Central Bank of Nigeria Communiqué’ No. 102 of the Monetary Policy
Committee Meeting of Thursday and Friday, July 23 and 24, 2015.
The Monetary Policy Committee met on 23rd and 24th July, 2015 against the
backdrop of lingering uneven recovery in the global economy and slowing
growth in the domestic economy. In attendance were all 12 members. The
Committee reviewed the global and domestic economic and financial
environment in the first half of 2015 as well as the outlook for the rest of the year.
International Economic Developments
The Committee observed that global output recovery remained largely sluggish
although with strong promise in the United States and the Euro area. The IMF
maintained its growth forecast of 3.5 per cent for 2015 with improved outlook for
the advanced economies but weak performance in the emerging and
developing economies. Softening oil prices continued to present improved
growth opportunities for the advanced economies and oil importing countries
while dampening growth prospects in oil exporting economies. The United States
led growth in the advanced economies largely on account of lower energy
prices, increased consumer spending and housing market recovery. The
expectations of US monetary policy normalization in the medium term
continued to fuel investor expectations. Growth outlook for the US remains
steady as inflation stays below the Federal Reserve’s 2 per cent target.
The Bank of Japan continued its accommodative monetary policy stance by
injecting ¥6.7 trillion ($55.83 billion) monthly under its assets purchase
programme. In the Euro area, the Greek debt crisis crystalized into uncertain

and difficult negotiations with the tripartite group of creditors and altered the
underlying confidence in the survival of Greece in the Eurozone.
Meanwhile, the ECB’s €61 billion monthly asset purchase programme continues,
in an effort to combat the effects of deflation and high unemployment in the
peripheral economies. The Bank of England has maintained its £375 billion asset
purchase programme in the face of the downward trend in inflation, in most of
the surrounding euro area economies. These expansionary policies by the ECB,
Bank of England and the Bank of Japan, could moderate the threat of capital
reversal posed by the imminent normalization of US monetary policy.
Amongst the emerging markets and developing economies, growth is expected
to slow considerably but resume moderately in 2016. Growth in China is
projected to slow at 6.3 per cent in 2016 from 6.8 per cent in 2015 due to
continued financial market vulnerabilities, declining productivity, excess
capacity and weakening domestic demand.
Growth in the developing economies is expected to remain uneven in the shortto-medium-term, largely reflecting their weak demand, lower commodity prices
and tight financial conditions.
Global inflation is expected to remain moderate at 3.5 per cent in 2015 but
projected to accelerate to 3.7 per cent in 2016, due to rising downside risks,
particularly in the Euro area, as well as the tailwinds arising from the sharp drop
in oil prices, excess capacity in the advanced economies and the appreciation
of the US dollar.
Domestic Economic and Financial Developments
Output growth in the first half of 2015 continued to decelerate compared with
the end-December 2014 level, mainly as a result of softening oil prices.
According to the National Bureau of Statistics (NBS), growth in real GDP

declined to 3.94 per cent in the first quarter of 2015, from 5.94 and 6.21 per cent
in the preceding quarter and corresponding period of 2014, respectively. Real
GDP growth is projected at 5.54 per cent for fiscal 2015, reflecting a 68 basis
point decrease compared with the 6.22 per cent in 2014. At 5.59 per cent, the
non-oil sector continued to be the main driver of output growth in the first
quarter of 2015, at 5.59 per cent with the leading growth sectors being
construction, services, agriculture and trade which grew by 11.17, 6.85, 4.70 and
4.47 per cent, respectively. On the other hand, the oil and gas sector declined
by 8.15 per cent, in contrast to the modest growth of 1.2 per cent achieved in
the last quarter of 2014.
While the successful conduct of the 2015 general elections was a stabilizing
factor for the economy, persistent scarcity of fuel products as well as slow
improvements in electricity supply could be a drag on output growth in the near
term. The Committee underscored the need for the intensification of various
ongoing initiatives to diversify the economy away from oil, and expand the base
for foreign exchange receipts.
Prices
The Committee was concerned about the gradual but steady increase in
headline inflation up to June 2015, and noted that this reflected a rise in both
the core and food components of inflation. Core inflation rose to 8.4 per cent in
June from 8.3 per cent in May, and food inflation increased to 10.0 per cent
from 9.8 per cent, over the same period.
The Committee observed that the uptick in year-to-date inflation rates was
traceable to transient factors such as energy, arising from scarcity of petroleum
products around the country, poor electricity supply and increased demand for
transportation and food, from the build-up to the general elections and the
ensuing Easter and Sallah celebrations.

The Committee reiterated its commitment to price stability, and observed that
monetary policy would remain tight because of the high liquidity in the system. It
however, noted that the drivers of the current upward inflationary spiral were of
a transient nature and mostly outside the direct control of monetary policy.
Consequently, the opportunity for further policy maneuver remains largely
constrained in the absence of supporting fiscal measures. It therefore, urged for
coordination of monetary, fiscal and structural policies to stimulate output
growth, and stabilize the exchange rate.


Monetary, Credit and Financial Markets Developments
Broad money supply (M2) declined by 0.61 per cent in June 2015, below the
level at end-December 2014. The modest decline in money supply reflected the
decreases in the net foreign assets of 16.15 per cent and other assets (net) of
21.40 per cent. Net domestic credit (NDC), however, grew by 13.45 per cent.
Annualized, NDC grew by 27.90 per cent over the end-December 2014 level but
essentially within the provisional benchmark of 29.30 per cent for fiscal 2015. The
growth in aggregate credit was attributable to growth in Federal Government
borrowing which reached 40.81 per cent in June 2015.
During the period under review, money market interest rates were relatively
volatile, owing to fluctuations in banking system liquidity. Average inter-bank call
and OBB rates opened at 6.55 and 6.45 per cent on 1st July, 2015 and closed at
26.51 and 21.00 per cent, respectively, on July 23, 2015. Average inter-bank call
and OBB rates for the period were 9.83 and 10.23 per cent, respectively.
The Committee noted a bearish trend in the equities segment of the capital
market during the review period. The All-Share Index (ASI) declined slightly by

1.66 per cent from 31,744.82 on March 31, 2015 to 31,216.72 on July 23, 2015.
Similarly, Market Capitalization (MC) decreased by 0.37 per cent from N10.72
trillion to N10.68 trillion during the same period. Relative to end-December 2014,
the market indices decreased by 9.9 and 6.9 per cent, respectively. The slight
decline in share prices year-to-date was largely due to subdued sentiments
preceding the general elections as well as the lingering effects of falling oil
prices.

External Sector Developments
The average naira exchange rate was relatively stable at the inter-bank
segment, but significantly volatile in the BDC segment during the review period.
The exchange rate at the interbank market opened at N197.00/US$ and closed
at N197.00/US$, with a daily average of N197.00/US$ between July 21 and July
23, 2015. The relatively stable exchange rate in the inter-bank segment can be
attributed to the effects of some recent demand management measures. Gross
official reserves increased from US$28.57 billion at end-May 2015 to $31.53 billion
as at July 22, 2015, reflecting the blockage of leakages as well as the bank’s
management policies.

Committee’s Considerations
The Committee was concerned about the trends in key macroeconomic indices
in the first half of 2015.
The Committee acknowledged the absence of easy choices in the
circumstance but monetary policy alone is limited, and would require urgent
complementary fiscal policies to define the path of growth and create the basis
for stabilization.
On the external front, the adverse effect of the protracted decline in global
crude oil prices on the fiscal position of government is becoming increasingly

obvious. The expected policy normalization in the US could accentuate capital
flow reversals from emerging and developing economies and further tighten
global monetary conditions, thus exerting greater pressure on exchange rates in
those countries. Given the choice between controlling either quantity or price,
the limitations on choosing quantity were evident necessitating the need to
employ some flexibility around price while allowing current demand
management measures to fully work their way through the economy. The
Committee however noted that financial system stability considerations placed
key limitations on the extent of considering price flexibility, creating a
compelling need to balance measures to address the current vulnerabilities.
On inflation, the Committee stressed that some of the drivers of the current
pressure on consumer prices were transient and outside the direct influence of
monetary policy. Pressure on food prices is expected to gradually wane as the
planting season gives way to harvests in the months ahead. Early resolution of
fuel scarcity would dampen transportation costs and improve food distribution
across the country while improvements in electricity supply could steady output
at lower costs.

Overall, the Committee expressed optimism that business confidence would
continue to improve as Government continues to unfold its economic plans. In
addition, some of the reassuring measures of the administration including efforts
aimed at resolving fiscal challenges at the sub-national levels, and the fight
against corruption and improving the business environment would unlock the
inflow of foreign direct investment. The Committee also underscored the
imperative of growing and protecting the country’s foreign reserves and
building fiscal buffers in the process of strengthening confidence in the
economy which is essential for promoting growth and stability.

The Committee’s Decisions
In consideration of the underlying fundamentals of the economy, the evolving
international economic environment, developments in oil prices as well as the
need to allow for the unveiling of the economic agenda of the Federal
Government, the Committee decided by a vote of 8 to 4 to retain the Monetary
Policy Rate at its current level of 13 per cent, by a unanimous vote to retain the
CRR at 31 per cent while 4 members voted to remunerate the CRR.

Overall, the MPC voted to hold its position.
In summary, the MPC voted:
(i)
To retain the MPR at 13 per cent with a corridor of +/- 200 basis points
around the midpoint;
(ii)
Retain the CRR at 31 per cent; and
(iii)
To retain the symmetric corridor of 200 basis points around the MPR.

Thank you.

Godwin I. Emefiele
Governor, Central Bank of Nigeria
24th July 2015

PERSONAL STATEMENT BY THE MONETARY POLICY COMMITTEE MEMBERS

1.0
ADELABU, ADEBAYO
Risks in both the global and domestic macroeconomic environments intensified
in the first half of the year up to the few weeks of the second half. In the global
environment, the financial crisis in the Euro zone assumed a dangerous
dimension with the banking holiday in Greece, the attendant referendum and
uncertainty about the form of assistance from the Euro zone. Although the

impact of the crisis on the global financial market remains muted for now, it
would ultimately exacerbate the diverging monetary policy stance between
the US Federal Reserve and the European Central Bank with dire consequence
for emerging and developing economies. In the domestic economy, headline
inflation continued its upward trend for the sixth consecutive months, inching up
to 9.2 per cent in June thereby posing considerable threat to the single digit
inflation target of the Bank. Besides, output growth has remained tepid with the
3.9 per cent in the first quarter of 2015, a significant dip from 5.94 and 6.21 per
cent recorded in the preceding quarter and corresponding period of 2014,
respectively. The most important concern is the lingering pressure in the foreign
exchange market despite the series of recent administrative measures including
the exclusion of a number of goods from the interbank markets. This has,
invariably, widened the premium between the interbank and the BDCs’ market
to a phenomenal height of about 24 per cent.
Against this background, a number of obvious considerations would inform my
decision in this meeting. The first one is the challenge of creeping inflation
primarily due to recurring fuel scarcity, supply shocks, and pass through effect of
exchange rate depreciation. A great deal of controversy surrounds the fuel
scarcity issue but the dominant reason seems to be the uncertainty around the
fuel subsidy. In my own view, the official position of the Government, for now, is
that the subsidy remains and thus the scarcity of petroleum products is not really
driven by fundamentals but speculation and sentiment. With improvement in
communication and coordination, the situation would be better managed and
therefore does not require policy response, at least for now. With respect to
supply shock related issues, it is apt to mention that the drivers like the activities
of the insurgents are outside the purview of the monetary authority. It is
however, gratifying that the Federal Government is attacking the insurgency
head-on and this is expected to translate to a friendly production environment
soonest.

