary Policy Review

global economy, which may transmit
to the domestic economy.

The inception of the new government
is considered a stabilizing factor for
improvements in the outlook, as fiscal
shocks are expected to moderate to
make room for the accumulation of
revenue and building of buffers, to
help insulate the economy from the
adverse effects of oil price shocks.

The key risk to the outlook remains the
slowdown in global oil prices, which
has had adverse impacts on global
commodity prices, global inflation and
accretion to external reserves.

Outlook for Domestic Inflation
Headline
inflation
(year-on-year)
increased throughout the first half of
2015, despite the tight monetary policy
stance of the Bank. Although within a
single
digit
range,
it,
however,
exceeded the upper limits of the
Bank‘s inflation threshold of 6 – 9 per
cent during the review period.

The IMF projects headline inflation in
Nigeria to accelerate to 9.6 per cent in
2015 and 10.7 per cent in 2016 (WEO
Update, April 2015). Staff estimates
indicate that headline inflation (yearon-year) is expected to rise for most of
the second half of 2015. It is expected
to increase to 9.3 and 9.8 per cent in
August
and
September,
2015,
respectively, and stabilize at 10.0 per
cent in October and November, 2015.
Thereafter, it would decline marginally
to 9.9 per cent in December 2015
(Table
6.2
and
Figure
6.1).
The
anticipated rise in inflation would be
mainly due to the combined effects of
the depreciation of the naira and its
pass-through and disruptions to food
supply chain due to insurgency, which
is expected to impact on food prices.
On
the
upside,
receding
global
inflation is expected to ameliorate the
impact of import costs on domestic
prices.

On the other hand, the gradual
normalization of petroleum products
supply, reflected in the availability of
PMS
at
official
pump
prices,
is
expected to cushion the impact of
transient factors on domestic prices.
The
Bank‘s
tight
monetary
policy
stance may help to rein-in excess
liquidity and moderate inflationary
pressures.

Table 6.2
Inflation Forecasts (Staff Estimates)


CBN Monetary Policy Review

Figure 6.1
Fan Chart for Inflation from 2015:6 -2016:6

Outlook for Monetary Policy in 2015
Developments in the domestic and
global economy would continue to
shape the formulation and outcomes
of monetary policy in the second half
of 2015 and beyond. The policy
instruments
available
to
monetary
authority seems almost stretched to its
limit
and
thus,
would
require
complementary
fiscal
policies
to
define the path of growth and create
the basis for stabilization. Continuous
reassessment and evaluation of the
previous policy pronouncements is
needed, to respond to the everchanging
economic
and
financial
environment.
The continued decline in global crude
oil prices and its negative impact on
the fiscal position of government poses
a great challenge to monetary policy.
In addition to the low prices, the
market
share
of
Nigerian
crude
continued
to
be
threatened
by
sustained global over-supply, leading
to non-availability of buyers for the
country‘s crude, a situation that forced
the authority to offer further discount in
order to attract buyers. Crude oil
receipts accounted for over 90 per
cent of the country‘s foreign exchange
earnings, and with the price of the
bonny light below US$50 per barrel,
compared with over US$100 per barrel
in the corresponding period of 2014,
accretion to reserves continued to be
threatened, resulting in a sustained
pressure on the exchange rate with
high pass-through to domestic prices.
Furthermore,
the
expected
normalization of the US monetary
policy could accentuate capital flow
reversals from emerging market and
developing economies, and further
tighten global monetary conditions,
thus
exerting
greater
pressure
on
exchange
rates.
Also,
the
improvements in growth performance
of some advanced economies could
further compound the problem of
capital flow reversals, and make the
monetary policy environment more
challenging in the coming months.
The continued excess liquidity in the
banking system despite the various
tightening measures by the monetary
authority,
remained
a
source
of
concern. The direct consequence is
that real sector activity continued to
be stifled by high cost of loan able
fund. The Bank would continue to
formulate proactive policies that would
encourage DMBs to lend to the real
sector,
in
addition
to
its
various
interventions in the critical sectors such
as power, manufacturing and SMEs.
However, the recent upticks in inflation
and a forecast of further rise in the


CBN Monetary Policy Review

domestic price level would continue to
be closely watched, and appropriate
policy measures deployed to counter
the risks of inflation.
Overall, there is optimism that investor
confidence
on
the
economy
will
improve
as
the
new
government
unfolds
its
economic
plans
and
improve the business environment. In
addition,
some
of
the
reassuring
measures
of
the
administration
including efforts aimed at resolving
fiscal challenges at the sub-national
levels, the fight against corruption and
counter insurgency in some parts of
the country are expected to unlock
economic recovery and boost capital
inflows.
Nonetheless,
improved
coordination between the fiscal and
monetary policies would be necessary
to minimize risks in the short-to-medium
term.


