CENTRAL BANK OF NIGERIA
MONETARY
MONETARY
POLICY REVIEW
POLICY REVIEW
MONETARY
POLICY REVIEW
AUGUST, 2016
AUGUST, 2016
AUGUST, 2016
Volume 6, No. 1
Volume 6, No. 1
Volume 6, No. 1
Central Bank of Nigeria
33 Tafawa Balewa Way
Central Business District
P.M.B. 0187, Garki,
Abuja
Phone: +234 (0)9 462 36011
Website: www.cbn.gov.ng
E-mail:
ISSN: 2141-6281
©2016 Central Bank of Nigeria
Mandate
§Ensure monetary and price stability
§Issue legal tender currency in Nigeria
§Maintain external reserves to safeguard the international
value of the legal tender currency
§Promote a sound financial system in Nigeria
§Act as banker and provide economic and financial
advice to the Federal Government
Vision
“By 2015: Be the model Central Bank delivering Price and
Financial System Stability and promoting
Sustainable Economic Development"
Mission Statement
“To be proactive in providing a stable framework for the economic
development of Nigeria through effective, efficient and
transparent implementation of monetary and exchange
rate policy and management of the financial sector"
Core Values

· Meritocracy
· Leadership
· Learning
· Customer - Focus
Central Bank of Nigeria
iii
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To Facilitate the Conceptualization and Design of
Monetary Policy of the Central Bank of Nigeria
Mandate
To be Efficient and Effective in Promoting the
Attainment and Sustenance of Monetary and
Price Stability Objective of the
Central Bank of Nigeria
Vision
To Provide a Dynamic Evidence-based
Analytical Framework for the Formulation and
Implementation of Monetary Policy for
Optimal Economic Growth
Mission
MONETARY POLICY DEPARTMENT
CONTENTS
Page
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Table of Contents
Statement by the Governor

ix
Chapter 1
Overview..


Chapter 2
Output in the Domestic Economy
..
..
..

Chapter 3
Price Developments ..


Chapter 4
Monetary Policy and Liquidity Management..
..

Chapter 5
Developments in the Financial Markets..
..
..

Chapter 6
Economic Outlook..


List of Tables
Table 3.1:
Inflation Rates, January – June 2016..
..
..

Table 3.2:
Major Components of Headline Inflation (Y-on-Y),


January-June 2016


Table 3.3:
Major Components of Headline Inflation (M-on-M),


January-June 2016


Table 3.4:
Major Components of Food Inflation (Y-on-Y),


Jan - Jun 2016 ..


Table 3.5:
Major Components of Food Inflation (M-on-M),


January -June 2016


Table 3.6:
Major Components of Core Inflation (Y-on-Y),


January- June 2016


Table 3.7:
Major Components of Core Inflation (M-on-M),


January- July 2016


Table 3.8:
Actual and Seasonally Adjusted Headline Inflation


Jan -June 2016


Table 4.1:
OMO Bills Auction (January 2015 – June 2016) (N'million)..

Table 4.2:
CBN Standing Lending Facility (January 2015 – June 2016)
(N'billion)


Table 4.3:
CBN Standing Deposit Facility (January 2015 – June 2016)
(N'billion)


Table 4.4:
Foreign Exchange Supply by the CBN (US$ Million)
..

Table 4.5:
Monetary Aggregates Outcomes (Growth in % except


otherwise stated)


Table 5.1:
Weighted Average Monthly Money Market Interest Rates


(January –June 2016) ..


Table 5.2:
Average Monthly Spot Exchange Rates (July 2015 –


June 2016) (N/US$)


Table 5.3:
End-Month Exchange Rates (July 2015 – June 2016)


(N/US$)


Table 5.4:
Nominal and Real Effective Exchange Rates Indices


(January 2015 – June 2016)) ..
..
..
..

Table 5.5:
Monthly Foreign Exchange Flows through the CBN


(January 2015 – June 2016).. ..
..
..
..

Table 5.6:
Monthly Foreign Exchange Flows through the Economy
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Page


(Jan 2015 – Jun 2016) (US$ Million)..
..
..
..

Table 5.7:
NSE All-Share Index (ASI) and Market Capitalization (MC)


(June 2015 – June 2016)..


Table 5.8:
Policy Rates of Selected Countries July 2015 - June 2016

Table 5.9:
Selected International Stock Market Indices as at


June 30, 2016 ..


Table 5.10
Exchange Rates of Selected Countries (Value in currency


units to US$)


Table 6.1:
Global Output and Inflation Outlook ..
..
..

Table 6.2
Inflation Forecasts (Staff Estimates)
..
..
..

List of Figures
Figure 2.1:
Real GDP Growth (%) 2015 Q1 – 2016 Q2
..
..

Figure 2.2:
Non-oil Sector Performance 2015Q1-2016Q2 ..
..

Figure 2:3:
Oil Sector Performance 2015Q1-2016Q2
..
..

Figure 2.4:
Agricultural Sector Contribution by Activity,


2014Q4-2016Q1


Figure 2.5:
Industrial Sector's Contribution by Activity, 2014Q4-2016Q1 .. 10
Figure 2.6:
Services Sub-Sector Contribution, 2014Q4-2016Q1
..

Figure 2.7:
Quarterly Oil Production, 2014 Q1 – 2015 Q4 ..
..

Figure 2.8:
Monthly Bonny Light Oil Price, January 2015 – June 2016

Figure 3.1:
Headline, Core and Food Inflation Rates


(January - June 2016) ..


Figure 3.2:
Major Components of Headline Inflation (Y-on-Y),


January-June 2016


Figure 3.3:
Major Components of Headline Inflation (M-on-M),


January-June 2016


Figure 3.4:
Major Components of Food Inflation (Y-on-Y),


Jan - June 2016


Figure 3.5:
Major Components of Food Inflation (M-on-M),


Jan - Jun 2016 ..


Figure 3.6:
Major Components of Core Inflation (Y-on-Y),


January-June 2016


Figure 3.7:
Major Components of Core Inflation (M-on-M),


January-July 2016


Figure 3.8:
Actual and Seasonally Adjusted Headline Inflation


January - June 2016


Figure 4.1:
OMO Sales (January - June 2016)
..
..
..