The other factor is the pass through effect of exchange rate depreciation which
the monetary authority cannot completely ignore. It is doubtful if the adjustment
process has completed in view of continuous increase in the contribution of
imported foods to inflation in recent times. The antidote however lies in either
exchange rate appreciation or substituting imported items with domestically
produced goods. Exchange rate appreciation, obviously, is not the least cost
route in view of the grave impact on external reserves. Supporting the process of
domestic production, in my view, appears to be the logical step in the present
circumstances and that is why I think further tightening particularly through the
Monetary Policy Rate (MPR) is not a preferred option. The counter argument
however may be the need to raise policy rate to stem the tide of capital outflow
and perhaps attracts new one. My position in this regard is that it is high time we
begin to assess our policy objective within the context of the long run
developmental objective of the economy. Inflow of foreign portfolio capital is
good to stabilize the macroeconomic environment in the short run but in most
cases, it has not positively impacted on inclusive growth and development in
the long run. As a result, our interest should be in foreign direct investment which
depends on overall ease of doing business in the economy.
Another important consideration is the pressure in the foreign exchange market,
resulting from both the supply and demand sides. The supply side may suffer
further setback due to some developments in the global environment notably
the UN-Iran nuclear deal and the prospect of normalization of monetary policy
in the US with the attendant reversal of investors’ sentiment from developing and
emerging economies. The demand side is basically accentuated by the
persistence of liquidity surfeit in the banking industry as indicated by an all time
low money market rates as well as renewed increase in demand for the Bank
Standing Deposit Facility (SDF). The supply side may be partly addressed by an
increase in the policy rate while the demand side could be managed by
curtailing excess liquidity through increase in the cash reserve requirement.

Either of these options has a further tightening implication for which I have
considerable reservations in light of certain pertinent issues. Firstly, it needs to be
noted that most of the outflows of portfolio investments in recent times have little
to do with interest rates but mainly due to political risk and with the recently
concluded peaceful election therefore, the prospects of some of these
investments returning back into the country is high. A critical issue at this point in
time is the need to build confidence in the entire economy as such could lead
to conversion of some of the portfolio investments to foreign direct investment.
Following this, the entire mechanism of foreign exchange allocation ought to be
reviewed with a view to enhancing policy consistency. Efforts should be made
to ensure that all obstacles inhibiting the effectiveness and efficiency of the
current framework are removed. A major challenge to the current framework is
the wide and unacceptable premium between the interbank and the BDC
rates. The premium should be narrowed after which some flexibility could be
introduced into the interbank market, possibly by widening the band.
Another key issue to contend with at this point in time is the rising threat to
banking system stability. High interest rate engendered by the tightening stance
of monetary policy would not only constrain aggregate demand but is equally
inimical to banking system stability. It is true that most of the banks have posted
fairly impressive results for the first half of the year but I would like to treat those
results with some elements of caution. At an average lending rate of about 26
per cent, most business entities could hardly break even thereby impairing their
capacity to repay their credit obligation. In essence, the possibility of banks
reversing some of the figures previously credited into their profit and loss
accounts could not be completely ignored. The truth is that whether tightening
is achieved through the MPR or CRR, once the cost of fund to the banks is
affected, the burden would eventually be passed to the customers. Against this
perspective I would not only advise against further increase in the CRR but some

form of remuneration on the existing CRR should be considered to partly
alleviate the burden of cost of funds on the banks and ultimately the customers.
In the light of the foregoing, I would like to propose that the MPR, LR and CRR be
retained at the subsisting 13, 30 and 31 per cent, respectively. The symmetric
corridor on the MPR should equally be maintained. I would, however like to
propose a remuneration of 30 per cent of the MPR on 50 per cent of the CRR to
minimize the burden of cost of fund to the banks and ultimately drive the
lending rates southward.


2.0
ALADE, SARAH O.
The direction of global economic growth has remained unchanged since the last MPC
meeting in May. While the advanced economies continued with gradual pickup,
emerging markets and developing economies are witnessing a slowdown in growth as
a result of lower commodity prices, tighter external financing conditions and
economic distress related to geopolitical factors. In the domestic environment, the
policy inertia is having a negative impact on the economy as investors adopt a waitand-see attitude in making business decisions on Nigerian assets. This, coupled with
lower oil prices is helping to increase pressure in the foreign exchange market and the
bearish situation in the stock market as investors divest their portfolio away from the
Nigerian market. In addition, lower food supply is also driving up inflation as headline
inflation surpassed CBN upper band limit of 9 percent for the first time since the band
was adopted in 2013. Given the uncertainties surrounding oil prices, declining growth
and other vulnerabilities faced by the economy I support a hold of Monetary Policy
Rate (MPR), and CRR to preserve the local economy in the short run.

The distribution of risks to global economic growth still remains on the downside.
Global growth has been further downgraded to 3.3 percent in 2015 according to the
July 2015 IMF, World Economic Outlook (WEO). While the outlook for advanced
economies remain positive, growth in emerging market and developing economies is
projected to be lower as low commodity prices and tighter financial conditions pose
increasing risk to growth in the region. After a sluggish start in the United States in the
first quarter, growth momentum picked up in the second quarter as unemployment
rate declined to 5.3 percent, a seven year low for the economy. In the Euro zone,
recovery is expected to continue, as growth projection for some economies like Italy
and Spain has been revised upward for 2015 due to the effect of asset purchase
program. Nevertheless, Greek crisis remain a source of concern that could derail euro
area growth. In emerging market and developing economies, growth slowed down
from 4.6 percent in 2014 to 4.2 percent in 2015, largely due to lower commodity prices.
Oil exporting countries especially those with high dependency on oil have had to
revise their growth projection downwards.
Medium term growth projections remained subdued with further downside risks. Real
GDP growth moderated to 3.96 percent in the first quarter of 2015, down from 5.9
percent in the fourth quarter of 2014. The decrease is attributable to lower oil prices
which resulted in lower government revenue. In addition, the stand-off between oil
marketers and government which led to prolonged periods of fuel scarcity affected
economic activities. However, when government policy is articulated, and a
conducive environment is created to attract foreign and domestic investors, the
downside risk to growth will be reversed.
In general the sluggish global economic growth resulting in weak demand for oil and
falling oil prices on the back of increased supply has serious implications for the foreign
exchange market, household income and ultimately consumer prices. This requires
monetary policy to remain steady in the short run.

Headline inflation increased to 9.2 percent in June compared to 9.0 percent recorded
in May 2015. Headline inflation increased to 9.2 percent in June, suggesting that
inflation may be expected to stay elevated in the coming months, as local food
supply dwindle . Core inflation rose to 8.4 per cent in June from 8.3 per cent in May,
and food inflation increased to 10.0 per cent from 9.8 per cent, over the same period.
This is the first time that headline inflation surpassed CBN upper band limit of 9 percent
time since the band was adopted by the Bank in 2013. The uptick in year-to-date
inflation rates can be traced to the scarcity of petroleum products around the country
which increases the cost of transporting food and high cost of food imports resulting
from reduced importation due to scarcity of foreign exchange. An increase in MPR at
this time will therefore, not address inflation unless the bottlenecks are removed. What
the economy requires is adequate supply of PMS to ease movement of people and
goods and liquidity in the foreign exchange market.
The foreign exchange market is experiencing intense pressure as the gap between
interbank and bureau de change rates continue to widen and external sector shows
deterioration in all vulnerability indicators. Months of import cover of reserves which
stood at 8.33 a year earlier and declined to 7.10 at March end. Current account
balance/gdp went from a surplus of 1.93% in Q3 2014 to a deficit of -3.39% at the end
of first quarter in 2015.
Generally the macroeconomic environment is weak as growth rate continues to
decline and inflation continues to rise steadily. In order to encourage capital inflows
and improve macroeconomic fundamentals there is urgent need for a liquid, efficient
and competitive foreign exchange market that will ultimately lead to improvement in
resource allocation. I therefore vote to hold.

3.0
BALAMI, DAHIRU HASSAN

THE GLOBAL ECONOMY
In my opinion, activities at the global level particularly GDP growth in Nigeria’s
major trading partners will have implication for the domestic economy. At the
global level the Euro Zone witnessed 0.4% GDP growth rate in the first quarter of
2015. However, there is great variation among the Euro Zone countries. France
and Italy registered upside growth rate while Spain remained a healthy
economy. The German economy on the other hand witnessed 0.3% GDP growth
rate which is slightly lower than expected. On the whole, the Euro Zone is
expected to grow by 0.5% in the second quarter of 2015. For the US economy
the GDP growth rate in the second quarter contracted to 0.2%. This low level
growth is temporary accounted for by the poor weather condition in the North
East and Ports Strike on the West Coast. Although consumer confidence has
declined, business survey and capital good was on the increase in the US in the
month of May. This suggests that the economy was on the path of recovery.
World Bank staff expected a GDP growth rate of 0.6% in the second quarter
which is slightly lower than expected.
In the case of China, the GDP growth rate has fallen from 7.4 % in 2014 to 7.0% in
the first quarter of 2015. Both industrial production and retail sales in China has
remained weak. The ratio of new lending to GDP has declined making Chinese

economy to be less credit intensive. The Chinese Government had adopted
successive policies to loosen the monetary policy. For example, the exchange
rate has increased by 10%. The global economy GDP growth rate in 2015 first
Quarter is 1/2 % on a PPP weighed basis in 2015 first Quarter. The April data on
GDP shows a slowing down of GDP growth rate in the United Kingdom, United
States and China. This is important in analyzing or judging the domestic product
in Nigeria.
Other challenges at global level include the Greek debt crisis as to whether it
has the funds to pay the IMF and ECB due in the first week of July. The Ukraine
crisis is also another case in point. The lower oil price is also another major
problem attacking the global economy which has impact on the Nigerian
national economy. The problem in the Middle East including ISIS war, the
challenges in Yemen and Syria etc are all major constraints. Of recent is the
positive development in Iran’s nuclear negotiation and possible implication on
crude oil output. To consider the breath and perspective of the global
slowdown is important in assessing the domestic economy because of its
implications. At the domestic level the Nigerian economy has been infected
with the “Dutch disease”. How can monetary policy be used in assisting to put
the economy on the path of growth and sustainability?
THE DOMESTIC ECONOMY
Since the last MPC meeting, available data shows that the GDP growth rate
and foreign reserves were falling. The level of inflation both core and food
inflation, unemployment, and non-performing loans (NPLs) are on the increase.
The domestic currency has been under pressure. However, the exchange rate
has been stable at the interbank but volatile at the BDCs, at the same time
interest rates have not been investor friendly. The economy has witnessed
capital reversal. It is pertinent to note that though the economy is facing
myriads of problems; the most challenging of all is the insurgency in the