CBN Monetary Policy Review

Appendices

Central Bank of Nigeria Communique
No.

of
the
Monetary
Policy
Committee Meeting of Monday 19th
and Tuesday 20th January, 2015

The Monetary Policy Committee (MPC)
met on January 19 and 20, 2015
against the backdrop of challenging
external conditions and downside risks
in
the
domestic
economic
environment. In attendance were all
the
eleven
members
of
the
Committee. The Committee reviewed
key external developments as well as
domestic
economic
and
financial
conditions and outlook for 2015.
International Economic Developments

The
Committee
noted
the
tepid
recovery of the global economy in
2014. The major impetus for global
growth in 2014 came from the U.S, and
supported later in the year by the drop
in
oil
prices.
However,
both
developments fell short of returning the
global
economy
to
the
pre-crisis
growth path. This was mainly due to
the weakness in Europe and the much
slower pace of expansion in the
emerging
market
economies
in
particular. Specifically, global growth
continues to be constrained by a
number of old and new adversities
including
high
debt
and
rising
unemployment
in
many
countries;
geopolitical tensions and conflicts; the
negative impact of commodity price
shocks
on
commodity
exporting
countries; weak external demand; and
the tapering and eventual exit of the
US
Federal
Reserve
Bank
from
quantitative easing; triggering sharp
corrections in the financial markets.
Consequently, global output rose by
about 3.3 per cent in 2014, which was
the same rate of growth attained in
2013. It is estimated to strengthen to
about 3.5 per cent in 2015.

The Committee, however, noted many
downside risks to the outlook. The Euro
Area and Japan appear trapped in
low
inflation
and
low
growth
conditions. High unemployment and
debt could persist much longer in the
Euro Area in particular while a possible
deflation is likely if inflation continues
on
the
downward
trend.
The
Committee also acknowledged the
high likelihood of an increase in interest
rates in the United States; which
portends negative consequences for
emerging and frontiers economies.
Already, growth is moderating in most
industrial countries and could further
be dampened by the strengthening of
the U.S dollar, more volatile capital
flows
and
financial
system
vulnerabilities arising from currency
depreciations. All of these could be
compounded
by
increased
geopolitical
risks
arising
from
the
Ukrainian stand-off, militant terrorism,
armed insurgency and the aftermath
of
the
Ebola
epidemic
in
some
countries in the West African subregion. Furthermore, the divergence
between
the
US
and
Euro
Area


CBN Monetary Policy Review

monetary policy stance, non-inclusive
growth and the regional impact of
falling oil prices with acute revenue
shortages in countries like Nigeria,
Venezuela and Russia add to the risk
factors.
Evidently, the outlook for growth in the
various economic clusters continued to
be shaped by the identified risks and
opportunities. The IMF projects the
major advanced economies to grow
at a modest pace of about 2.3 per
cent
in
2015,
premised
on
the
sustained growth in the U.S and some
improvements in Europe. The decision
of the European Central Bank (ECB) to
continue with the existing provision of
unlimited short-term liquidity as well as
the
implementation
of
new
programmes will be critical to the
global economic performance in 2015.
For
the
emerging
markets
and
developing economies, , growth could
be modestly maintained in 2015 at
about 4.3 per cent, driven essentially
by
domestic
consumption
and
increased investment as net exports
continue to moderate in response to
softening commodity prices.

Inflation is not an immediate global
priority as most of Europe and Japan
grapples
instead
with
potential
deflation and high unemployment. The
outlook for monetary policy suggests
continued divergence amongst the
various economic blocs. The Euro Area
and Japan are expected to sustain this
accommodative
monetary
policy
stance while the U.S authorities appear
to
be
leaning
towards
monetary
tightening. Similarly, monetary policy is
likely to remain restrictive amongst
developing and emerging economies
in order to stabilize their local currency,
and
to
rein-in
potential
inflation
pressures.
The
Committee
was
generally of the view that monetary
policy play a pivotal role in restoring
economic activity to optimum levels
globally,
especially
when
complemented by structural reforms,
fiscal
adjustments
and
better
coordination of policy actions. In fact,
current conditions call for engagement
of
multiple
macroeconomic
and
structural policy levers.

Domestic
Economic
and
Financial
Developments Output

The National Bureau of Statistics (NBS)
estimated real Gross Domestic Product
(GDP) growth rate at 6.23 per cent in
the third quarter of 2014 compared
with 6.54 per cent in the second
quarter. The Committee noted the
continued dominance of the non-oil
sector,
particularly
Services
which
contributed 2.53 percentage points,
Agriculture (1.21 per cent) and Trade
(1.08
percentage
point).
The
Committee noted with satisfaction the
Federal Government‘s efforts to boost
power generation and supply, among
others,
which
would
improve
the
economy‘s job creation prospects in
the medium- to long-term.
The
Committee
was,
however,
concerned
about
the
weakening


CBN Monetary Policy Review

contribution of the oil sector to overall
growth,
which
is
now
being
exacerbated by the rapid drop in oil
prices since June 2014. In addition, the
Committee noted that the security
challenges in some parts of the country
might also be contributing to the
dampening effects on overall growth
in the country.