Figure 4.2:
Standing Lending Facility (January - June 2016)
..

Figure 4.3:
Standing Deposit Facility (January - June 2016)
..

Figure 4.4:
Foreign Exchange Sales (January - June 2016)..
..

Figure 4.5:
Money Supply (M1) and (M2) (Dec 2015 – June 2016)

Figure 4.6:
Growth in Money Supply (M1) and (M2)
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(Dec 2015 – June 2016)


Figure 4.7:
Net Domestic Asset (NDA) (Dec 2015 – June 2016)
..

Figure 4.8:
NDA, NDC and Other Assets (net) (Dec 2015 – June 2016)

Figure 4.9:
Domestic Credit to Private Sector (Dec 2015 – June 2016)

Figure 5.1:
Weighted Average Monthly Money Market Interest Rates


(Jan.–June 2016)


Figure 5.2:
Weekly Interbank Call Rate (January – June 2016)
..

Figure 5.3:
Weekly Open Buy Back Rate (January-June 2016)
..

Figure 5.4:
Daily Naira/US Dollar Exchange Rate (January - June 2016). 45
Figure 5.5:
End-Month Exchange Rates (July 2015 – June, 2016)


(N/U$$)


Figure 5.6:
Nominal and Real Effective Exchange Rates Indices


(July 2015 – June 2016)


Figure 5.7:
Monthly Foreign Exchange Flows through the CBN


(Jan 2015 – June 2016)


Figure 5.8:
Monthly Foreign Exchange Flows through the Economy


(Jan 2015 – Jun 2016) (US$ Million)..
..
..
..

Figure 5.9:
NSE ASI and MC (June 2015 – June 2016)
..
..

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

Figure 5.11:
NSE Market Capitalisation by Sector as at


End-December 2015 ..


Figure 5.12:
NSE Market Capitalisation by Sector as at End-June 2016

Figure 5.13:
Warren Buffett Valuation of Nigerian Equities Market ..

Figure 5.14:
10-Year U.S. Dollar-denominated Bond Yield for Nigeria


(Jan 1, 2014 – Jun 30, 2016)


Figure 5.15:
FGN Bonds Yield Curves: end-Jun. 2015 vs. end-Dec.


2015 vs. end- Jun. 2016


Figure 5.16:
Structure of the Nigerian Capital Market (June, 2016)..

Figure 5.17:
Indices of Primary Commodity Prices June 2015 – June 2016


(2005=100 US$)


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

List of Boxes
Box 1:
Rebalancing of the Chinese Economy..
..
..

Box 2:
The New Flexible Exchange Rate Regime in Nigeria ..

Box 3:
Brexit – the Referendum by the United Kingdom to Exit the


European Union..


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STATEMENT BY THE GOVERNOR
Monetary policy environment in the first half of 2016 was shaped by a number of
global and domestic economic developments. The global developments included
the slowdown in global growth; the US monetary policy normalization and the
associated policy divergence in the advanced economies; protracted financial
market turbulence worsening global risk aversion; geopolitical tensions as well as
China's continuing transition to a balanced growth path. Although the global
economy has witnessed a modest recovery in the prices of crude oil and other
commodities in the first half of 2016, government receipts remained low, thereby
pressuring the domestic economy. This resulted in limited fiscal space, low accretion
to foreign reserves, continuing depreciation of the naira and the slippage of the
economy into a recession.
These headwinds weakened consumer and business confidence, as well as
domestic spending, and slowed economic activity. Accordingly, the Gross
Domestic Product (GDP) dipped for two consecutive quarters by -2.06 and -0.36 per
cent (year-on-year) in the second and first quarters of 2016, respectively, compared
with a growth of 2.35 per cent in the corresponding quarter of 2015. This
development implies that the Nigerian economy is now in recession, in the face of
rising domestic price level. The pass-through of exchange rate depreciation to
domestic prices owing to uncertainties surrounding the implementation of flexible
exchange rate regime as well as increases in the prices of petroleum products and
energy exacerbated pressure on the domestic price level. Consequently, headline
inflation rose to 16.5 per cent in June from 9.6 per cent in January 2016.
The Bank's monetary policy in the review period, accordingly, focused on restarting
economic growth, curtailing inflation, reducing unemployment rate, boosting
external reserves to stabilize exchange rate and moderating liquidity levels in the
banking system.
The imperative of these developments is that the Bank steered a cautious monetary
tightening course during the review period by raising the MPR from 11.0 to 12.0 per
cent and narrowing the asymmetric corridor to +200/-500 basis points around the
MPR. The Monetary Policy Committee (MPC) also increased the CRR from 20.0 to
22.5 per cent of total reserve deposits. The Liquidity Ratio was, however, retained at
30.0 per cent.
The near-term outlook for the domestic economy suggests the Bank's major
challenge remains balancing price stability mandate against the urgent imperative
to restart growth. The challenge is further emphasized by lack of sizeable fiscal
adjustments as well as the negative developments in the external sector and their
potential impact on exchange rates. The Bank is, however, optimistic about
increased coordination between fiscal and monetary policies, as the monetary
authority alone cannot anchor the suite of policies required to steer the economy
back to stability and growth. Monetary policy would, therefore, remain proactive, to
confront macroeconomic challenges in order to achieve its objectives.
Godwin I. Emefiele
Governor, Central Bank of Nigeria
August, 2016


CBN Monetary Policy Review

CHAPTER ONE

1.0
OVERVIEW

n the first half of 2016, monetary
policy was influenced by a number
of key developments in the global
and
domestic
economic
and
financial
environments.
On
the
external front, the key factors were
weak
growth
from
depressed
aggregate
demand,
output
deterioration
in
the
euro
area,
continued rebalancing of the Chinese
economy, and the referendum by the
United Kingdom to exit the European
Union (EU). Others included: the US
policy normalization, as well as weak
global commodity prices which have
adversely
pressured
the
foreign
exchange reserves and the exchange
rates.