Northeast region of Nigeria. In the same vain, corruption and tax administration
are great threats to the Nigerian economy. These often overlapping challenges
have considerable impact on other sectors of the economy especially
agriculture. Militancy in the south- south has also reduced oil production
significantly which is a major revenue source as well as a principal foreign
exchange earner for the Nigerian economy. Other challenges include the
following: dwindling oil revenues resulting from fluctuation in crude price,
volatility in exchange rate of the Naira, infrastructural decay as well as the
incapacity to maintain and provide more facilities due to shortage of funds.
The National Bureau of Statistics reported that as at May 2015, headline inflation
stood at 9% which is 30bps much higher than the 8.7% observed in April 2015. In
the month of May under review, headline inflation rose by 1.1 percent. However
June’s inflation rate stood at 9.2% above CBN 9% rate. The rise in inflation is
attributed to scarcity of petroleum products which led to increase in pump
price, high transportation cost and late commencement of the rains which
delayed the harvesting season. Other forecasting risk in the economy include
cloud of uncertainty surrounding the subsidy removal by the new administration
which might affect future price stability, the growth in global crude oil supplies
and its impact on external reserve accretion and exchange rate volatility and
the widening gap between the interbank exchange rate and the Bureau de
Change which is alarming. This is partly driven by speculative demand as well as
the declining level of oil revenue due to declining oil prices.
In my mind the monetary and fiscal space must be tailored towards promoting
employment generation and growth which is inclusive. It should be noted that
the level of growth is slowing down because the infrastructural challenges and
insecurity in the country particularly north east has led to the collapse of the
lucrative cross-border trade. Prior, to insurgency the North east region is noted
for the flourishing fish activities, livestock rearing, and other agricultural products

like millet, sorghum, gum Arabic etc. The lull in the sector led to increasing the
level of unemployment in the country. Others include the problem of IDPs and
the security challenge on how to resettle them back in their homes have slowed
down the growth prospects. The data provided by the NBS on GDP,
unemployment, inflation etc. provided support for keeping hold on the earlier
policies. The lag effect of the earlier policy need time to work through.
I therefore, vote to hold
(i) To retain the MPR at 13%.
(ii) To retain the CRR at 31%.
(iii) To maintain symmetric corridor of +2/-2%.
I am of the conviction that there is need for the July 2015 MPC meeting to
provide greater clarity as to the direction the national economy will be
expected to follow domestically.


4.0
BARAU, SULEIMAN
Summary
Developments in the first half of 2015 revealed intensification of risks in both the
global and domestic macroeconomic environments. Global growth for 2015 has
been marginally revised downward from the earlier 3.5 per cent to 3.3 per cent
owing largely to contraction of output in the US with potential spillover to major
economies in North America. Within the domestic economy, creeping headline
inflation since January 2015 is now assuming a disturbing dimension; about to
burst the upper band of the single digit threshold. At the same time, output
growth is slowing down while pressure is mounting in the foreign exchange
market. It is pleasing that a new legacy of enduring democratic institution is

being built with the successful conduct of the general election and the
peaceful transition into a new civilian government. The inherent goodwill is
expected to moderate the rising negative sentiments from the external
environment and thereby boost investment. Notwithstanding, it would take a
fairly long lag before the benefits of the new transition impact on key
macroeconomic variables.
Decisions at this meeting therefore, may involve some delicate trade-offs in view
of the complexity of the issues involved. There are clearly some grounds for
easing to address declining growth concern but I think stabilizing the
macroeconomic environment is germane in line with the primary mandate of
monetary policy. Besides structural reform at this time is more critical to growth,
As a result, I would like to hold on both the CRR and LR with a view to continuing
to manage demand pressure in the foreign exchange market arising from
liquidity surfeit while I propose an increase in the MPR by 50 basis points to
address the uptick in headline inflation.
Issues and Pressure Points
External Sector: Major developments in the external sector during the first half of
the year have been less favorable to emerging and developing economies
particularly oil exporting ones. Three of such developments continue to pose
significant adverse consequence to developing and emerging economies. The
first one is the anemic recovery in the global economy. Global growth is
projected to moderately pick up in 2015 but the declining trend which
commenced in 2014 in developing and emerging economies is yet to abate.
Overall growth in these economies declined from 5.0 per cent in 2013 to 4.6 per
cent in 2014 while it is expected to show a further slowdown to 4.2 per cent in
2015 owing to softening commodity price, geo political tension, and structural
bottlenecks. This development portends a grave implication to the domestic
economy in the quest to diversify its trade flows in the face of dwindling fiscal

revenue. The second issue is the lingering downturn on commodity prices on
the back of rising supplies and huge inventories. Average Brent crude oil spot
price in June 2015 was $62.35/ barrel, representing a decline of 44.26 per cent
relative to the corresponding period of 2014. The future appears more worrisome
with the recently concluded UN-Iran nuclear deal, which is expected to boost
global oil supply by additional 1 million barrels per day. This, invariably, would
worsen the already precarious fiscal revenue, constituting potential headwinds
to the already subdued output. Apart from the adverse effect on real output
growth, the declining crude oil prices has severe consequence on the health of
the domestic banking system as well as exchange rate and foreign reserves. A
significant portion of credit exposure in the industry is to oil and gas sector with
implication that repayment capacity is impaired with the likely rise in the level of
non-performing loans.
The third issue is the increasingly harsh global financial environment. The
termination of the 3rd quantitative easing and the prospects of normalization of
monetary policy by the US Federal Reserve continue to take its toll on the
financial market condition in developing and emerging economies. Net foreign
exchange flows to the domestic economy in the first half of the year was
negative, an indication that the monetary easing of the European Central Bank
(ECB) and the Bank of Japan (BoJ) did not produce the kind of impact the Fed’s
QE3 had on capital flows to Nigeria. The ongoing banking crisis in Greece may
likely worsen the situation. Regardless of the outcome of the reform proposal by
Greece, the Euro zone is likely to be worse off as investors take flight to safety
preferably in dollar denominated assets. The likely implication is that dollar may
strengthen.
Domestic Economy
Risks to various macroeconomic variables in the domestic economy scaled up
in the first half of the year. The upward trend in headline inflation, which

commenced in January 2015, continued up to the end-June, inching up to 9.2
per cent from 9.1 per cent in the preceding month. The underlying factors are
from both core and food components with the exchange rate pass through
playing significant role. It is more appalling that the rising price level is occurring
even in the face of partial suppression of aggregate demand given the
significant salary arrears to civil servants in a number of states in the last six
months. With the recent bailout on wages and salaries owned by the sub
national governments, aggregate demand is expected to tilt towards
equilibrium which coupled with ongoing exchange rate pass through would
pose further upside risk to price level.
Available indicators suggest that the storms in the foreign exchange market,
which commenced in the second half of 2014, are far from being settled.
Although there was moderate increase in external reserves in the month of July,
relative to the position at the last meeting, the result was principally due to the
recent administrative measures aimed at eliminating frivolous demand as well as
minimization of leakages by the new administration. Thus, the accretion as well
as stability observed in the interbank foreign exchange rate was not a reflection
should not give us comfort that a definite direction has been defined. I need to
quickly add, however, that the strategic intent of the recent administrative
measure, which is to drive the long run demand towards a sustainable
equilibrium level through domestic production of hitherto imported goods,
remains on course. Notwithstanding the anticipated long term gains of the
measures, the short run pains have started manifesting. Among others, the
premium between the interbank and the BDCs’ rates has widened to an
intolerable level of about 22 per cent while currency substitution index as a
measure of store of value is above the international threshold of 30 per cent.
Again, the depreciation has implication for the safety and soundness of the
banking sector. Some of the domestic banks have foreign currency
denominated liabilities like the Euro bond while the corresponding asset is in the

local currency coupled with the fact that some of their borrowers are exposed
in foreign currency against revenues denominated in naira. Thus the banking
system stability is threatened from both domestic and external influences.
The last issue is continuing excess liquidity condition. Following the harmonization
of the CRR at the last meeting, liquidity surfeit in the system appears moderated
but some traces of it are still visible. The OBB and interbank rates experienced a
record low of about 4 per cent during the period while demand for the Bank SDF
ascended to a phenomena height. This development would continue to add
pressure to the interbank foreign exchange market
Key Considerations
In the light of the pressure points identified above, the key considerations for
decisions in this meeting include:
Need to address the creeping headline Inflation: It is imperative that the
Bank strives to maintain its inflation target in order to effectively anchor
expectation and maintain credibility. It is true that some of the drivers of
current inflationary trend are structural in nature but the effects of
monetary factors particularly the exchange rate depreciation could not
be completely discounted. Medium term inflation outlook is further
threatened by recent recurring fuel scarcity, the controversy around fuel
subsidy, and of course, likely uptick in aggregate demand resulting from
the bailout to states. To address this concern, I would like to propose an
increase in the Monetary Policy Rate by 50 basis points in order to
manage expectation.
Need to Manage the Pressure in the Foreign Exchange Market: This
appears to be the most important consideration in view of its profound
influence on monetary policy process. There are a number of options
including alignment of the interbank rate towards the BDCs’ rate.

Desirable as this option could be, the attendant devaluation in exchange
rate
could
push
inflation
above
the
set
threshold
and
thus
counterproductive. My take is that the BDCs’ market is very shallow as the
proportion of foreign exchange in this market is still relatively small. Using its
rate to mirror the real effective exchange rate could be misleading as
well as heavily penalize industries whose products are critical to the
growth of the Gross Domestic Product. Besides, depreciation of the
exchange rate may not be beneficial to our economy in view of the
inelastic nature of our exports and imports. I would rather prefer a guided
flexibility in the market such as the widening of the band around the
interbank rate. Overtime, with domestic production of goods, excluded
from the interbank foreign exchange market, demand pressure would
reduce and convergence of the two rates would be feasible. In the
meantime,
rather
than
further
devaluation,
effective
monitoring
mechanism should be put in place to prevent round tripping and the
attendant arbitrage opportunity as well as continuance of the demand
management measures. In addition, the Bank should not hesitate to make
appropriate sanction in respect of any infraction on the part of all the
agents in the foreign exchange market
Need to Manage the Liquidity Surfeit in the Banking Industry: The decision
to harmonize the CRR at the last meeting has significantly achieved
reduction in the degree of liquidity surfeit. Further tightening through CRR
could help achieve optimal liquidity condition but at the risk of banking
system stability as some banks may fail liquidity ratio. Besides, the twin
effects of exchange rate depreciation and liquidity shortage in the
foreign exchange market are posing significant threat to the bottom line
of the banks. It is also my view that adjustment process is yet to complete
in respect of the series of decisions taken recently to address liquidity
condition in the banking system. As such, the current state of excess

liquidity could be managed with administrative measures rather than
upward adjustment in policy instruments
Need to Manage Threat to External Reserve: In the very unlikely event of
attracting new capital flow to shore up the external reserves, the need to
stem outflow and related hemorrhage could not have attracted utmost
consideration at any other period than now. Most emerging economies
have continued to maintain tight stance to reduce their vulnerabilities to
strengthening US dollar and likely contagion from bank holiday and the
attendant referendum in Greece. Notable central banks in emerging
economies have recently strengthened their tightening stance through
upward adjustment to their policy rates. Given the intense competition in
the global financial market, monetary policy in the country cannot afford
diverging stance from the other emerging economies. This, invariably,
rules out easing of policy stance at this period. The increase in the MPR
equally has the tendency to increase the yield on financial instruments
and make the economy competitive for global capitals that could help
shore up the reserves buffer. I would like to quickly add, however, that the
entire gamut of portfolio flows need to be reviewed with a view to
minimizing the disruptive impact of its volatility on the economy
Decisions
Against the foregoing, I propose as follow:
Increase the MPR by 50 basis points to 13. 5 per cent
Retain the CRR at 31 per cent
Retain the LR at 30 per cent
Retain the symmetry corridor of 200 basis points around the MPR

5.0
DANIEL-NWAOBIA, ANASTASIA

1. The Nigerian economy is expected to continue on its growth path in 2015,
although with less robustness than it did in the corresponding period in
2014. The relatively tepid growth outlook is based largely on the rather
sluggish crude oil markets. The risk to the outlook continues to be
developments in the external environment, particularly the slow accretion
to reserve as a result of weak global economic recovery and declining
demand of Nigeria’s crude oil.
2. Despite the gradual recovery in global oil prices in the last four months,
there is still a great threat to the global oil price. Increase in production by
the U.S., OPEC’s refusal to cut production and the weakening demand of
crude oil from China have led to the significant fall in global oil prices and
pose a threat to the growth of oil revenue in Nigeria, especially in the
medium to long- term. Furthermore, the nuclear agreement between Iran
and Western powers may give rise to increase in global oil supply as
sanctions imposed on the country ease off, effectively contributing to the
supply glut. The expected decline in crude oil prices signals a major threat
to the Nigerian economy, in the short to medium term.