Prices

Headline inflation at end-December
2014 was 8.0 per cent, which was
within the range of 6.0-9.0 per cent
benchmark for inflation set by the
Central Bank of Nigeria. The inflation
recorded in December 2014 reflects a
reduction in core inflation, seasonal
factors
related
to
the
Yuletide
celebrations, as well as the stabilization
in
food
prices.
The
Committee,
however, recognized some upside risks
to inflation in the near-term including
the likely higher import prices on the
strength of an appreciating dollar and
possible food supply bottlenecks linked
to insurgency and insecurity in some
major agricultural zones of Nigeria.
Monetary, Credit and Financial Market
Developments

Broad money supply (M2) grew by 7.29
per cent at end-December 2014 over
the level in 2013. This represented a
marked improvement over the 1.32 per
cent increase in 2013, but lower than
the benchmark of 15.02 per cent for
2014. The relatively slower growth of
total monetary liabilities (M2) reflected
developments
in
both
credit
to
government and the net foreign assets
(NFA). During the period, credit to
government contracted by 21.8 per
cent, far below the growth benchmark
of 28.4 per cent. Similarly, the NFA
declined by 15.02 per cent. Credit to
the private sector, however, grew by
about 12.1 per cent, essentially pushing
aggregate domestic credit growth of
about
11.0
per
cent.
The
weak
performance of NFA was largely due
to the lower oil prices with the
attendant consequence of reduced
accretion to external reserves. The
Committee welcomed the posture of
fiscal policy, which reflected in the
decline
in
credit
to
government
coming especially at a time when
government
revenue
was
greatly
pressured
by
adverse
oil
price
developments. The Committee noted
that this orientation of fiscal policy
would have an overall beneficial
effect by leaving DMBs with greater
room to support the real sector with
the
much-needed
credit.
The
Committee
encouraged
the
Management of the Bank to continue
to implement measures aimed at
providing support to enable increased
flow of credit to the private sector.
Interest rates in all segments of the
money
market
trended
upward
between 26th November 2014 and 13th
January 2015. The interbank call rate
opened at 8.98 per cent on 26th
November 2014 and closed at 26.15
per cent on 16th January 2015. Similarly,
the OBB and 30-day NIBOR increased


CBN Monetary Policy Review

from 10.2 and 11.38 to 23.46 and 11.63
per cent, respectively, during the
period. The significant increase in these
rates particularly for interbank and OBB
was
mainly
due
to
the
further
tightening measures introduced at the
November 2014 meeting of the MPC.
The Committee observed that the
bearish
conditions
in
the
capital
market continued as the equities
market indicators trended downwards
in the review period. The All-Share
Index (ASI) declined by 16.1 per cent
from 41,329.19 to 34, 657.15 between
December
31,

and
endDecember
2014.
Similarly,
Market
Capitalization (MC) decreased by 13.2
per cent from ₦13.23 trillion to ₦11.48
trillion during the same period. The
Committee noted that the downward
trend has continued into January 2015
as, year-to-date, both have declined
by 16.2 and 15.7 per cent, respectively.
Although this phenomenon is driven by
global economic conditions, in Nigeria
in
particular,
the
situation
is
exacerbated by the declining oil prices
as foreign portfolio investors divest from
the country. These developments call
for closer monitoring and proactive
interventions
by
all
institutions
concerned. The Committee reiterated
its commitment to sustaining and
deepening
measures
aimed
at
fostering confidence and stability in
the financial system.


External Sector Developments

The Committee noted that significant
pressure
persisted
in
the
foreign
exchange market during 2014 resulting
in further weakening of the Naira
across the three segments of the
market. The exchange rate at the
rDAS-Spot
opened
at
N157.34/US$
(including 1% commission) and closed
at
N164.08/US$,
representing
a
depreciation of N12.34 or 4.28 per
cent.
The
inter-bank
selling
rate
opened at N165.7/US$ and closed at
N180/US$, representing a depreciation
of N14.73 or 8.63 per cent in the
period, while at the BDC segment, the
selling rate opened at N170/US$ and
closed at N191.50/US$ representing a
depreciation of N21.50k or 12.64 per
cent.
Gross official external reserves as at
December 31, 2014 stood at $34.25
billion compared with $42.85 billion at
the corresponding period of 2013. The
decrease in the reserves level was
driven largely by increased funding of
the
foreign
exchange
market
interventions to stabilize the exchange
rate in the face of decline in reserve
accretion.
The
country‘s
external
reserves as at the end of December,
2014 could finance 7.44 months of
imports, which we considered very
good given the average of 3 months
of import that is the standard.


CBN Monetary Policy Review

Considerations

The Committee noted with satisfaction
the
growth
performance
of
the
economy as well as the year-end
inflation outcome. It was, however,
concerned about a number of risks
including the security challenge in
parts
of
the
country,
which
has
continued to disrupt farming and
related activities; and the sustained
decline in oil GDP. With regard to
inflation, the Committee noted the
recurring challenge of excess liquidity
in the banking system and the possible
complications arising from capital flow
reversal, as well as the demand
pressure
in
the
foreign
exchange
market.
On the external front, falling oil prices,
slowing
global
output
recovery,
divergent monetary policy postures
between the US and Euro Area as well
as non-inclusive growth remain very
important
risks.
The
gradual
normalization of monetary policy by
the US Fed could exacerbate the
current retrenchment of portfolio flows
and increase pressure on currencies in
emerging and developing countries
including Nigeria.
In
the
light
of
the
above
considerations,
the
Committee
observed
that
its
decisions
of
November 2014 needed sometime for
the
effects
to
crystallize
in
the
economy and therefore, voted to
retain the current position.