On the domestic front, the substantial
depreciation
of
exchange
rates
following
the
introduction
of
the
flexible
exchange
rate
policy,
the
depletion
in
foreign
exchange
reserves, as well as the resurgence of
militancy in the Niger Delta continued
to put pressure on domestic prices.
Accordingly, headline inflation rose to
16.48 per cent in June 2016 from 9.6
per cent in December 2015. Food and
Non-Alcoholic Beverages remained a
major driver of headline inflation in the
period under review. This was followed
by housing, water, electricity, gas and
other fuels.

The severe shock witnessed in the
domestic economy triggered by falling
private and public expenditures due
largely to the impact of weak oil
prices, low consumer demand and
shortages
of
foreign
exchange
resulting in the depreciation of the
currency,
the
prolonged
budget
impasse
as
well
as
continued
inflationary
pressures, combined
to
depress domestic output growth in the
review period.

Data from the National Bureau of
Statistics (NBS) showed that the real
GDP contracted by 0.36 per cent
(year-on-year) in the first quarter of
2016 in contrast to 2.1 per cent growth
in the previous quarter. The decline in
the first quarter was lower by 2.46
percentage points from the preceding
quarter and 4.32 percentage points
compared
with
the
corresponding
quarter of 2015. The contraction was
mainly driven by the oil sector which
further declined by 1.89 per cent in the
first quarter of 2016 from a decline of
8.28 per cent in the preceding quarter;
and the non-oil sector, which fell by
0.18 per cent in the review period. The
growth performance was influenced
by:
Agriculture
(0.61%),
and
Trade
(0.36%),
while
contractions
were
recorded
in
Services
(-0.07%),
Construction (-0.23 %) and Industry (-
1.03%). In the second quarter, output
growth further contracted by 2.06 per
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CBN Monetary Policy Review

cent,
(year-on-year)
from
the
contraction of 0.36 per cent in the first
quarter, compared with the growth of
2.35
per
cent
recorded
in
the
corresponding quarter of 2015. This
further
contraction
in output
was
driven largely by contractions in the
industry,
services,
construction
and
trade sectors. The agricultural sector,
however, grew by 0.96 per cent.

In the foreign exchange market, the
persistent decline in crude oil prices
limited the supply of foreign exchange
which, when
confronted with the
continued increase in the demand for
foreign
exchange,
led
to
further
depreciation of the Naira. In a bid to
curtail further depletion of external
reserves to fund the market, as well as
reduce
the
demand
pressure
for
foreign
exchange,
the
Bank
introduced
a
series
of
measures
culminating in the adoption of a new
flexible foreign exchange framework
which
effectively
resulted
in
the
floating of the Naira. It also maintained
the discontinuation of sale of foreign
exchange to Bureau de Change (BDC)
operators and the exclusion of forty-
one (41) ineligible import items from
accessing
the
official
foreign
exchange window. As a result of these
policy measures, the demand pressure
in the foreign exchange market slightly
moderated during the review period.
Activities in Nigeria‟s financial markets
remained challenged by continued
global
economic
uncertainties
reflected in the general slowdown in
economic
activities
in
emerging
markets;

China‟s
rebalancing
of
economic
activity
away
from
investment
and
manufacturing
to
consumption and services; low oil
prices, and the impact of Brexit from
the European Union. Accordingly, the
Bank deployed various instruments to
ensure
price
and
financial
system
stability in order to boost investor
confidence and encourage foreign
inflows. The key instruments were the
Monetary Policy Rate (MPR), the Cash
Reserve Ratio (CRR), Open Market
Operations (OMO), Discount Window
Operations
(DWO),
and
the
introduction of the flexible exchange
rate policy.

In the period under review, the MPR,
which was 11.0 per cent in January
2016, was reviewed upward by 100
basis points to 12.0 per cent in March
2016. Also, the asymmetric corridor
around the MPR was narrowed from
+200 and -700 basis points to +200 and
-500 basis points in March 2016. In
addition,
the
CRR
was
adjusted
upwards from 20.0 per cent to 22.5 per
cent of total deposits. The adjustments
were intended to address the excess
liquidity condition observed in the
banking
system
and
the
growing
reluctance of DMBs to grant new
credits owing partly to the rising cases
of non-performing loans (NPLs). The
liquidity
ratio,
however,
remained
unchanged at 30.0 per cent in the first
half of 2016.


CBN Monetary Policy Review

The Bank increased its reliance on
open market operations (OMO) as the
main tool in managing banking system
liquidity in the first half of 2016. As a
result, actual OMO sales increased by
34.47 per cent to N2, 329.75 billion in
the first half from N1, 732.55 billion in
the second half of 2015. The increased
reliance on OMO in the first half of 2016
arose from a need to reduce the level
of liquidity in the banking system and
ultimately,
moderate
inflationary
pressures.

The interbank and Open Buy Back
(OBB) rates remained largely below the
floor of the asymmetric corridor around
the MPR for most of the period. The
interbank and OBB rates however, rose
above the corridor in the later part of
the review period. The Nigerian money
market reference rate, the NIBOR, was
relatively stable across all tenors during
the
review
period.
The
NIBOR,
however, spiked at 17.62 per cent in
June, owing largely to the introduction
of the flexible exchange rate system. In
the first half of 2016, the capital market
performance was moderately bullish.
The All-Share Index (ASI) rose by 3.49
per cent to 29,597.79 at end-June
2016, from 28,642.25 at end-December
2015. This, however, represented a
decline of 11.40 per cent compared
with 33,456.83 at end-June 2015.

The bonds market was largely driven
by Federal Government of Nigeria
(FGN)
securities.
Sub-national
governments and corporate bonds
also
registered
some
activity.
The
corporate bonds segment recorded
the least share by market volume. The
yield
on
the
10-year
dollardenominated
bonds
recorded
a
decrease of 1.74 per cent to 6.74 per
cent at end-June 2016, from 8.48 per
cent
at
end-December
2015.
It,
however, showed an increase when
compared with 5.91 per cent recorded
at end-June 2015. This development
was attributable to improved investor
perception of the country‟s sovereign
risk as well as the correction of market
reaction that followed the delisting of
Nigeria
from
the
JP
Morgan‟s
Government Bond Index for Emerging
Markets (GBI-EM) in September, 2015.
Headline inflation has remained in
double digits since February 2016 and
is projected to rise till year-end. Staff
projections indicate that year-on-year
headline inflation would remain in
double digits throughout 2016, closing
at 16.83 per cent in December 2016.
The anticipated increase would be
due,
primarily,
to
the
effects
of
exchange rate depreciation (owing to
the introduction of greater flexibility in
foreign exchange management) as
well as increases in the prices of
petroleum products and energy, on
account of recent policy reforms.