3. The year-on-year headline inflation has been creeping upwards in the
past few months, moving from 8.2 per cent in January, 2015 to 9.2 per
cent in June, 2015. At 9.2 per cent in June, 2015, the year-on-year
headline inflation has exceeded the CBN upper limit target of 9.0 per
cent. Staff estimates show that the year-on-year headline inflation is
expected to rise further in the coming months.
4. The performance of monetary aggregates in the review period was
below the indicative benchmarks, indicating the impact of the sustained
tight monetary policy stance in controlling system liquidity. Retail lending
rates of DMBs, however, remained high, and the interest rate spreads still
widened.

5. The exchange rate remains weak partly due to low accretion to foreign
reserves. There is therefore the need to put policy in place to attract more
foreign investments while we retain the existing investments in order to
boost the level of the external reserves. Efforts should also be made to
block all revenue leakages as well as discourage speculative demand in
the foreign exchange market.
6. Though the Nigerian Banking Industry remains sound with capital
adequacy of 17.3 per cent as at June, 2015, which is well above the 8 per
cent minimum required by Basel for internationally active banks, the
recent increases in non-performing loans (NPLs) should be closely
monitored.
7. Staff forecasts indicate that share prices in the next three months may
decline but projected to increase from October to December, 2015. The
initial decline in share prices suggests investors’ continued concerns about
the fragility of the global economy, unstable oil prices and capital flow

reversals and uncertainties as the new administration gradually settles
down.

8. The key challenges to monetary policy currently include: managing
inflation and exchange rate expectations, and building fiscal buffers to
insure against external shocks.
9. In view of the above, it is advisable to sustain the current tight monetary
policy stance of the Bank.

Consequently, I vote as follows:

(i) The Monetary Policy Rate (MPR) to be retained at the current level of 13%
and corridor of +/- 2% for the inter-meeting period.
(ii) The CRR to be retained at 31 per cent, but a portion of it could be
remunerated in order to free some funds for bank lending to the
economy.
(iii) The liquidity ratio should be retained at 30 per cent.

6.0
GARBA, ABDUL-GANIYU

Context of Decision
The global economic outlook remains uncertain, tenuous and tough for
emerging markets and resource driven economies. The Euro-Greek crises, the
busting of the Chinese asset market bubble and the persisting uncertainty about
the timing of the US Fed’s rate increase have heightened uncertainties in global
financial markets. For oil exporting countries such as Nigeria, the economic
effects of the Iran P5+1 nuclear deal (potentially good for global security) are
not likely to be positive if it leads to a weakening of the crude oil prices. Weaker

oil prices could have adverse consequences for public, private, external and
national accounts and cause expectations to be even more pessimistic with
resultant pressures.
Available macroeconomic data show that GDP growth has slowed down
considerably from 6.33% in 2014 and 5.9% in the fourth quarter of 2014 o 3.96% in
the first quarter of 2015. The GDP growth rate in the first quarter was 1.54% below
the 5.5% projected for 2015. It would be short-sighted to ignore the fact that
GDP has been trending down in the aftermath of the commencement of
monetary tightening that began at the September 2010 MPC. Much of the
opportunity costs of the deflationary policies have been disproportionate in
terms of growth and employment losses. It would seem therefore, that the
downward trending of the real GDP of real sector activities is part of the costs of
the price stability that was achieved between 2010 and November 2014 as well
as that of the exchange rate stability that was achieved until the ‘’Bernanke
effect’’ of May 2013 began to unravel the stability of emerging markets.
Headline inflation which had trended downward from 2008:07 to 2014:11 began
trending upwards in December 2014 such that between November 2014 (7.9%)
and June 2015 (9.2%) headline inflation had risen by 1.3%. The 9.2% rate of
inflation is above the 9% upper band of the target inflation band. The 9.2% rate
of inflation is also, the highest rate since May 2013 (9.3%). NBS data indicates
that most of the items that make up core and food inflation contributed to the
rise in headline inflation in June 2015. It is not a coincidence that the rise in
domestic price inflation started a month after the major policy shifts of the
November 2015 MPC. Indeed, the evidence indicates that the paths of
headline, food and core inflation have been sensitive to the downward
revaluation of the value of the Naira on 25 November 2014 and on 19 February
2015.
It is however, important to note that the exchange rate markets of emerging
countries have been under pressure since June 2013 well before commodity

prices slumped. It follows that the commodity price slump simply worsened an
already deteriorating situation. The underlying cause of pressures has deeper
roots in capital account liberalization (equity and debt) where it was a
deliberate policy to fund the forex market and some foreign and Naira
denominated bank loans with the savings of foreign players. As far back as
September 2011, I had been concerned about the lack of ‘’harmony between
the fiscal system and monetary system’’ which I believed was ‘’critical to the
medium to long term success of fiscal and monetary policies and indeed,
macroeconomic
management.’’ I
argued,
in
my
personal
statement
(September 2011) that it was of ‘’the outmost necessity, that the fiscal system be
brought into harmony with monetary policy and to be bounded by the
requirements for price stability, sustained growth in investment, employment,
productivity and output. It is also, important that monetary system is similarly,
bounded.’’ Then, it would have been possible to increase fiscal savings, build
needed buffers and limit the need for foreign savings as means of funding the
forex market and government deficits. However, the failure to bring fiscal
operations within the provisions of the Fiscal Responsibility Act, 2007 meant that
the fiscal savings did not reflect rising oil prices. The decision to relax capital
account liberalization (equity and debt) was a choice for short term stability at
great risk of medium term instability which began to crystalize in June 2013.
The dangers of portfolio flows to medium term stability and the risks to the value
of the Naira, the stability of the capital and money markets, to growth,
employment, external balance and to financial system stability led me in
January 2013 to warn against the ‘’sharp growth in portfolio flows (i) after
October 2011 and (ii) after July 2012 (which were) well above trend’’. I argued
that the effects of the growth in portfolio flows ‘’on the capital market already
(signaled) that financial and macroeconomic instability (lay) in the future unless
the right forward looking policies are implemented now . . . (and that the)
effects of the last episode of outflows in 2008 . . . on the capital market, the

banking system and the costs of bailouts are still fresh.’’ In voting for a rate cut at
the January 2013 MPC, I sought to signal ‘’a commitment to macroeconomic
stability now and, in the future and, to avoid history repeating itself at an even
greater cost.’’
About four months later (May 2013), the dangers of portfolio flows to medium
term stability began to crystalize in most emerging countries which imprudently
raised rates to attract portfolio flows. The Bernanke’s mis-communication about
tapering after the meeting of the US Fed on May 19, 2013 sent shock waves
through the global financial markets triggering flight of portfolio capital from
emerging countries. The evidence that the competitive capital account
liberalization in emerging markets was imprudent is the forex crisis that was a
consequence of the Bernanke effects. Analysis made it clear that the financial
flows to emerging markets triggered by episodes of quantitative easing in the
global Central Banks which purchased toxic assets as means of injecting liquidity
into their economies were unsustainable. While emerging countries including
Nigeria raised rates to attract the ‘’hot money’’, the US Fed, European Central
Bank and the Banks of England, Japan and China were reducing rates to
stimulate their economies. Thus two traps prevailed globally: a low interest rates
(US, Germany, UK and Japan) and high interest rates (most emerging countries).
It was clear that exits from low interest rate traps by the US would unsettle global
financial markets. It was also obvious that emerging markets will suffer the
adverse consequences of the inevitable reversal of hot money flows. This is why
one warned against the dangers of ‘’hot money’’ and repeatedly argued for
forward looking and coordinated strategies to ward against the looming
dangers given the experience of 2008 and its costs.

The malfunctioning of the forex market is a major constraint to policy
effectiveness and the way it is being addressed has significantly altered the
framework for monetary policy. The data shows upward trending of forex market

spread (difference between official and BDC) from an N2.7 (January 1, 2013) to
N3.19 (June 10, 2013), N14.76 (December 31, 2013) and N16 a day before the
policy shifts of November 25, 2014. The rising forex spread is a clear indication of
inefficiencies in the allocative mechanism and ineffectiveness of policy. After
the policy shifts at the November 2014 MPC, the spread rose steadily to N42.32
on February 18, 2015 when the RDAS auction system was abolished. The forex
spread (now the difference between interbank and BDC) widened further to
N44 on July 21, 2015. Clearly, the mechanism for allocating forex in Nigeria is not
working and needs an urgent fix to restore efficiency, effectiveness, credibility,
transparency and liquidity.
The real issue for me at this MPC (July 2015) are the weaknesses of the
mechanism for allocating forex in Nigeria. The failure has adverse effects on
growth, inflation, external balance and capital market stability as well as on the
credibility of the interest rate corridor and indeed, the credibility of monetary
policy. Given the liberalization of foreign borrowing, restoring efficiency and
effectiveness of the mechanism for rationing foreign exchange is also critical to
financial system stability.
A key area of failure besides the widening spread and the pressures to
depreciate far in excess of fundamentals is the structure of allocation of forex
and its implications for growth and external balance. Available data show that
between January 2013 and June 2015, industrial sector (15.6%), transport (3%),
agricultural sector (0.79%), manufactures (8.35%) and food (7.56%) combined
accounted for 35.3% of total transactions valid for foreign exchange while
financial services accounted for 38.33% out of which asset management (cash
or portfolio management) took up 20.72% of forex. With oil imports taking up
15.65%, it implies that asset management and oil imports combined took up
37.37% of total foreign exchange sold for transactions valid for foreign