Consequently,
the
Committee
decided as follows:
Decision

(1)
All eleven members voted to
retain the MPR at 13 per cent;
retain the CRR on Private Sector
deposits at 20 per cent; retain
CRR on Public Sector deposits
at 75 per cent; and retain the
liquidity ratio at 30 per cent.
(2)
One member, however, voted
for
an
asymmetric
corridor
around the MPR.
I thank you all for Listening

Godwin I. Emefiele, CON
Governor
Central Bank of Nigeria

20th January, 2015


CBN Monetary Policy Review

Central
Bank
of
Nigeria
(CBN)
Communiqué No. 100 of the Monetary
Policy Committee Meeting of Monday
23rd and Tuesday 24th March, 2015

The Monetary Policy Committee (MPC)
met on 23rd and 24th March, 2015,
against the backdrop of harsh external
economic environment and significant
risks in the domestic economy. In
attendance were eleven (11) out of
the twelve (12) members, including Dr.
O. J. Nnanna, who assumed duty as
Deputy Governor (Financial System
Stability) at the end of January 2015.
The
Committee
analyzed
key
developments
in
the
global
and
domestic
economic
and
financial
conditions as well as the outlook for the
rest of 2015.

International Economic Developments
The Committee noted that the pace of
global
economic
recovery
had
remained moderate and uneven. In
particular, the Committee noted that
lower
commodity
prices
were
weighing heavily on output growth,
especially in the oil exporting countries.
In addition, expectations of a rise in US
short-term interest rates continue to
fuel capital outflows and currency
weaknesses in the emerging markets
and developing countries. Against the
backdrop of sustained weakness in the
Euro zone and softening growth in the
emerging markets, global output has
remained largely tapered.
During the first quarter of 2015, the
United States led the global impetus to
output growth as consumer demand
strengthened on the heels of falling oil
prices,
lower
US
oil
imports
and
accommodative monetary policy. In
contrast, in the Euro area, continued
output decline, in the face of positive
oil price shocks, made the European
Central Bank (ECB) to introduce a
massive €1.1 trillion asset purchase
programme, commencing in March
2015, involving a €60 billion monthly
asset
purchase.
The
programme,
although open-ended, is expected to
last at least until September 2016 by
which time inflation may have gained
reasonable traction.

The Committee, however, noted a
number of important downside risks to
global
outlook
in

including
geopolitical tensions and conflicts; the
negative impact of commodity price
declines; weak external demand and
the
possibility
of
Monetary
Policy
normalization in the US. Growth could,
however, remain subdued in most of
the Euro Area and Japan, in the shortto-medium
term.
Growth
in
the
emerging markets may exhibit wide
variations with sharp deceleration in
most of the large emerging market
economies, especially in Latin America
and Eastern Europe, due to the
headwinds from softening commodity
prices
and
slowdown
in
external
demand
from
the
advanced
economies.
In
addition,
country
specific risks, such as political crisis,
structural factors, adverse weather
conditions,
and
large
swings
in
currencies
may
continue
to
slow


CBN Monetary Policy Review

aggregate demand in a number of
countries.

Global inflation continues to be low
due
to
declining
oil
prices
and
continuing slack in global output. Core
inflation has continued to sag due
amongst
other
things
to
the
dampening effect of low oil prices and
lack
of
appreciable
wage
gains.
Average inflation for the developed
economies is projected to remain flat
at 1.5 per cent in 2015 due to the
increasing output gap, weak recovery,
and strong regional currencies. This
development appears to be offsetting
the risk of imported inflation in the
emerging and developing countries,
most of which have experienced
moderate to severe depreciation in
their
local
currencies.
Developing
economies are thus expected to have
moderate inflation in the medium term.

The Committee observed that the
outlook for global monetary policy
suggested
a
predominantly
easy
stance. The Euro Area and Japan are
expected
to
remain
in
the
accommodative
mode.
Even
in
countries where growth appears to be
strengthening like the US, UK and
Canada, there are indications of
delayed switch to tight monetary
policy stance. Owing to currency
concerns, however, the Committee
further noted that some emerging and
developing
economies
may
experience moderate tightening in the
short to medium term. Growth in subSaharan Africa is projected to average
4.9 per cent in 2015.

Domestic
Economic
and
Financial
Development Output
The National Bureau of Statistics (NBS)
estimated real Gross Domestic Product
(GDP) growth rate at 5.94 per cent in
Q4 of 2014 lower than the 6.77 per
cent recorded in the corresponding
period of 2013 and the 6.23 per cent
recorded in Q3 2014. The Committee
noted that the slowdown in growth
resulted mainly from the non-oil sector,
which grew by 6.44 per cent in Q4,
2014 compared with 8.78 per cent in
Q3
2014.
Agriculture,
industry,
construction,
trade
and
services
contributed, 0.89, 1.30, 3.64, 0.87 and
2.45 percentage points, compared
with 1.21, 1.04, 0.36, 1.08 and 2.53
percentage points, respectively, in Q3
2014. The softening non-oil GDP was
partly traced to the spill over effects of
low
oil
prices
which
negatively
impacted agricultural output, trade
and services.