Domestic output in 1H, 2016 took a
downturn
into
negative
territory.
According to the National Bureau of
Statistics
(NBS),
Gross
Domestic
Product (GDP) contracted by -0.36%
(year-on-year)
in
real
terms,
2.46


CBN Monetary Policy Review

percentage points lower than the
preceding
quarter
and
4.32
percentage points lower than the
corresponding quarter of 2015. The
contraction in GDP growth has been
attributed to decline in oil prices and
oil production, and consequently, oil
revenue
which
remains the major
source of government revenue. The
economy is projected to continue on a
weak growth path in the second half
of 2016. This relatively weak growth
outlook is based largely on the current
low oil price which is projected to be
low in the medium to long term with
attendant implications for the fiscal
position. The International Monetary
Fund (IMF) had in April 2016, revised
Nigeria's
GDP
growth
for

downward to -1.8% from the earlier
projection of 2.3%. .

This bleak outlook is exacerbated by
persistent fragilities in the international
economy, principally the slow global
economic
recovery; low crude oil
prices; falling demand for crude oil
from
Nigeria;
and
the
continued
depletion
of
foreign
exchange
reserves.


CBN Monetary Policy Review

CHAPTER 2

2.0
OUTPUT
IN
DOMESTIC
ECONOMY

he Nigerian economy slipped into
recession in the first half of 2016,
due mainly to persisting challenges
in the oil sector which impacted
adversely on foreign exchange
receipts and revenue of government.
Real GDP contracted by 0.36 per cent
(year-on-year) in the first quarter of
2016, in contrast to the growth of 2.11
and 3.96 per cent in the previous
quarter and the corresponding period
of
2015,
respectively.

This
development
was
driven
by
contractions in both the oil and non-oil
sectors of 1.89 and 0.18 per cent,
respectively. In terms of the primary
sectors,
the
major
drives
of
the
contraction were largely Industry (-
1.03%),
Construction
(-0.23%)
and
Services (-0.07%), while Agriculture and
Trade grew marginally by 0.61 and 0.36
per cent, respectively. The contraction
of the industrial sector was due to the
contractions recorded in all its subsectors, namely: crude petroleum and
natural gas (-0.20%), solid minerals (-
0.12%)
and
manufacturing (-0.71%).
The relative shares of the key sectors in
GDP
were:
Services
(37.35%),
Agriculture (20.48%), Industry (19.86%),
Trade
(18.19%)
and
Construction
(4.13%).


Figure 2.1
Real GDP Growth (%) 2015 Q1 – 2016 Q2


In the second quarter of 2016, real GDP
further contracted by 2.06 per cent
(year-on-year), following a contraction
of 0.36 per cent in the previous quarter
and growth of 2.35 per cent in the
corresponding
period
of
2015.
Contractions in both the oil and non-oil
sectors of 17.48 and 0.38 per cent
accounted for the development. The
contraction
was
driven
largely by
Industry (-2.03%), followed by Services
(-0.70%),
Construction
(-0.28%)
and
Trade (-0.01%); while Agriculture grew
by
0.96
per
cent.
The deepening
contraction of the industrial sector was
attributed to the shrinkage in crude
petroleum and natural gas (-1.71%)
and
manufacturing
(-0.32%).
The
relative shares of the key sectors in
GDP
were:
Services
(37.74%),
Agriculture (22.55%), Industry (17.83%),
Trade
(17.57%)
and
Construction
(4.30%). The persistent contraction of
the oil sector has led to the drop in the
contribution of industry to overall GDP
from 19.86 per cent in the first quarter

Q1-2015
Q2-2015
Q3-2015
Q4-2015
Q1-2016
Q2-2016

Per cent
T


CBN Monetary Policy Review

to 17.83 per cent in the second quarter
of 2016. Similarly, during the same
period, the contribution of trade to
GDP fell from 18.19 to 17.57 per cent,
possibly
indicating
the
effect
of
dwindling
oil
receipts in financing
trade.

Overall, the major factors responsible
for the output contraction in the first
half of 2016 was the persistent low
crude
oil
prices,
compounded
by
delayed passage and implementation
of
the

fiscal
budget, which
negatively
impacted
other
macroeconomic
indicators
.
These
indicators include weak aggregate
demand worsened by non-payment of
salaries, rising energy costs due to tariff
and
foreign
exchange
reforms,
shortage of foreign exchange leading
to pressure on the exchange rate etc.

2.1
Domestic Economic Activities

Activities in the first quarter of 2016
remained
limp, reflecting sustained
weakness in the oil sector, spilling over
to the non-oil sector. Non-oil real GDP
contracted by 0.18 per cent in the first
quarter of 2016, compared with a
growth of 3.14 and 5.59 per cent in the
preceding and corresponding quarters
of 2015 respectively. The contraction in
the non-oil sector in the first quarter of

was
largely
driven by food,
beverages
and
tobacco
(-0.57%),
financial institutions (-0.46%), real estate
(-0.35%) and electricity and gas (-
0.18%).
This
compares
with
their
respective contributions of -0.05, 0.32,
0.24,
and
-0.16
per
cent
in
the
corresponding
quarter
of
2015.
However,
crop
production
and
telecommunications and information
services
recorded
positive
contributions to growth at 0.58 and
0.47 per cent, respectively, during the
first quarter 2016.
In the second quarter of 2016, non-oil
GDP further contracted to 0.38 per
cent from 0.18 per cent in the first
quarter, in contrast to the growth of
3.46 per cent in the corresponding
period
of
2015.

The
deepening
contraction in the non-oil sector was
largely driven by real estate (-0.46%);
financial
institutions
(-0.42%);
food,
beverages and tobacco (-0.27%); and
public
administration
(-0.17%).
This
compares
with
their
respective
contributions to non-oil growth of 0.26,
0.20, -0.31, and -0.35 per cent in the
corresponding
quarter
of
2015.
However,
crop
production,
telecommunications and information
services, broadcasting and livestock
recorded
positive
contributions
to
growth at 0.98, 0.16, 0.11 and 0.11 per
cent, respectively, during the second
quarter 2016.