exchange. It is hard to see how this structure of forex utilization could promote
growth, investments, employment or macroeconomic stability.
The issues for me at this MPC Meeting are not about tightening or loosening or
about the flexibility of the exchange rate band. It is far more fundamental. It is
about institutions, incentives, strategy, coordination and forward looking. At the
heart is the primacy of mechanism design and about leveraging on the new
government’s positive signals about fiscal prudence, consolidation of NNPC
Accounts in the Central Bank and possibility of re-starting production in the
refineries to develop a macroeconomic management strategic framework for
Nigeria.
I am convinced that unless an allocative mechanism that restores credibility,
liquidity and confidence is designed and operationalized, the opportunities for
arbitrage and currency depreciation are more likely to persist and so would be
the demand and related pressures. The idea of funding BDCs to narrow spreads
has not been successful: spread has widened creating opportunities for
arbitrage and short positions that self-fulfills depreciations. I have never
supported the shifts from WDAS to RDAS because there is sufficient evidence
from credible researches to the effect that forex spreads tend to widen in RDAS
regimes than in WDAS regimes because of the restrictions in RDAS and
institutional weaknesses. There is also sufficient evidence on the high likelihood of
collusion or rigging of rates by buyers in the auction system. In principle
therefore, the greatest challenge is how to ensure that players play by the rules.
This in turn implies that the mechanism must be rules driven, non-discretionary
and non-ad-hoc.
I am convinced that the management of demand is unlikely to be successful
without (1) an efficient rule-driven or rules-based mechanism and (2) an
effective coordination of monetary policy design and operations with the
design and operations of fiscal policy. An efficient rule-driven or rules-based

mechanism developed within the mandate and frameworks of the Central Bank
will prioritize industry and agriculture ahead of asset management and oil
imports. An effective coordination of monetary policy design and operations
with the design and operations of fiscal policy would significantly (i) reduce oil
imports hence, demand for forex by oil importers (average of 15.65% of total
forex allocation in 2013-2015); (ii) reduce dollar denominated subsidy payments
as well as the claim of subsidy on the budget; (iii) increase fiscal savings hence,
(iv) reduce dependence on portfolio flows to superficially shore up forex
reserves.
Cautious Optimism
I restate five of my fundamental convictions about Nigerian macroeconomic
management process. First, a backward looking short termed monetary policy
stance is inappropriate in a post global financial crisis central banking, financial
market operations and global economy. Second, ‘’given the multiple principal
objects of the CBN as provided for in Section 2 and the dual mandate of the
MPC as provided for in Section 12 (1) of the CBN Act of 2007, a feasible
framework for coordinating fiscal and monetary policy with macro and micro
prudential policies is the top priority.’’ Third, improving market functioning in the
forex, money and capital markets are critical to policy effectiveness and to the
ability of fiscal authorities to achieve macroeconomic goals of growth,
employment and stability (price and external). Unless the markets function well,
monetary policy would not be effective at least from the view point of the
commonwealth. At the moment all three markets are malfunctioning and
blunting the effectiveness of monetary policy. Applying products of fast thinking
(heuristics) to problems that require slow (effortful, purposeful and deliberate)
thinking is a critical strategic error as is; a shortsighted view of macroeconomic
management. Four, normalizing the expanded balance sheet of the central
bank due to its interventions and costs of resolving the banking system crisis
through AMCON is necessary and critical to medium term macroeconomic

stability and policy effectiveness. Five, a dependence on the savings of foreign
players to fund malfunctioning forex, money and capital market undermines
medium
term
stability,
allocative
efficiency,
fiscal
discipline,
growth,
employment and financial system stability. There is more than enough research
evidence and historical experiences before and after the collapse of the Gold
Standard to support my claim.

Notwithstanding the negative global and national economic outlook, I am
convinced that policy and strategy should not be based on pessimistic outlooks
because nothing in the future is inevitable: it is the quality of current choices that
will shape future paths. Indeed, some important positives in the recent
governance system give me a strong basis for cautious optimism: the rise in
accretion to reserves, stronger likelihood of fiscal consolidation and savings,
easing of demand pressures from resumption of production at Warri and Port
Harcourt Refineries and improved credibility of government pronouncements
and; greater likelihood of a buy-in by fiscal authorities to a coordinated medium
to long term macroeconomic management strategy for Nigeria.


Decision
I vote for holding the existing policy stance.
I also strongly support re-designing the mechanism for allocating foreign
exchange to improve efficiency, effectiveness, transparency and credibility and
to eliminate the opportunities for arbitrage that have widened since November
25,2015. I am convinced that relying on BDCs to stabilize the Naira or to narrow
the forex spread is self-defeating. The evidence is unimpeachable!

I do not support a remuneration of CRR as proposed. The argument is very weak
and in conflict with evidence: industry profits are rising and there is no evidence
that remuneration of CRR will pass-through to borrowers in terms of lower
borrowing costs or growth in lending to real sectors and retail borrowers. Any
expectation that remunerating CRR will expand credit to higher growth and
high employment elastic sectors is incompatible with current concentrated
structure of credit or with historical evidence.

I support a leveraging on the positive signals from fiscal authorities to begin
conversations that will produce a strategic macroeconomic management
framework and strategy for medium to long term. This is the credible path to
attaining the goals of macroeconomic policy. The earlier this conversation takes
place the better given expected tail winds from the potential disruptions of
global financial markets by the inevitable increase in US interest rates, the
weakening of the Chinese economy and the busting of the contrived asset
price bubble of the Chinese Stock market.


7.0
LAWSON, I. STANLEY
The 245th MPC meeting of the 23rd and 24th of July 2015 was held in a period of
lingering uneven recovery in the global economy and worsening economic
situations on the domestic front. The meeting was therefore, as expected, a very

difficult one and thus elicited intense and extensive discussions around the
domestic economic and financial environment over the two-day period; all
aimed at ensuring monetary and financial systems stability in the country.
The Global Economy
The global economy continues to face recovery challenges with a moderated
growth momentum in half year 2015. Increased financial market volatility,
disruptive asset price shifts, and lower commodity prices continue to be the
near-term risks and the main drivers of the sluggish growth output recovery.
Despite a 0.2 percentage points dip in the world economic output growth
projections for 2015 by the IMF, The United States and some advanced
economies continue to show prospects of improved outlook due largely to the
softening oil prices (price of OPEC Reference Basket stood at USD 53.79/barrel
on July 21 2015) which presents improved growth opportunities for the
advanced economies and oil importing countries while at the same time
catalyzing dampening growth prospects and weak performance in oil exporting
countries. With her inflation below the Federal Reserve’s 2% target and her
economy projected to grow by 2.5% in 2015, the United States remains a bright
spot in the global economy and a clear leader of global growth.
Despite the risk posed by the Greek crises, the Euro zone economy presented a
strong 2015 H1 outlook. The Euro zone economy is projected to grow by 1.5% in
2015 and 1.7 in 2016. Inflation in the region rose to 0.3% in May 2015, up from 0 in
April. The massive quantitative stimulus programs by the ECB, the Bank of
England, and the Bank of Japan would appear to be subduing the
crystallization of the risk of deflation in the Euro area and Japan.
Growth in China is projected to decline from 6.8% in 2015 to 6.3% in 2016 due to
financial market vulnerabilities, declining productivity, excess capacity, and
weakening domestic demand.

Domestic Economy
On the domestic scene, Nigeria continues to witness a deceleration in growth.
This deceleration 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 Gross Domestic Product (GDP) growth is expected to decline to 5.54% in
2015 from 6.22% in 2014. As is typical, the non-oil sector comprising services,
trade, agriculture and construction was the major contributor to growth. Industry
growth was negative at -1.02% in Q1 2015.
For six consecutive months since December 2014, headline inflation rate has
continued to edge higher up to 9.2% in June from 9.0% in May 2015, arising from
a steady increase in food inflation which inched up marginally to 10.0% in June
from 9.8% in May 2015, and a continuous increase over the same period of the
core sub-index which recorded an increase to 8.4% in June from 8.3% in May
2015. The rise in food inflation may be due to the gradual crystallizing impact of
the current exchange rate regime on imported food prices as well as escalating
transportation costs due to scarcity of petroleum products. This needs to be
closely monitored and pre-emptive administrative actions taken as appropriate
to halt the continuous slide in the exchange rate.
Between December 31, 2014 and July 22, 2015, the Naira has depreciated at
the interbank and BDC markets by 9.44% and 25.85% respectively, leading to a
widening of the premium between the interbank and BDC market to 22.34% up
from 6.39%. The widening gap between the interbank and bureau-de-change
exchange rates continues to be a source of concern as it continues to fuel
arbitrage and speculative activities. Ongoing currency substitution and partial

dollarization of the economy by economic agents is also a source of immense
pressure on the exchange rate.
Low oil prices have continued to take a toll on Nigeria’s foreign reserves. The
latest official foreign reserve figures show a slight increase from $30.181 billion in
May 2015 to $32.46 billion as at July 21, 2015. This amount represents 6.6 months
of
import
cover.
In the money market, interest rates continue to be volatile, mirroring the
fluctuations in the liquidity position of the deposit money banks. Average interbank call and OBB rates, which opened at 6.55 and 6.45 per cent on 1st July
2015, closed at 26.51 and 21 per cent, respectively, on July 23, 2015.

Conclusion
The global outlook has remained largely sluggish and continues to face the risk
of deflation. Other than the Greece situation the global economy has not
witnessed any significant change over the last two months. On the domestic
front, most of the parameters and economic indices are coming under a lot of
pressure driven largely by softening oil prices and dwindling foreign reserves. It is
my candid opinion that any measure taken by the MPC to stem the present
trend will be insufficient unless it is reinforced with corresponding fiscal measures.
Increasingly, opportunities for further effective maneuverability by the MPC is
being crowded out as the source of the continued deterioration in most of the
indices can be traced to fiscal activities. The need for supporting fiscal and
structural policies to stimulate output growth, encourage foreign investments,
and
stabilize
the
exchange
rate
is
now
imperative.
Though adverse developments in international oil prices have affected
government revenues and accretion to reserves, the financial system has
remained relatively stable with key banking stability indicators showing
robustness. It is imperative to ensure that the existing banking stability is

maintained and therefore any administrative action that is likely to impinge on,
or dampen the resilience of the financial system and the functioning of the
financial markets should be promptly reviewed. It is noteworthy that in general
the profitability of banks increased in H1, 2015 not as a result of foreign
exchange arbitrage activities but largely from their ordinary business of financial
intermediation.
While it is not good economic practice to attempt to hold price and quantity,
our peculiar circumstance has forced the Central Bank of Nigeria to attempt to
strike a delicate balance between demand and price control. Since this has not
yielded the desired result, the introduction of some flexibility around price may
be advisable at this time. With this, I believe that some of the distortions that
prevail in the market today will begin to self-moderate.
It is gratifying to note that the Central Bank of Nigeria, through preemptive and
timely administrative actions have succeeded in mitigating several domestic risk
factors confronting the economy.
In the light of all the above, I am inclined to vote as follows:
1. Retain the MPR at 13% with a corridor of +/- 2% around the midpoint;
2. Retain the non remuneration of CRR and
3. Retain CRR at 31%.