Oil-GDP on the other hand, grew by
1.18 per cent in Q4, 2014 compared
with a decline of 3.60 per cent in the
preceding quarter. The growth in oilGDP
is
particularly
noteworthy
because it came at a time when the
sector
was
experiencing
external
negative price shocks.


CBN Monetary Policy Review

Prices
Headline inflation remained within the
6.0—9.0 per cent band established by
the CBN. However, the Committee
noted
with
concern,
the
gradual
increase in the year on year headline
inflation during the first two months of
the
year
from
8.0
per
cent
in
December 2014 to 8.2 per cent in
January and further to 8.4 per cent in
February
2015.
The
underlying
inflationary
pressures
came
largely
from food (particularly imported food)
and
the
core
components.
Food
inflation rose from 9.2 per cent in
December 2014 to 9.4 per cent in
February 2015 while core inflation
increased from 6.2 to 7.0 per cent
during the same period. The major risks
to inflation, the Committee noted,
include elevated aggregate spending
in the run-up to the 2015 general
elections, the likely higher import prices
on the strength of an appreciating
dollar and possible food supply shocks
linked to insurgency and insecurity in
some major agricultural zones of the
country.

Monetary,
Credit
and
Financial
Markets’ Developments
Broad money supply (M2) declined by
1.70 per cent in February 2014 over the
level at end-December 2014. This
translated to an annualized decline of
10.23 per cent compared with the
provisional growth benchmark of 15.24
for fiscal 2015. The decline in M2
primarily reflected the contraction of
18.14 and 8.22 per cent in net foreign
assets (NFA) and other assets (net),
respectively, during the period. The fall
in NFA is attributed to the combined
effects of weakening oil price and
reversal of portfolio
capital flows.
During the period, net domestic credit
(NDC) grew by 9.89 per cent in
February 2015, annualized to a growth
rate of 59.31 per cent, compared with
a growth rate 7.89 per cent recorded
in the corresponding period of 2014
and an indicative benchmark of 29.3
per cent for 2015.
The credit-togovernment (net) component grew
sharply by 54.69 per cent relative to a
decline of 21.81per cent at endDecember 2014.

The Committee noted that money
market interest rates were relatively
volatile in the intervening period but
stabilized on average during the first
two months of 2015, as banking system
liquidity fluctuated. Thus, average interbank call and OBB rates, which
opened at 10.58 and 10.52 per cent on
5th and 6th January 2015, closed at
11.00 and 9.23 per cent, respectively,
on February 27, 2015. Average interbank call and OBB rates for the period
were
15.21
and
18.36
per
cent,
respectively.

The Committee observed that the
bearish
conditions
in
the
capital
market continued in the review period.
The All-Share Index (ASI) decreased by
13.1 per cent from 34,657.15 at endDecember

to
30,103.81
by
February
27,
2015.
Market


CBN Monetary Policy Review

capitalization also moved in the same
direction, falling by 12.5 per cent from
N11.48 trillion to N10.04 trillion during
the period. The Committee noted that
the situation, though reflecting current
trends
globally,
needed
to
be
monitored closely.

External Sector Developments
Following the closure of the Retail
Dutch Auction System (rDAS) window
of the foreign exchange market on 18th
February 2015, the foreign exchange
market is now unified. Consequently,
the naira exchange rate opened at
N180.1/US$ and closed at N198.0/US$,
with
a
daily
average
rate
of
N198.0/US$.
This
represented
a
depreciation of N17.9k or 9.04 per cent
for the period.

Considerations
The Committee expressed satisfaction
with the impact of the decisions taken
to harmonise the foreign exchange
market. As a consequence of those
actions, the interbank exchange rate
has
stabilized
after
an
initial
adjustment. The Committee, however,
expressed concern about the wide
divergence between the interbank
and the bureau-de-change exchange
rates, which provides an avenue for
arbitrage and speculative activities in
the market. The Committee noted with
concern the phenomenon of currency
substitution and partial dollarization in
the economy, a development which
may have significantly fuelled the high
demand for foreign exchange. The
Committee, therefore, reiterated that
the naira remained the currency of
transaction
in
the
economy
and
advised the Bank to take all possible
measures to address this development.
The
Committee
also
expressed
concern about the outlook for growth,
which had moderated partly due to
the effects of low oil prices, naira
exchange
rate
depreciation,
and
election-related
concerns.
The
Committee was however, optimistic
that the situation would improve once
elections were successfully conducted
with the expected improvement in
business confidence.

The Committee took note that while
adverse developments in international
oil prices had affected government
revenues and reserves accretion and
impacted negatively on capital flows,
the financial system remained stable
with key banking stability indicators
showing robustness. In the light of this,
the Committee directed the Bank to
take all necessary measures to improve
the resilience of the financial system as
well
as
the
overall
economic
environment and functioning of the
financial markets.