CBN Monetary Policy Review

Figure 2.2
Non-oil Sector Performance 2015Q1-2016Q2

In the review period, the weakness of
the oil sector which dampened non-oil
performance continued. The oil sector
contracted moderately by 1.89 per
cent (year-on-year) in the first quarter
of 2016, from contractions of 8.28 and
8.15 per cent in the preceding and the
corresponding quarters of 2015. The
contraction was due to average daily
crude oil production declining from
2.11million barrels per day (mbpd) in
the first quarter of 2016 compared with
2.16 and 2.18 mbpd in the preceding
and corresponding quarters of 2015.
This was attributed to the increasing
incidences of pipeline vandalism from
to
militant
activities,
leading
to
production cuts.

The
contraction
in
the
oil
sector
deepened to 17.48 per cent (year-onyear) in the second quarter of 2016,
compared with 1.89 per cent in the
preceding quarter of 2016, and 6.79
per cent in the corresponding quarter
of 2015. Oil production in the second
quarter of 2016 also declined to 1.69
mbpd
from
2.11
mbpd
in
the
preceding
quarter, compared with
2.05
mbpd
in
the
corresponding
quarter of 2015.

Following the continued contraction of
the
oil
sector,
its
percentage
contribution to GDP declined to 8.26
per cent in the second quarter from
10.29 per cent in the first quarter of
2016, compared with 9.80 per cent in
the corresponding quarter of 2015.

Figure 2.3
Oil Sector Performance 2015Q1-2016Q2

2.2
Sectoral Analysis

This section
analyses the sectoral
performance of the economy taking
into
account
key
institutional
developments that shaped domestic
output growth in the first half of 2016.


CBN Monetary Policy Review

2.2.1 Agriculture

Agricultural output slowed to 3.09 per
cent in the first quarter of 2016 down
from 3.48 and 4.70 per cent in the
preceding and corresponding quarters
of 2015. The share of agriculture in total
GDP decreased to 20.48 per cent in
the first quarter of 2016 from 24.18 per
cent in the preceding quarter. It was,
however,
19.79
per
cent
in
the
corresponding quarter of 2015.

At the growth rate of 3.86 per cent,
activity in the livestock sub-sector was
the main driver of agricultural output in
the first quarter of 2016. This was
followed
by
fishing
(3.25%),
crop
production
(3.02%)
and
forestry
(2.31%). This compares with 6.44, 6.97,
4.46 and 4.33 per cent recorded in the
corresponding
quarter
of

for
livestock, fishing, crop production and
forestry, respectively.

In
the
second
quarter
of
2016,
agricultural output grew by 4.53 per
cent up from 3.09 per cent in the
preceding quarter and 3.49 per cent in
the corresponding quarter of 2015. The
share
of
agriculture in total GDP
increased to 22.55 per cent in the
second quarter of 2016 from 20.48 and
21.12
per
cent
in
the
preceding
quarter of 2016 and the corresponding
period of 2015.

At the growth rate of 6.32 per cent,
activity in the livestock sub-sector still
remained the key driver of agricultural
output in the second quarter of 2016.
This was followed by crop production
(4.72%) and forestry (3.84%), while the
fishing sub-sector contracted by 6.85
per cent. This compares with livestock
(6.20%),
crop
production
(3.20%),
forestry
(4.01%)
and
fishing (5.53%)
recorded in the corresponding quarter
of 2015.

Figure 2.4
Agricultural Sector Contribution by Activity,
2014Q4-2016Q1


2.2.1.1 Agricultural
Policies
and
Institutional Support

During the first half of 2016, the
agricultural sector benefited from a
number of key policies, reforms and
institutional support. These included:

The
Agricultural
Credit
and
Guarantee Scheme (ACGS)
A total of 23,774 loans valued at
N3.633 billion were granted between
January and June, 2016. A total of
29,519 loans valued at N4.034 billion

Crop Production
Livestock
Forestry
Fishing


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were fully repaid in the period under
review.


N200
Billion
Commercial
Agriculture
Credit
Scheme
(CACS)
The sum of N35.992 billion was released
from CACS repayments in respect of
thirty
nine
(39)
projects
between
January and June, 2016.


N200 Billion SME Credit Guarantee
Scheme (SMECGS)
A total of 88 projects valued at N4.25
billion was guaranteed from January to
June, 2016. Cumulatively, however, the
total number of fully repaid loans since
inception is 40, valued at N2.76 billion.

2.2.2 Industry


2.2.2.1 Industrial Production

Industrial
sector
output
further
contracted by 4.94 per cent in the first
quarter of 2016, compared with 3.80
and 4.51 per cent contractions in the
preceding and corresponding quarters
of 2015. The contraction of the sector
was due largely to the huge shrinkage
of
the
solid
minerals
and
manufacturing
sub-sectors
by 73.63
and 7.00 per cent, respectively in the
first quarter of 2016, although crude
petroleum
and
natural
gas
also
contracted
by
1.89
per
cent.
Compared
with the corresponding
period
of
2015,
manufacturing
contracted by 0.70 per cent, while
solid minerals grew by 11.28 per cent.
This was, however, in contrast to the
growth of 0.38 and 5.73 per cent for
manufacturing and solid minerals in
the
preceding
quarter.
The
huge
contraction in the solid minerals subsector was primarily due to the 88.87
per cent contraction in quarry and
other mining activities, reflecting the
general slowdown in construction.

In the second quarter of 2016, the
contraction of the industrial sector
intensified to 10.42 per cent from 4.94
and 5.27 per cent in the preceding
quarter of 2016 and corresponding
quarter of 2015, respectively. During
the quarter, the sector‟s contraction
stemmed from the 17.48 and 3.36 per
cent contraction in crude petroleum &
natural gas and manufacturing subsectors, respectively, while the solid
minerals sub-sector grew by 2.64 per
cent.
Compared
with
the
corresponding period of 2015, crude
petroleum
&
natural
gas
and
manufacturing sub-sectors contracted
by 6.79 and 3.82 per cent respectively,
while solid minerals grew by 7.09 per
cent.
This
followed
the
trend
of
contraction witnessed in the preceding
period for crude petroleum & natural
gas
(1.89%),
manufacturing
(7.00%)
and
solid
minerals
(73.63%).
The
deepening contraction of the crude
petroleum & natural gas sub-sector
was due to continued softening of the
global
oil
market
and
domestic
production challenges, including: lack
of investment, declaration of force


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majeure by oil companies, production
cuts and resurgence of militancy in the
oil producing areas.