8.0
NNANNA, O. JOSEPH

Global macroeconomic development during the first half of 2015 was generally
characterized
by
uneven
growth
in
both
the
advanced
and

emerging/developing economies. In the United States, economic growth
gained momentum – largely driven by low crude oil price, sustained aggregate
demand and relatively high industrial production. In the Euro-zone, recovery
was moderate, but concern over Greece exit from the zone continued to
influence market sentiment. In Asia, Chinese economic growth was stable, but
sluggish due mainly to the downward pressure associated with structural reforms.
OUTPUT AND PRICES
Weak output growth accompanied by inflation uptick amid worsening
unemployment suggested emerging stagflation and the need for monetary
policy to encourage deposit money banks to strongly embrace financial
intermediation and lending to the private sector.
The Nigerian economy during the review period was characterized by
‘stagflation’ as evidenced by inflation uptick of 9.2 per cent; and sluggish output
growth. The GDP growth rate fell to 3.9 per cent in Q-1 2015, vis-à-vis 5.9 per cent
during the fourth quarter in 2014. The decline in output coupled with the
creeping rise in the domestic price level demanded for the implementation of a
comprehensive structural reform policy measures aimed at addressing the
weaknesses in the product and financial markets. While the responsibility of
addressing the numerous infrastructure challenges such as – power supply,
transportation, security etc. are outside the sphere of the monetary authority,
nevertheless, ensuring a level playing field for the deposit money banks to carry
out their role of financial intermediation falls within the mandate of the
monetary authority. Accordingly, the critical focus of monetary policy remains:
exchange rate management under the binding constraint of foreign reserve
short-fall and enhancing monetary policy transmission mechanism in the money
market.

However, with the collapse of the global crude oil market and the consequent
decline in Nigeria’s foreign exchange earnings, monetary policy has inordinately
relied on demand management strategies. Available data and anecdotal
evidence suggested that financial intermediation was less than optimal, while
the excessive demand pressures in the forex market was largely speculative.

LIQUIDITY MANAGEMENT
Maintaining optimal liquidity in the banking system and avoiding financial
repression has become a delicate balancing act.
Available data during the period showed that the deposit money banks were
awash with excess liquidity – as evidenced by the un-seasonally low inter-bank
and call rates in the money market as well as the persistent demand pressure in
the Forex market, despite the prevalence of a high Cash Reserve Requirement
(CRR) of 31.0 per cent and 30.0 per cent Liquidity Ratio during the period. Yet,
another set of worrisome indicators which emerged during the review period
were the low rate of growth of banks’ credit to the private sector and the rising
trend of non- performing loans ( NPLs).
The liquidity surfeit in the banking system which spilled over to the forex market
despite the subsistence of the high CRR of 31.0 per cent and the decline in
domestic credit to the private sector from 11.9 per cent during the fourth quarter
of 2014 to 4.3 per cent In June 2015 were indicative of a dysfunctional money
market. Of serious concern was the rising incidence of non-performing loan
(NPL). All things being equal, the decline in aggregate credit to the private
sector may be attributable to risk aversion on the one hand, and financial
repression on the other. I believe that going forward, monetary policy shall
endeavor to address the challenges of time inconsistent monetary policy. A
short-term solution to the problem of financial repression may lie in remunerating

the deposit money banks for their accrued stock of CRR with the Central Bank of
Nigeria.

EXCHANGE RATE MANAGEMENT
Despite the accumulation of a marginal reserve accretion – the demand
pressure in the forex market remained strong in spite of the strong demand
management strategies which were introduced to encourage local substitution
by excluding the funding of non-core imports. Perhaps, a complimentary foreign
exchange ‘supply’ management strategy may require the introduction of some
‘guided’ flexibility in the exchange management going forward.
There is enough empirical evidence to show that the Nigerian economy
performs relatively better during the period of relative exchange rate stability. In
fact, average growth rates 6-7 per cent per annum from 2004-2014, were
achieved when the naira/dollar exchange rate fluctuated within the narrow
band of +/- 3.0 percentage points. Nevertheless, the relative stability which was
achieved in the inter-bank and bureau de change (BDC) exchange rates
markets following the closure of the WDAS and RDAS forex windows was eroded
partly as a result of the weakening of crude oil price and the consequent
decline In foreign exchange reserves inflows, portfolio capital reversal and
speculative attack. Market conditions and anecdotal evidence seem to
suggest that the demand pressure in the forex market is not likely to abate in the
near term despite stringent application of the demand management policy
measures recently introduced. In the circumstance, I saw merit advocating for
the implementation of a policy of ‘guided’ flexibility in the determination of the
naira/dollar exchange rate in the interbank market in order to induce greater
supply of forex higher liquidity in the interbank market. I am certain that this

strategy shall assist in narrowing the widening arbitrage premium in the interbank and BDC rates.
CONCLUSION
In the light of the emerging macroeconomic developments – particularly, the
sluggish product and labor markets, the demand pressures in the forex and
money markets and the bearish capital market, I saw merit in advocating for:
1. Remuneration of DMBs’ accrued CRR at the rate of 3.0 per cent to lessen
the negative impact of financial repression. I also voted to reduce the
CRR to 25 per cent from 31 per cent.
2. Introduce a policy of ‘guided’ flexibility in the management of the
exchange rate by establishing a wider band within which the exchange
rate will fluctuate in the short-run in order to encourage greater liquidity in
the interbank market. The CBN shall intervene periodically, to discourage
speculative demand and ensure relative stability in the interbank market.
3. An increase in the MPR by 100 basis points – from 13.0 per cent to 14.0 per
cent to signal an anti-inflationary monetary policy stance.


9.0
UCHE, CHIBUIKE U

In recent times, effective monetary policy formulation in Nigeria has become
increasingly difficult. By far the most important reason for this is the declining

international price of crude oil. With the recent nuclear power dispute resolution
agreement reached between Iran and Western nations and the resultant
imminent end to the international boycott of Iranian oil, it is unlikely that there
will be any appreciable increase in the price of crude oil in the near future. In
the light of the fact that the Nigerian economy is largely dependent on oil rents,
it is prudent to assert that effective monetary policy formulation is unlikely to
become easier in the near future.
Dwindling oil revenues have put extensive pressure on funding of governance at
the federal, state and local government levels. Given the import dependent
nature of our economy it is not surprising that it has also put pressure on the
exchange rate of the Naira. Inflation and the nonperforming loans of
commercial banks have also been inching upwards while GDP growth rate is on
the decline. In order to curtail the increasing demand and pressure on its limited
foreign exchange the CBN management has administratively put in place a
discretionary foreign exchange management system which essentially prevents
banks from allocating foreign exchange to companies that want to import
specified goods which the CBN believes can be manufactured locally.
Although I am in full support of policies that encourage local production, I am
not altogether sure that the CBN alone can effectively achieve this without the
collaboration of the fiscal authorities. In my view, the denial of foreign exchange
to businesses that engage in legitimate economic activities is confounding. It
certainly makes better sense for the Government to officially ban such products
out rightly. More important however is the fact that I am not convinced the CBN
has the legal powers to deny the allocation of foreign exchange to legitimate
businesses engaging in legitimate economic activities.
Until legal opinion is sought on my above concern, a more immediate concern
is the need for the CBN to, as much as possible, reduce the information
asymmetry
associated
with
running
a
discretionary
foreign
exchange

management system. One effective way to curtail speculation in such a
scenario is to ensure that the rules of discretion are clearly defined and known to
all stakeholders.
Another important issue that requires immediate attention is the issue of capital
account liberalization. I have consistently called for some sensible controls to be
imposed on capital inflows into Nigeria. The current scenario where Foreign
Direct Investments and Foreign Portfolio Investments are allowed to be brought
in and taken out at will has encouraged speculation to the detriment of national
economic development. The data presented to MPC is clear proof of this. Such
unhealthy capital flows are also responsible for the increasing pressure on the
exchange rate of the Naira and the volatility of the Nigerian Stock Exchange.
Available statistics, for instance, show that such financial flows constitute over 30
percent of the demand for foreign exchange in Nigeria. Prioritizing the foreign
exchange demand of financial flows over that of the industrial sector is, in my
humble opinion, meaningless.
Furthermore, I am not at all convinced by the argument that has been put
forward by some MPC members in support of the continued maintenance of
the current capital account liberalization stance. Specifically, they have argued
that given our current financial difficulties, this is the wrong time for controls on
capital accounts to be put in place. On the contrary, I believe that this is the
right time to institute such capital controls. The fear that existing investors will
interpret such action as the changing of the rules of engagement midway and
thus pull out is not realistic. This is especially so given the fact that whatever we
do cannot affect existing investors. International and national investment
regulations do not allow us to change the rules of engagement mid-way. Any
capital control that is put in place can therefore only relate to future
investments and not current investments.

Insisting that foreign capital flows into Nigeria will have to stay a minimum of 12
months for instance will instantly curtail the inflow of speculative capital, which
has been very destructive to our economy, into the country. I am also not
convinced by the argument that we cannot withstand a sudden outflow of
foreign direct investments at the present time especially given our dwindling
foreign reserves. In my humble view, such an argument makes little sense as
most of the foreign capital inflows have already left the country. The current
desperation to attract such speculative capital can only lead to temporary
relief, which is neither sustainable nor beneficial to the long term stability of the
Nigerian economy.
Another issue of concern to me is the manner in which the CBN is being called
to bail out various sectors of the economy. During this MPC meeting, for
instance, MPC members were informed that the CBN has been directed to bail
out the various state governments so as to enable them pay outstanding
salaries. Although MPC had no input into this decision, I am concerned that such
bailout programmes, if not well designed, could lead to moral hazard problems.
In this particular instance, I am of the opinion that it would be better to apply
such bailout funds to defraying the ballooning indebtedness of states to the
banking sector. At the very least, this could help curtail the public sector
exposure of Nigerian banks. Unconditional bailout funds could also cause the
concerned states to trivialize the need to diversify their economies and
restructure their civil service and governance structures.
One is also at a loss why the CBN should be asked to bail out the states when
the Federal Government continues to channel huge sums of money from the
Distributable Pools Account into uneconomic and corruption prone ventures like
the petroleum subsidy scheme. Surely the abolition of the petroleum subsidy
scheme will materially increase the revenue the states get from the DPA. The
removal of petroleum subsidy will also encourage the establishment of local

refineries and reduce the pressure on Nigeria’s dwindling foreign exchange
reserves. My recommendation that the Government should find other ways of
saving money is hinged on the fact that the CBN does not have infinite reserves
in its balance sheet. My suspicion is that the CBN can only meet the increasing
bailout demands on it through quantitative easing. This can only further
complicate the effective promulgation of monetary policy in Nigeria.
Despite the above gloomy picture, I strongly believe that the new political
dispensation in the country could provide the much-needed catalyst for positive
change. For this to happen however, there is need for improved policy
cooperation between the fiscal and monetary authorities. Unless this is urgently
done and deliberate effort made to diversify our mono product economy, we
will have no choice but to further devalue the Naira and raise the MPR in the
near future. These actions can only worsen our current dire economic
conditions.
In summary therefore, I hereby vote as follows: (1) to retain MPR at 13 percent
with interest rate corridor of + 200/- 200 basis points; (2) to retain CRR at 31
percent; and (3) to retain Liquidity Ratio at 30 percent.