The Committee also took note of the
administrative measures implemented
by the Bank since the last meeting of
the MPC to achieve stability in the
foreign exchange market. The Bank
had on 18th February 2015 taken the
bold supply management measures to
close the official window of the foreign


CBN Monetary Policy Review

exchange market in order to create
transparency and minimize arbitrage
opportunities in the foreign exchange
market. Furthermore, to deepen the
market and enhance the efficacy of
the demand management measures,
the Bank gave specific directives on
the
effective
monitoring
and
repatriation of both oil and non-oil
export proceeds. In addition, the
utilization of export proceeds has been
restricted to eligible transactions only,
to minimize leakages. The Committee
enjoined the Bank to continue to finetune demand management measures
as well as implement appropriate
supply-enhancing strategies to ensure
effective demand and utilization of
foreign exchange in the country.
The Committee noted the gradual rise
in headline inflation, driven mainly by
exchange rate-induced high prices of
imported (processed) food and output
supply
shocks.
However,
the
Committee was of the view that the
prevailing tight monetary policy stance
and some of the recent administrative
measures would among others help to
lock-in
inflation
expectations
and
further stabilize the naira exchange
rate.

Decision
In
the
light
of
the
above
considerations,
the
Committee
observed that its previous decisions
needed time for their effects to fully
permeate the economy and therefore,
voted to maintain the current position.
Consequently,
the
Committee
decided as follows:

All eleven members unanimously voted
to retain the MPR at 13 per cent; retain
the CRR on Private Sector deposits at
20 per cent; retain CRR on Public
Sector deposits at 75 per cent; and
retain the liquidity ratio at 30 per cent.

I thank you all for Listening


Godwin I. Emefiele, CON
Governor,
Central Bank of Nigeria

24th March, 2015


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué
No.

of
the
Monetary
Policy
Committee Meeting of Monday and
Tuesday, May 18 and 19, 2015

The Monetary Policy Committee met
on 18th and 19th May, 2015 against the
backdrop of fragile but moderate
growth
and
accentuating
discrepancies in global output across
regions
and
intensification
of
weaknesses in the domestic economy.
In attendance were 11 out of the 12
members. The Committee reviewed
the fragilities in the global economic
and financial environment in the first
four months of 2015, and reassessed
the
short
to
medium-term
policy
options for the domestic economy.

International Economic Developments
The Committee noted that global
economic recovery continued at a
modest
but
uneven
pace
partly
because most countries were just
shedding the deadweights of 2014. The
IMF has projected a marginal increase
in global output from 3.4 per cent in
2014 to 3.5 per cent in 2015, although
with
considerable
variation
across
regions and major economies. The
softening oil prices have continued to
support an uptick in growth of oil
importing countries but dampening
growth prospects in major oil exporting
economies.
Overall,
economic
activities have gained some traction
particularly in the US, underpinned by
sustained monetary easing, ebbing
fiscal consolidation, improvements in
housing
market
conditions,
lower
financing
cost,
rising
private
consumption and increase in real
household
income.
Elsewhere,
low
commodity prices continued to boost
higher aggregate demand in addition
to
creating
conditions
for
accommodative
monetary
policy
especially in Japan and the euro area
where recovery appears to suffer
severe setbacks due to structural
bottlenecks
and
the
threat
of
deflation. For the Eurozone, however,
the massive quantitative programme
of the ECB opens a new growth vista,
halting the slide in potential output and
engendering a more solid recovery.

Global
growth
is
expected
to
accelerate to 3.8 per cent in 2016 but
with
significant
downside
risks.
Protracted stagnation in the Euro area
could constrain global trade while the
anticipated end of monetary easing in
key industrial countries could limit
investment
growth.

In
addition,
stronger currencies in both the US and
UK may likely moderate net exports
coupled
with
lower
capital
expenditure in the energy sector due
to the softening oil prices. Furthermore,
the huge asset purchase program by
the UK Treasury and the Bank of Japan
is an indication of divergent monetary
policy stance among key advanced
economies
with
the
attendant
widening of long-term interest rate
differentials. We are of the view that
with the UK inflation at -0.1 per cent in
April, the size of its asset purchase


CBN Monetary Policy Review

programme of £385 billion may be
revisited by the Treasury.

For
many
emerging
markets,
the
outlook for growth is less optimistic,
reflecting cyclical factors, domestic
policy tightening, political tension, and
structural factors. In China, growth is
expected to decline below the long
run target of 7.0 per cent in 2015 owing
to
financial
market
vulnerabilities,
declining
productivity,
excess
capacity, and weakening domestic
demand. It is however, envisaged that
recent
policy
stimuli
by
both
government and the Peoples Bank of
China would help unwind the excess
capacity and strengthen the financial
system with the ultimate goal of
restoring growth to the historical path
in the long run.

Developing economies as a group
continue to show relative resilience
with growth projected to accelerate
from 4.4 per cent in 2014 to 4.8 per
cent in 2015. Growth in the developing
economies is also expected to remain
uneven in the near term, reflecting the
pattern in the advanced economies.
Countries with high trade exposure to
US and UK would likely gain substantial
momentum while those depending on
the
Euro
Area
may
experience
continuing
slow
down
in
export
demand in the near to medium-term.