Figure 2.5
Industrial Sector’s Contribution by Activity,
2014Q4-2016Q1


2.2.2.2 Industrial Policy and Institutional
Support

In
the
first
half
of
2016,
the
performance of the industrial sector
benefited from existing and new
reforms and incentives including:


N300 Billion Power and Airline
Intervention Fund (PAIF)
The sum of N11.59 billion was disbursed
for two projects during the first half of
2016, while the sum of N11.35 billion
was received as principal repayment
under the PAIF in the first half of 2016.
The sum of N6.31 billion was received
from Power Projects while the sum of
N5.04 billion was from Airline Projects.


Nigerian
Electricity
Market
Stabilization Facility (N213 billion)
During the first half of 2016, the sum of
N41.88 billion was released to seven (7)
market participants who had satisfied
the
conditions
precedent
to
the
disbursement.


N300 Billion Real Sector Support
Facility (RSSF)
Under the N300 billion Real Sector
Support Facility (RSSF), a total of
N4.60 billion was disbursed to two (2)
projects between January and June,
2016.

2.2.3 Construction and Trade


2.2.3.1 Construction
The construction sector contracted by
5.37 per cent in the first quarter of 2016
in contrast to a growth of 11.17 per
cent in the corresponding quarter of
2015. The sector also contracted by
0.35 per cent in the preceding quarter.
In the second quarter of 2016, the
sector‟s contraction deepened to 6.28
per cent in contrast to the growth of
6.42 per cent in the corresponding
quarter of 2015. The sector contracted
by 5.37 per cent in the preceding
quarter of 2016. This development
reflected the slowdown in fiscal sector
activities during the period.

2.2.3.2 Trade
Activity in the trade sector has slowed
down in recent times. In the first quarter


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of 2016, the sector slowed to 2.02 per
cent from 6.47 and 4.69 per cent in the
corresponding and preceding quarters
of 2015.

This dismal performance continued into
the second quarter, leading to a
further contraction of 0.03 per cent in
contrast to the growth of 5.07 per cent
recorded in the corresponding quarter
of 2015 and 2.02 per cent in the
preceding quarter of 2016. The poor
performance of the trade sector was
partly traced to the general slowdown
of
the
economy
on
account
of
declining government receipts as well
as weaknesses in the external sector.

2.2.4 Service Sector

The
general
weakness
in
the
economy
permeated
the
services
sector
in
the
first
half
of
2016.
Consequently, the sector contracted
by 0.18 per cent in the first quarter of
2016, in contrast to the growth of 3.25
and 6.85 per cent in the preceding
and corresponding quarters of 2015
respectively. This contraction was due
largely to the significant shrinkages in
the
following
sub-sectors:
utilities
(30.03%); finance & insurance (11.28%);
accommodation
&
foods
services
(7.41%); and real estate (4.69%) in the
first quarter of 2016. This compares with
utilities (-19.47%): finance & insurance
(9.01%); and accommodation & foods
services
(26.66%);
and
real
estate
(3.08%) in the corresponding period of
2015.

In the second quarter of 2016, the
services sector further contracted by
1.86 per cent from 0.18 per cent in the
preceding quarter, in contrast to the
growth
of
4.35
per
cent
in
the
corresponding period of 2015. This was
due to contractions in finance &
insurance (10.82%), accommodation &
foods
services
(6.39%),
transport
(5.34%), real estate (5.27%) and utilities
(4.47%) subsectors. This compares with
finance
&
insurance
(6.41%),
accommodation & foods services (-
8.97%), transport (4.84%), real estate
(2.97%) and utilities (-4.93%) in the
corresponding period of 2015.

Figure 2.6
Services Sub-Sector Contribution, 2014Q42016Q1

2.2.6 Oil Sector
The performance of the oil sector
remained weak in the first half of 2016,
indicating the persistent softening of
the international oil market. In the

Q1-2015
Q2-2015
Q3-2015
Q4-2015
Q1-2016
Q2-2016


CBN Monetary Policy Review

second quarter, average daily crude
oil production declined to 1.69 mbpd
from 2.05 mbpd in the corresponding
period of 2015 and 2.11 mbpd in the
preceding quarter. The average daily
oil production of 2.11 mbpd in the first
quarter
represented
a
decline
compared with 2.18 and 2.16 mbpd in
the
corresponding
and
preceding
quarters of 2015.

Figure 2.7
Quarterly Oil Production, 2014 Q1 – 2015 Q4


During the review period, the global oil
price which had remained low showed
signs of modest recovery. The price of
Nigeria‟s reference crude, the Bonny
Light 370API, rose from US$30.66 per
barrel in January to US$37.76 per barrel
in March and further to US$48.46 per
barrel in June, 2016. The increase in
price of Bonny Light crude (and other
global crude streams) was largely as a
result of the decline in US inventories
and shale oil production as well as
decreased supplies from major OPEC
producers
including
Nigeria,
Libya,
Kuwait and Venezuela. The sluggish
recovery in global oil prices has been
traced to weak demand, slow output
growth
and
supply
glut
due
to
increased production from non-OPEC
member countries, including Russia.
The appreciation of the US dollar and
dollar-denominated assets were also
contributory
factors.
The
persistent
weak
oil
price
has
continued to
constrain foreign exchange receipts
and
fiscal
activities.
Overall,
the
average Bonny Light price of US$40.51
per barrel in the review period was
slightly above the Federal Government

budget
benchmark
price
of
US$38.00 per barrel.