10.0 YAHAYA, SHEHU

I vote to maintain the status quo with respect to MPR and the symmetric
corridor, CRR. I provide the arguments for my position hereunder

Global Economic and Financial Situation
Overall, there is some improvement in the global economic and financial
situation, with better growth prospects for the US despite the poor Q1 2015
performance, better prospects for Europe and Japan, partly tampered by the
unresolved crisis in Greece and the slowdown in Germany. Growth in India
remains strong and China is relatively steady on a slightly lower growth path.
Tempered
There are improving prospects for Sub-Saharan Africa, particularly for non-oil
exporting countries, while oil importing countries are faced with difficult
adjustment challenges. Libya is still mired in crisis.
World oil prices are somewhat unstable, although higher than in Q1 2015.
International food prices are also relatively stable.
Domestic Economy
There is some optimism following the successful elections and some keen
expectations regarding the security situation, response to the corruption
challenge and the development of new policies and programs. Nevertheless,
there are a number of important challenges to the economy
First, there is considerable concern about the fiscal situation. Although current
spot price of Brent crude at about 57 dollars/barrel is higher than the budget
base, price uncertainty remains, particularly with the prospects of the full return
of Iran to the market and continuing technological innovations in fracking.
Secondly, GDP growth rate at 3.96% in Q1 2015 is much lower than previous
quarters and also lower than forecast. Giving the uncertainty in the oil market,
patchy rainfall so far in some of the agricultural heartlands, it is not clear that
there would be a significant recovery in the second quarter of the year.

Thirdly the foreign exchange situation remains a challenge. Significant pressures
on the value of the Naira remain, despite the depreciation in November 2014
and the measures taken by the CBN to manage demand. The pressures
obviously remain due to the lower earnings from oil exports, a reduction of
reserves, policy credibility and speculations on the future direction of the
exchange rate.
Fourthly, the general price level has been rising consistently for the last 4-5
months and is forecast to continue in that direction for some time. Prices are
already breaching the upper levels of the policy target.
The unemployment situation, although fairly stable, remains a challenge and is
compounded by high levels of underemployment
The banking system remains stable with respect to liquidity, capital adequacy,
return on equity and on assets, profitability. NPLs in the sector remain below
policy thresholds, but efforts should continue to be made to ensure that they
remain low.
On the fiscal side, the main challenges are to develop imaginative policies to
substantially
increase
government
revenue,
fulfill
recurrent
expenditure
responsibilities, raise capital expenditure for infrastructure and promote local
production and value-addition.

Conclusion and Recommendations
In the face of the challenges outlined above, monetary policy options are not
clear-cut. The MPR, although quite high, cannot be significantly reduced right
now to help raise lending/investment and help support growth because it will
give an additional boost to the inflationary pressure and further undermine
incentives to portfolio investment at a time when reserves are already under

pressure. Given the current structure of the financial markets, it is also not selfevident that such a lowering of the MPR will translate into lower lending rates for
manufacturing and agriculture. On the other hand, raising the MPR to help
defuse inflationary pressures and provide incentives for portfolio investment is
almost certain to lead to a rise in lending rates, which may undermine growth,
jobs and also impact negatively on NPLs.
Reducing the CRR will increase liquidity in the banking system which may put
pressure on prices and the Naira exchange rate, without necessarily lowering
interest rates or increasing lending to the productive sectors.
It might seem illogical not to do something significant on the policy options in
the face of the challenges identified above. Yet, at this particular time, when
the domestic and international markets are waiting to see the main policy
thrusts of the new government, there is a credible probability that significant
policy activism might cause more damage than provide palpable solutions
I therefore vote to maintain the status quo at this particularly meeting.


11.0 ADEDOYIN SALAMI

Ahead of this meeting of the Monetary Policy Committee (MPC), staff estimates
for seasonally adjusted output for Q1 - 2015 showed GDP growth to be slowing
significantly, at 3.96%. Although the growth in disposable incomes slowed to
3.34% (from 6.45% a year earlier), on the expenditure side the data showed a
recovery in domestic spending over the quarter. This was driven by sharply
higher government spending, and a recovery in household expenditures.

Investment expenditure continued, as usual, to significantly lag the pace set by
consumption spending. Consistent with slower output growth, the data
reviewed by the Committee also indicated contractions, in real-terms, of narrow
money (M1) and liquidity during the period.
Given lower oil prices, the Monetary Policy stance in 2nd half of 2014, and
uncertainties surrounding the potential for changes in Administration, the drop in
output growth over Q1-2015 was not unexpected. However, both narrow and
broad measures of liquidity continued shrinking during Q2- 2015. Worsening
liquidity conditions, realterm declines in the growth of credit to the Private
Sector, disruptions to fuel and energy supplies; all these factors support
expectations that output in Q2- 2015 will again be sluggish.
Inflation, however, continues to rise and, at 9.2 percent, has breached the 6-9
percent band adopted by the CBN in 2013. While supply disruptions provided
the impetus for the latest recorded increases in general prices, it is worth noting
that Headline inflation has been rising every month since November 2014.
I believe the post-election response to depleted external reserves to be the
defining challenge now facing the MPC; with important implications for
exchange rate and inflation management. I however do not yet see interest
rates playing a meaningful role in resolving the primary issue affecting the
economy at this juncture. Indeed, higher interest rates would, in my view, simply
exacerbate the economy’s increasingly precarious position. I therefore voted to
maintain the status quo where interest rates are concerned.

Signaling another “all-clear” for higher interest rates, by raising the MPR, would
also not address overarching concerns of investors in Nigeria; the majority of
whom appear to be discouraged by uncertainties around postdevaluation
Naira Exchange Rate values. Investors are consequently standing back in
askance, baffled also by the CBN’s expressed unwillingness to countenance any
further currency adjustments and market liberalizations.

The Central Bank’s resistance would be better appreciated in the light of
conflicts arising, once again, between its Monetary Policy objectives, and its
Financial Sector Stability ambitions.
Banking Sector Stability Reports provided by CBN staff show a disconcerting rise
in levels of the industry’s Non-Performing Loans (NPL’s). These have been rising
sharply – from 2.88% in Dec 2013, to 4.65% at the end of June, 2015. Indeed, of
the 22 lines into which CBN classifies bank lending, 11 business lines had NPL’s
breaching its 5% limit as of June this year. Furthermore, of the 10 largest
borrowing sectors, 7 (i.e. 70%) produced NPL’s in excess of the stipulated ceiling.
Surprisingly, both Oil & Gas and Manufacturing report NPL’s wellbelow the limit
– at 2.93% and 3.94% respectively. Hopefully, this outcome reflects sustainable
loan-restructurings by our banking institutions; given that their loan-books tend to
be highly concentrated. The Oil and Gas industry alone accounts for at least
one-third of all bank loans.
Although motivated by its Exchange Rate stability objective, CBN exchange
rate policy, and associated measures aimed at restraining foreign currency
demand, will likely also lead to continuing increases in NPL’s. There are
significant currency and duration mismatches on Nigerian bank balance sheets,
as well as on corporate balances, large and small. The recent oil-price collapse
also introduced regulatory risk; an added challenge, to which Nigerian banks
will need to respond constructively, and the Central Bank with diligence.
Beyond risks to banking soundness are risks also to jobs and economic growth.
The recent decision to deny foreign currency market access to 41 categories of
imported items will, doubtless, crimp growth in the short-to-intermediate term. In
this regard, the CBN likely needs to unambiguously justify its decision to trade-off
growth and employment for banking and exchange rate stability.
All of the above, and related developments, lead me to support rational views
that a greater degree of flexibility is needed to sustainably attend Naira
exchange rate management. A viable avenue canvassed with the Committee

(i.e. affording the CBN greater flexibility) has yet to gain majority support.
Nonetheless, I remain guardedly optimistic that this issue will be revisited;
probably after all other options have been exhausted.
My primary concern about the CBN’s administrative measures relates to their
potential for rapidly degenerating into “cures” that end up being worse for the
“patient” (i.e. the domestic economy) than the disease. Which is to say that I
remain largely unconvinced by arguments insisting that demand management
measures being unveiled will not do the economy, and its prospects, more harm
than good.

To begin with, the measures seem to be setting back vital processes for
deepening and advancing the development of our domestic financial markets.
In the absence of transparent price discovery, and wholesale market liquidity,
allocations of FX (as a scarce resource) tend to rapidly become politicized;
leading to allocation by subjective considerations – at best. Similarly formulated
measures have been attempted, on several occasions, by past Federal and
CBN Administrations. Each time, as I recall, policy makers and the economy
were fortuitously rescued by resurgent oil revenues, while visibly failing to
achieve their publicly stated objectives. What makes the current approach to
demand management different this time, and why, remains unclear.
Worse still, is a debilitating lack of forward guidance, or indeed, any indication
of how long the current regime of measures will be needed. The credibility that
CBN has carefully cultivated if not lost, is most certainly undermined. For this to
have to be rebuilt in the future would be unfortunate, and an entirely avoidable
distraction.

The CBN now also publicly appears unflinching in its resolve, and apparently
unfazed by undesirable, largely unanticipated market developments. This
‘resolve’ could be misinterpreted and further unsettle local financial markets

especially as its view – with which I disagree –is against a growing consensus
outlook for the global economy that bears troubling implications for Nigeria.
Witness the depth of startling declines, this year, in the markets, currencies and
foreign reserves of other developing economies; from Russia through China, SE
Asia, and Brazil, to economies bordering the EU and weakened peripheral
states. It is clear that global capital providers are now becoming concerned
about the quality and sustainability of continued, rapid GDP growth in Emerging
and Frontier Markets. Such markets will be progressively less alluring as the
process of US Dollar monetary normalization – the reversal of Quantitative Easing
(QE) – begins in earnest.

The broad consensus is that, as early as September 2015, the US Federal Reserve
is expected to decisively turn from steadily injecting dollar liquidity into the
global economy to draining. QE-driven market operations led the US central
bank to amassing a portfolio of US$ 4-5 Trillion in financial assets. Draining liquidity
essentially means selling down this portfolio. The Banks of England, and possibly
Japan, are expected to follow the Fed’s lead thereafter; leaving the ECB as the
only remaining advanced economy Central Bank engaged in QE, for widely
understood reasons. It would also be prudent to also assume that, added to
tighter monetary conditions for global reserve currencies, there will be far fewer
petrol-dollars globally recycled over the next few years, owing to lower oil
prices.
Real returns from financial assets in Developed Markets are thus likely to become
more attractive in the next decade than they have been in the last. This also
suggests that access to global capital will become more challenging; especially
for laggard economies, with substantial investment needs, pitching shallow,
underdeveloped capital markets to investors. Furthermore, should present
challenges with access to foreign exchange lead to Nigeria’s ejection from the
widely followed JPMorgan index, our economy’s attractiveness as an

investment destination will be unquestionably diminished. Such a development,
in a “trickle-down” effect, could potentially deny the majority of earnest
Nigerian enterprises the investment capital needed to grow and minimize our
economy’s dependence on oil-based incomes.
Deploying monetary policy instruments against issues best dealt with by a robust
combination of appropriate fiscal and trade policy measures buy our economy
comparatively little time for adjustment. I do not view such approaches to be a
sustainable, or advisable, anchor of economic adjustment. While discouraging
imports in our quest to promote import substitution is desirable, it is not
encouraging to see the measures relied upon appearing to misjudge the
planning, physical logistics and lead-times required to succeed.
Industrial Policy based on compromised importsubstitution strategies, i.e.
without accessible and reliable domestic alternatives to restricted inputs, will
simply create supply shortages, raise prices, and embolden smugglers and
profiteers. Nigeria’s repetitive experience with fuel and electricity scarcities
makes this case. Worst of all, such developments erode improvements in global
perceptions of Nigerian Policy Risk; i.e. perceptions of the integrity and
consistency of our policies.
Policy Risk materializes when policy-makers fail to competently mitigate the
negative side-effects of their actions. It can also materialize when inconvenient
truths are carelessly dismissed, only to be belatedly acknowledged as
immutable forces; i.e. after compelling policy architects to undertake costly and
damaging reversals. It is difficult to realistically conceive of Nigeria becoming a
regular destination for large scale private investment in such circumstances. In
this context, our maintenance issues with Investment Benchmark-setting
institutions might be more constructively approached as a “mock” test of our
collective
policy-setting
competence
and
determination.
Not
some
inconsequential side-show, or conceited market conspiracy.