Key risks to growth in the developing
countries include the possible tightness
in the global financial markets and the
diverging stance of monetary policy in
the
advanced
economies
which
portend
grave
consequences
for
capital flows, exchange rate stability,
and inflation expectations. In addition,
sudden
deterioration
in
liquidity
conditions, volatility in commodity and
financial
markets,
narrowing
fiscal
space, and rising geopolitical tensions
are headwinds that could constrain
global output growth. Thus, monetary
policy in a number of developing
countries has to contend with the
delicate choice among supporting
growth,
reining
in
inflation
and
stabilizing currencies and the financial
systems.

Global inflation remains benign and is
expected to be moderate in 2015-16
due to the tailwinds from the sharp
drop in the prices of crude oil, excess
capacity
and
appreciation
of
currencies
in
key
advanced
economies.

Domestic
Economic
and
Financial
Developments Output
The deceleration in growth, which
commenced in the third quarter of
2014, intensified in the first quarter of
2015 in the aftermath of declining
crude oil prices. The National Bureau
of Statistics (NBS) estimated Real GDP
growth at 3.96 per cent in the first
quarter of 2015, which is significantly
lower than the 5.94 and 6.21 per cent
in the preceding quarter and the
corresponding
period
of
2014,
respectively.
Real
GDP
growth
is


CBN Monetary Policy Review

projected to decline to 5.54 per cent in
2015 from 6.22 per cent in 2014. In line
with trend, the non-oil sector remained
the main driver of growth in the first
quarter of 2015, recording 5.59 per
cent. The key growth drivers in the nonoil sector during the period were
services, trade, and agriculture which
contributed
2.82,
1.27,
and
1.05
percentage points, respectively. The
modest improvements recorded in the
oil sector in the fourth quarter of 2014
appear to have been reversed as oil
GDP contracted by 8.15 per cent in
the first quarter of 2015 compared with
an increase of 1.2 per cent in the
preceding quarter.

The Committee expressed concern
about
the
weakening
economic
momentum
but
recognized
the
relative similarity in the condition to the
evolving economic environment in
virtually all oil exporting economies,
suggesting the need for acceleration
of various ongoing initiatives to diversify
the economic base of the country.

With the successful completion of the

general
elections
and
the
progress recorded so far in the fight
against insurgency, the Committee
was optimistic that the slow pace of
economic momentum would reverse in
the near term.

Prices
The Committee noted that the yearon-year
headline
inflation
crept
upwards for the fourth consecutive
month in April 2015. The inflation rate
rose from 8.2 per cent in January 2015
to 8.5 per cent in March and further to
8.7 per cent in April. The increase in
headline inflation in April reflected
increases in both the core and food
components. Core inflation rose to 7.7
per cent in April from 7.5 per cent in
March, while food inflation increased
to 9.5 per cent from 9.4 per cent over
the same period.

The Committee noted that the uptick
in inflationary pressures, year-to-date,
was largely traceable to transient
factors such as high demand for
transportation,
food
and
energy,
especially in the period around the
general elections as well as the Easter
festivities. It also noted the roles played
by system liquidity and the passthrough
effects
of
the
recent
depreciation of the naira exchange
rate. When the transient causes are
isolated, the Committee observed the
decline in month-on-month inflation
across all the measures in April as
headline inflation moderated to 0.8%
from 0.9% in March; core inflation
moderated to 0.6% from 0.8% and food
inflation moderated to 0.9% from 1.0%.

The
Committee
reiterated
its
commitment to price stability noting
that given the already tight stance of
monetary policy and the transient
nature of the incubators of the current
inflationary trend, which are outside
the direct control of monetary policy,
the
space
for
maneuver
remains


CBN Monetary Policy Review

constrained,
necessitating
the
intervention of fiscal and structural
policies to stimulate output growth.

Monetary,
Credit
and
Financial
Markets Developments
Broad money supply (M2) increased by
1.80 per cent in April 2015, over the
level at end-December 2014. When
annualized, M2 increased by 5.39 per
cent, which is lower than the growth
benchmark of 15.24 per cent for 2015.
The modest increase in money supply
reflected
the
growth
in
the
net
domestic credit (NDC) of 9.66 per
cent. Annualized, net domestic credit
grew by 28.98 per cent over the endDecember, 2014 level, which was
within the provisional benchmark of
29.3 per cent for 2015. The significant
growth in aggregate credit was traced
mainly
to
Federal
Government
borrowing which increased by 177.26
per cent in April 2015 or 531.78 per
cent on annualized basis.

In the period under review, money
market interest rates were relatively
volatile, reflecting the fluctuations in
liquidity
in
the
banking
system.
Average inter-bank call and OBB rates,
which opened at 11.92 and 10.75 per
cent on 2nd March 2015, closed at
15.00 and 13.26 per cent, respectively,
on April 17, 2015. Average inter-bank
call and OBB rates for the period were
19.02 and 17.45 per cent, respectively.