Figure 2.8
Monthly Bonny Light Oil Price, January 2015 –
June 2016


Million Barrels Per Day

Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
US$


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Economic Recession in Nigeria
Economic recession simply refers to negative economic growth for two
consecutive quarters, reflecting a general slowdown in economic activity. The
technical indicator of a recession is two consecutive quarters of negative
economic growth of a country‟s real GDP. Primarily, economic recessions usually
occur due to a general fall in aggregate demand, owing to a number of factors,
including financial crisis, credit crunch caused by high interest rates, reduced
purchasing power due to high inflation and low income, decline in asset prices as
well as uncertainty and weak consumer and business confidence relating to
general economic conditions. During recessions, certain key macroeconomic
indices such as real GDP, investment spending, capacity utilization, househo ld
income and spending and business profits usually decline. As such, negative
trends such as bankruptcies, factory closures and unemployment rate tend to rise.
The Nigerian economy officially slipped into recession after the second quarter
2016 GDP dipped by -2.06 per cent. The growth rate was lower by 1.70
percentage points when compared with the contraction of 0.36 per cent
recorded in the preceding quarter and lower by 4.41 percentage points
compared with the growth rate of 2.35 per cent recorded in the corresponding
quarter of 2015. According to the National Bureau of Statistics (NBS), the Nigerian
economy recorded its lowest growth rate in three decades. Available statistics
indicate the Nigerian economy last had this magnitude of decline in 1987, when
the economy recorded consecutive declines of 0.51 per cent and 0.82 per cent in
first and second quarters, respectively. The recent dismal economic activity
generally reflected the sharp contraction in the oil sector, due to the combined
effects of lower crude oil prices owing to supply glut among OPEC members, and
low production arising from militancy and pipeline vandalism in the Niger Delta
region of the country.
Causes of the recession
Recession generally reflects the combined effects of a number of developments in
an economy. In Nigeria, the current recession was triggered primarily by the
persistent decline in crude oil prices. The low crude oil prices, which crashed to less
than $50 per barrel, added to Nigeria‟s production disruptions caused by militant
activities against oil infrastructure in the Niger Delta region. Oil production
dropped to 1.69 million barrels per day (mbpd) in the second quarter of 2016,
down from 2.11 mbpd in the first quarter, with oil GDP contracting by 17.5per cent
in the second quarter, compared with 1.9per cent in the first quarter. Over the


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years, the Nigerian government failed to build sufficient fiscal buffers. As crude oil
receipts fell due to low oil prices, monthly Federation revenue also fell, thereby
impacting the ability of the sub-national governments to meet their expenditure
obligations. Added to that was the lack of fiscal adjustment to the lower crude oil
prices. With a hugely significant government consumption expenditure in Nigeria,
a fall in government spending adversely affected consumer spending, as well as
funding of the real, and other growth-enhancing sectors of the economy.
The impact of the recession
Prior to NBS‟ announcement of the second quarter GDP contraction, the Nigerian
economy
manifested
a number of negative macroeconomic outcomes,
indicating the weakness of the economy. Banks and other companies began to
downsize, while twenty-seven (27) state governments could not pay the salaries of
their employees. Consequently, the total number of the unemployed increased
by 1,158,700 persons, resulting in an increase in the national unemployment rate to
13.3 per cent in Q2 2016, compared to 12.1 per cent in the preceding period and
10.4 per cent in the corresponding period of 2015. In the financial sector, a few
banks showed signs of stress following the depreciation of the Naira and rising nonperforming loans (NPL). The ratio of NPL to total credit rose to 11.7per cent against
the regulatory maximum of 5per cent at the end of June from 5.3per cent at the
end of 2015. Businesses recorded losses, with some foreign airlines exiting the
Nigerian aviation market due to high operating costs and weakening currency.
The Naira weakened by 38 per cent against the dollar since the Central Bank of
Nigeria (CBN) introduced greater flexibility to the foreign exchange regime in June
2016.


CBN Monetary Policy Review

CHAPTER 3

3.0
PRICE DEVELOPMENTS

n spite of the generally tight monetary
environment, inflationary pressure in
the domestic economy intensified in
the first half of 2016. All measures of
inflation, namely headline, core and
food inflation, trended upwards in the
review
period.
Headline
inflation
continued to breach the upper limit of
the Bank‟s benchmark of 6-9 per cent
during the period. Although both core
and
food
inflation
maintained
an
upward
trajectory,
food
inflation
stabilized towards the end of the second
quarter. The driving forces for these
price developments were both supply
and demand-related.

Developments in the foreign exchange
market resulted in significant volatility of
the
Naira,
leading
to
substantial
depreciation at both the interbank and
BDC segments of the market. The Bank
continued to implement a number of
policies and administrative measures
targeted at curbing excessive demand
pressure,
and
stemming
the
depreciation of the Naira, such as the
introduction of greater flexibility in the
inter-bank foreign exchange market. In
general,
the
depreciation
can
be
attributed to several factors, including
declining external reserves as a result of
low oil prices, amongst others.

In the money market, the Inter-Bank Call
and
Open
Buy
Back
(OBB)
rates
fluctuated
significantly,
reflecting
varying levels of liquidity in the banking
system
during
the
review
period.
Reduced borrowing from the money
market by the Federal Government, due
to the build-up in the Treasury Single
Account
(TSA),
resulted
in
excess
banking
system
liquidity.
Periods
of
liquidity shortage were due to the
combined effects of mopping by the
Bank as well as fiscal restraints.

3.1
Trends in Inflation

All measures of inflation maintained
upward trends in the first half of 2016. In
particular,
significant
increases
were
recorded in food and core measures of
this Consumer Price Index (CPI) between
January and June 2016. Both measures
rose from 187.9 and 178.2 in January to
205.4 and 198.3, in June respectively.
Food inflation (year-on-year) increased
from 10.6 per cent in January to 15.3 per
cent in June 2016. Similarly, core inflation
(year-on-year) rose progressively from
8.7 per cent in January to 16.2 per cent
in June 2016. This development resulted
in an increase in headline inflation (yearon-year) from 9.6 per cent in January to
16.5 per cent in July 2016 (Table 3.1and
Figure
3.1).
The
food
component
remained the key driver of headline
inflation due to its significant weight in
the consumer basket.