The Central Bank and MPC are committed by more than practical
circumstance to defend the Naira. Indeed, because Nigerian Law compels
Naira-defense, there is no shirking this responsibility. However, as I see it, no
longer holding high surpluses of foreign currency reserves, to deploy against this
task, calls for levels of pragmatism we are yet to discover. At its core, our
strategy practically depends on a recovery in oil prices; with the Authorities, in
effect, calling on citizens to hunker down and wait – until our current oil-market
bets pay off. I believe we can do better than doing the same thing over and
over while expecting different results.

However, if placing market bets is all we can do, or all we know, as Policy
Planners, then we will need to start drastically lowering Public expectations.
Because effectively offering the Nigerian economy as a macro betting-vehicle
for the direction of oil prices means attracting and deploying global capital only
when the economy (as a proxy for oil prices) is “on a roll”. Even then, this means
retaining mostly fairweather investment partners (i.e. hot money), and for only
as long as the up-cycle lasts. This also means that we remain structurally
incapable of scaling-up levels and rates of private investment needed to
supplement transformative Public investment. In short (and most worryingly),
placing market bets as Policy yet again seems to be doing, in reality means
degrading demographic potentials of the economy.
In my opinion, financial plans underwritten through gambles are best left in the
Private Sector where, under normal circumstances, fundamental disciplines and
limitations systematically keep a floor under its costs of failure. Private enterprises
can fail, and have their constituent capital and labor sponsors move on (to
hopefully better, more informed futures). The repercussions of Public Policy
failure are far more widespread and corrosive. For this reason, monetary and
public policy-planning, in general, has to tread more responsible and reasoned

paths than mere gambles; because here failed bets come with tremendous
downside financial, economic and sociopolitical reactions.

12.0 EMEFIELE, I. GODWIN, GOVERNOR OF THE CENTRAL
BANK OF NIGERIA AND CHAIRMAN, MONETARY
POLICY COMMITTEE
Global economic growth remained fragile in the first half of 2015 and continued
to be characterised by divergent and uneven outcomes across countries and
regions. Recovery and prospects were broadly stronger among advanced
economies relative to emerging and developing economies. Driven largely by
the bolstering effects of cheap energy prices on the performance of advanced
economies, global growth is projected at 3.5 percent for 2015.
Among developed countries, output growth in the United States, which was
weighed down earlier in the year by a strengthened dollar and un-benign
weather, is expected to pick-up in the second quarter with a maintained
momentum for the rest of the year. Consequently, the US economy is projected
to grow by 3.1 percent in 2015. In the UK, the strong economic growth recorded
in 2014 is expected to continue in 2015 with a projected growth rate 2.7
percent. In the Euro area, available data indicate that regardless of the threat
surrounding the Greek debt crisis, economic recovery has broadened. Quarteron-quarter output growth in the region rose to 0.4 percent in the first quarter of
2015 from 0.3 percent in the fourth quarter of 2014. Among these countries,
recovery is attributable to amplified private consumption due to the positive
impact of cheaper energy prices on real disposable income. To a large extent,
these strengthened recoveries and prospects also benefited from the prevailing
asset purchase programmes of the European Central Bank, the Bank of England
and the Bank of Japan.
Economic growth amongst emerging and developing countries remained tepid
in the first half of 2015 with a dampened outlook for the rest of the year. Output

growth is projected to decelerate to 4.3 percent in 2015 from 4.6 percent in
2014, due essentially to weak domestic demand, softening commodity prices
and probable rise in the US yield curve.
Divergent growth prospect is also expected within emerging and developing
economies. With the exception of India, which has a robust positive outlook,
growth prospects among the BRIC economies is expected to worsen in 2015 visà-vis 2016. The Chinese economy is projected to decelerate to a growth rate of
6.8 percent in 2015 from 7.4 percent in 2014, while Russia and Brazil are set to
undergo contractions of 3.8 percent and 1.0 percent, respectively, in 2015
compared with modest growths of 0.6 percent and 0.1 percent recorded in
2014. The economic outlook among low-income developing countries remains
cloudy in 2015 with output growth projected to slow-down to 5.5 percent in 2015
from 6.0 percent in 2014. For Sub-Saharan Africa, prospects remain weak as
output growth is projected to shed 50 basis points in 2015 to 4.5 percent. These
projections broadly reflect structural imbalances, financial market vulnerabilities,
cheap commodity prices and non-accommodating monetary policy.
On consumer prices, I note that against the backdrop of genuine threats of
deflation among major advanced economies, global inflation is expected to
moderate in 2015 reflecting softer energy prices, nominal wage rigidities and
weak demand particularly in economies with below-target inflation rate. For
advanced economies, the IMF projects a 40 basis points disinflation in headline
consumer prices in 2015 with inflation dropping to 0.6 percent from 1.0 percent
in 2014 to keep the rate appreciably below the 2.0 percent target set in these
economies.
The continued asset purchase programmes to re-inflate the Euro area and
Japanese economies pose an immediate risk to sustained inflationary pressure
amongst emerging and developing countries. In the addition, the lingering
expectation of a US interest rate hike in the light of a strengthening economy

may pose a pervasive risk to markets in emerging and developing economies,
which compel a further may tightening of monetary policy in these economies.
In Nigeria, the successful and stable transition of power in May 2015
strengthened the short-term growth prospects of the economy and supplanted
the uncertain outlook that pervaded the first quarter of 2015. Although output
growth rate decelerated by 200 basis points to 3.9 percent in 2015Q1 from 6.2
percent 2014Q4, the economy is likely to pick-up in the subsequent quarters with
annualised growth rate projected at 5.5 percent for 2015. The less-than
envisioned performance of output in the first quarter of 2015 reflects the 8.1
percent contraction in oil GDP in the face of continued turbulence in the
international crude oil market. The harmful impact of the oil sector was
counteracted by the 5.6 percent growth in non-oil GDP, which regardless of an
85 basis points slow-down remained the main driver of domestic output. The
performance of non-oil GDP was propelled by growths in the services, trade,
construction, crop production and telecommunications while the drag in the oil
sector is traceable to receding investments and productivity in that sector as a
result of falling oil prices.
Though the subdued performance in the first quarter is not peculiar to Nigeria,
but to all other commodity exporting economies, it underscores the importance
of diversifying our economy away from primary commodities, especially crude
oil, and towards value-added products. I note that the continued infrastructural
challenges illustrated by the lingering fuel scarcity and the power cuts represent
a genuine deterrent to meaningful growth prospects. However, I believe that
the short-term growth prospect of the Nigerian economy is stronger, at the
moment, following our recent strategy of restricting frivolous demand from the
Foreign Exchange market to boost domestic supply.
On domestic consumer prices, I note with concern that whilst headline inflation
remained single digit, it has breached the upper limit of the Bank’s tolerance
range of 6—9 percent. Data from the National Bureau of Statistics indicated

marginal increase in the rate of inflation to 9.2 percent in June 2015 from 9.0
percent in the preceding month furthering the successive uptick noticeable
since December 2014. The ascent in the review month reflected the rise in both
the food and the core components of headline inflation, which respectively
accelerated by 20 basis points and 10 basis points from their May 2015 levels to
10 percent and 8.4 percent in June. Though transitory, the lingering inflationary
pressure is essentially attributable to both structural and cyclical factors
including the aforementioned infrastructural challenges and the legacy effects
of the bustle that heralded the 2015 general elections, Easter celebrations and
Sallah festivities. I am of the view that the continued fear of deflation in major
advanced economies is genuine and, in the short-term, could moderate the
potential upside risks of imported inflation that ensues from a strengthening
dollar.
Examination of the liquidity conditions in the domestic monetary, credit and
financial markets indicate that broad money supply (M2) declined by 0.6
percent in June 2015 vis-à-vis the end-2014 level. This represented an annualised
contraction of 1.2 percent in contrast to the programmed expansion rate of 15.2
percent targeted for 2015. Much of the decline in money supply was due to the
16.2 percent contraction in net foreign assets and the 21.4 percent fall in other
assets (net). These combined to offset the 13.5 percent growth in net domestic
credit during the review period. On an annualised basis, the growth in net
domestic credit at 27.0 percent is comparable to the programmed target of
29.3 percent set for 2015. The recurrent spikes observed in the liquidity conditions
of the banking system translated to some instability in money market interest
rates. Average interbank call and the OBB rates rose from 6.6 and 6.5 percent,
respectively, at the beginning of July 2015 to 26.5 and 21.0 percent as at 23 July.
Year-to-date, the rates held at 9.8 and 10.2 percent, respectively. At the capital
market, bearish outcome continued since the last MPC as key equity indices
plunged during the period under review. Relative to the levels at end-March,

the Nigerian Stock Exchange’s All Share Index shed 1.7 percent to close at
31,216.7 as at 23 July 2015 while market capitalisation, at 10.7 trillion, fell by 0.4
percent. This weak performance of the capital market largely reflected the
dampening effects of softening oil prices and its attendant transmission to
investors’ sentiments.
I note the somewhat divergent performance in the two segments of the foreign
exchange market in July 2015. Whereas relative calm was observable at the
interbank segment of the market, the bureau de change segment experienced
some volatility. At the interbank market, the exchange rate held at 197.00/US$
throughout the review period. The observed stability recorded in the interbank
exchange rate follows from the firm resolve of the CBN to ensure stability by
effective demand management. Following efforts since the last MPC, the gross
official reserves rose by 10.4 percent or about US$2.9 billion from US$28.6 billion
at end-May 2015 to US$31.5 billion as at 22 July 2015. The observed accretion in
reserve during this period was largely attributable to the drive of the present
government to curb leakages in the system supported by the insightful strategies
of the CBN’s management.
Overall, I note that the smooth transition of power and the consolidated political
stability is expected to reflect positively on the domestic financial markets and
bolster macroeconomic outlook. While the associated improvement in market
perceptions, sentiments and confidence support net capital inflows and stability
in the foreign exchange, the lingering effects of falling oil prices and the
potential rise in US interest rates continue to challenge domestic markets and
monetary policy.

Given that the transient drivers of domestic inflation are evidently outside the
influence of monetary policy and given the existing tight stance of monetary
policy, I reiterate the need for complementary fiscal and structural policies to
spur domestic aggregate supply and rein in inflation. There is an urgent need to

resolve the infrastructural challenges including the protracted fuel scarcity and
incessant power cuts, which are inflating domestic consumer prices and
affecting the ease of doing business in Nigeria. As the economic plans of the
government unfold, I believe that the positive effects will enhance the
outcomes of its current efforts by strengthening productive capacity, calming
our financial markets, and moderating domestic inflation.
In this regard, and given the constrained space for further tightening of
monetary policy, I vote as follows:

1. Retain the MPR at 13.0 percent;
2. Maintain a symmetric corridor of ±200 basis points around the mid-point of
the MPR; and
3. Retain the CRR at a single rate of 31 percent.