The
Committee
noted
a
modest
improvement in the equities segment
of the capital market during the review
period. The All-Share Index (ASI) rose by
9.3 per cent from 31,744.82 on March
31, 2015 to 34,708.11 on April 30.
Similarly, Market Capitalization (MC)
increased by 10.0 per cent from N10.72
trillion to N11.79 trillion in the same
period. However, relative to endDecember 2014, the indices increased
marginally by 0.1 and 2.7 per cent,
respectively. The recovery in share
prices particularly in April 2015 was
largely
due
to
improvements
in
earnings
and
sentiments,
amid
successful conclusion of the 2015
general elections.

External Sector Developments
The average naira exchange rate was
relatively stable at both the interbank
and Bureau-de-Change segments of
the foreign exchange market during
the review period. The exchange rate
at the interbank market opened at
N197.80./US$
and
closed
at
N197.00/US$, with a daily average of
N197.04/US$.
This
represented
an
appreciation of N0.80k for the period.
At the Bureau-de-Change segment,
the
exchange
rate
opened
at
N225.00/US$
and
closed
at
N217.50/US$, with a daily average of
N216.75/US$.
This
represented
an
appreciation of N7.50k for the period.

The stability and modest appreciation
in the two segments of the market was
largely due to the closure of the rDAS
market and the modified two-way
quote
trading
at
the
inter-bank


CBN Monetary Policy Review

segments of the market. Gross official
reserves rose from US$29.34 billion at
end-March 2015 to US$30.05 billion on
May 15, 2015.

Committee’s Consideration
The Committee noted the salutary
effects of the successful conduct of
the 2015 general elections on the
macroeconomic environment. The
Committee expressed optimism that
the confidence and goodwill arising
from the successful elections would
stem the spate of capital reversal,
reduce
pressure
in
the
foreign
exchange market and stabilize the
financial
markets
in
the
short
to
medium term. A combination of the
renewed
confidence
and
recent
administrative measures around the
foreign exchange market have eased
pressure on the naira, resulting in
relative stability in all segments of the
foreign exchange market.

The Committee was concerned about
the creeping headline inflation since
January 2015 but noted that the
causal factors were largely transient
and outside the purview of monetary
policy.
Furthermore,
the
significant
rising trend in credit to government
was regarded as potential headwinds
to growth with negative spillovers to
the already elevated lending rates,
credit to the private sector and
aggregate
domestic
investment
including inflationary pressures.

The
Committee
expressed
deep
concern
over
the
lackluster
performance of the external sector
arising from a number of significant
global shocks.

First, the prospects of monetary policy
normalization in the US with attendant
increase in global interest rates and
accentuating
capital flow
reversal
which
could
further
exacerbate
tightness in global financial conditions
and create further pressure on the
naira.

Second, the continued glut in crude oil
supplies
amidst
softening
prices,
anchored by sluggish global output
expansion
could
further
threaten
foreign
exchange
earnings
and
accretion to external reserves over a
much longer period. A near- term rally
in oil prices is further undermined by
the diminishing market power of the
Organization
of
the
Petroleum
Exporting Countries (OPEC).

Third, the anemic recovery in the Euro
Area and Japan and tepid growth
conditions
in
China constitute
an
additional drag on crude oil exports
prospects. Consequently, the decline
in trade balance, which commenced
in the second half of 2014, could persist
over a much longer period with further
implications for public revenues and
external reserves.

In the light of these developments, the
Committee
stressed
the
need
for


CBN Monetary Policy Review

proactive measures to protect the
reserve buffer to safeguard the value
of
the
domestic
currency
and
engender
overall
stability
of
the
banking system. It was, however, noted
that
monetary
policy
is
gradually
approaching the limits of tightening
and
would,
therefore,
require
complementary fiscal and structural
policies.

Furthermore,
the
Committee
considered
that
the
current
discriminatory CRR on public and
private sector deposits has not only
constrained the policy space but
could inspire moral hazard by private
market participants. Consequently, it
was recognized that while additional
tightening
measures
may
not
be
appropriate now to avoid overheating
the economy, a harmonization of the
CRR was imperative in order to curb
abuses and improve the efficacy of
monetary policy.

The Committee’s Decisions
In view of these developments, the
Committee decided by a unanimous
vote to retain the current tight stance
of monetary policy. One member
voted to increase CRR on private
sector deposits from 20 to 25 per cent
and retain CRR on public sector
deposits at 75 per cent while another
member voted to retain the CRR on
private sector deposits at 20 per cent
and increase CRR on public sector
deposits from 75 to 100 per cent. Nine
members, voted to harmonize the
public and private sector CRR at 31
per cent. Two members voted to
remunerate a portion of the CRR. All
members voted to retain all other
decisions taken at the last meeting of
the
MPC
while
improving
the
implementation of the CRR regime.
Consequently, the MPC voted to:

(i)
Retain the MPR at 13 per cent
with a corridor of +/- 200 basis
points around the midpoint;

(ii)
Retain the Liquidity Ratio at 30
per cent; and

(iii)
Harmonize the CRR on public
and private sector deposits at
31.0 per cent.

Thank you.

Godwin I. Emefiele
Governor, Central Bank of Nigeria

19th May 2015


CBN Monetary Policy Review