I


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Most
components
of
food inflation
continued their upward trend in the
review period, as was experienced in
the preceding half year. Farm produce
remained the major driver of food
inflation, increasing by 2.64 percentage
points to 8.04 per cent in June from 5.40
per cent in January 2016. Processed
food
component increased by 2.01
percentage points to 7.26 per cent in
June from 5.25 per cent in January.
Other components of food inflation that
recorded price increases included: fish
and sea foods (0.47 percentage point);
meat
(0.43
percentage
point);
vegetables
(0.32
percentage
point);
and Yam, potatoes & other tubers (0.22
percentage point).

Table 3.1
Inflation Rates, January – June 2016

Headline
Inflation

Core Inflation
Food Inflation

CPI
YonY

M
MA
CPI
Yon
-Y

M
MA
CPI
Yon
-Y

M
MA
Jan
-16

1.7

9.6

9.1

8.1

8.

8.3

7.9

.6
10.

Feb
-16

5.8

11.

9.3

3.0

.0

8.7

0.5

.4
10.

Ma
r-

9.9

12.

9.7

6.4

.1

9.1

4.8

.7
10.

Apr
-16

2.9

13.

10.

9.5

.3

9.6

7.4

.2
10.

Ma
y-

8.3

15.

10.

4.7

.0

10.

2.4

.9
11.

Jun
-16

1.7

16.

11.

8.2

.2

10.

5.3

.3
11.

Source: Nigerian National Bureau of
Statistics data base

Figure 3.1
Headline, Core and Food Inflation Rates (Jan - Jun
2016)

Source: Nigerian National Bureau of
Statistics database

3.1.1 Headline Inflation

The
rise
in
major
components
of
headline
inflation
continued,
as
reflected
in
the
upward
trend
in
domestic prices during the first half of
the
year.
Food
&
non-alcoholic
beverages remained the major driver of
headline inflation, rising from 5.61 per
cent in January to 8.07 per cent in June,
2016. This was followed by housing,
water, electricity, gas & other fuels,
which increased from 1.29 per cent to
4.19 per cent over the same period
(Table 3.2 and Figure 3.4). In general,
headline inflation increased as a result
of the combined effects of the increase
in the prices of food & non-alcoholic
beverages, electricity and other energy
sources as well as cost of imported
products.

Inflationary pressure witnessed during
the period was attributed to several

P
e
r
c
e
n
t

Headline
Core
Food


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factors,
including
the
increase
in
electricity tariff and the removal of
subsidy on petroleum products which
increased domestic costs. In addition,
the pass-through to domestic prices
from the depreciation of the naira at the
interbank
and
parallel
markets
heightened inflationary pressure. Other
factors
included
the
impact
of
disruptions to the food supply chain due
to insurgency in the north east region of
the country as well as uncertainties
surrounding
the
delayed
implementation
of
the

fiscal
budget which impacted adversely on
business confidence, economic activity
and price expectations.

Table 3.2
Major Components of Headline Inflation (Y-on-Y),
January-June 2016


Figure 3.2
Major Components of Headline Inflation (Y-on-Y),
Jan-Jun 2016


On a month-on-month basis, headline
inflation fluctuated, rising from 0.87 per
cent in January to peak at 2.75 per cent
in May and close at 1.71 per cent in
June,
2016.
The
major
components
accounting for the increase were the
prices
of
food
&
non-alcoholic
beverages, which fluctuated between
0.49 and 1.35 per cent; and housing,
water, electricity, gas & other fuels,
which also fluctuated between 0.11 and
1.14 per cent (Table 3.3 and Figure 3.5).

Table 3.3
Major Components of Headline Inflation (M-on-M),
January-June 2016

Date
Headline
Food &
NonAlchoholic
Bev
Housing,
Water.
Elect.
Gas &
Other
Fuel
Clothing
&
Footwear Transport
Furnishings,
Household,
Equip and
HH Maint. Education
Jan '16

Feb '16

Mar '16

April '16

May '16

Jun '16

Date
Headline
Food &
NonAlchoholic
Bev
Housing,
Water.
Elect.
Gas &
Other
Fuel
Clothing
&
Footwear Transport
Furnishings,
Household,
Equip and
HH Maint. Education
Jan '16

Feb '16

Mar '16

April '16

May '16

Jun '16


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Figure 3.3
Major Components of Headline Inflation (M-on-M),
Jan-Jun 2016


3.1.2 Food Inflation

Food
inflation
(year-on-year)
maintained
an
upward
trajectory,
trending from 10.64 per cent in January
to 15.30 per cent in June 2016, an
increase of 4.66 percentage points. This
was largely attributed to increases in the
prices of its components: processed
food and farm produce. The price of
processed food rose from 5.25 to 7.26
per cent, while that of farm produce
also rose from 5.40 to 8.04 per cent
between January and June 2016. Of the
4.66 percentage point increase in food
inflation, farm produce contributed a
higher share of 2.25 percentage points
compared with processed food (1.70
percentage
points).
Food
supply
shortages due to the displacement of
farmers by insurgency, rising fuel and
transport costs as well as the incidence
of
plant
diseases
may
have
been
responsible for the development (Table
3.4 and Figure 3.6).

Table 3.4
Major Components of Food Inflation (Y-on-Y),
January - June 2016
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Change Jan
- Jun
Food

Processed Food

Farm Produce

Yams, Potatoes$Other Tubers

Meat

Vegetables

Fish & Sea Food

Figure 3.4
Major Components of Food Inflation
(Y-on-Y), Jan - Jun 2016

On
a
month-on-month
basis,
food
inflation increased from 1.00 per cent in
January to 1.44 per cent in June 2016,
moving in the same direction as the
year-on-year trend, but with a smaller
rise of 0.44 percentage point compared
with 4.66 percentage points year-on–
year.
The
price
of
processed
food
increased from 0.50 to 0.54 per cent,
while farm produce rose from 0.50 to
0.90 per cent between January and
June. Thus, the 0.44 percentage point
increase in food inflation during the


CBN Monetary Policy Review

period was contributed by the two
components
–
farm
produce
(0.40
percentage point) and processed food
(0.04 percentage point). Within the farm
produce category, the major increases
came from yams, potatos & other tubers
(0.08 percentage point), meat (0.06
percentage point) and fish & sea food
(0.06
percentage point), respectively
(Table 3.5 and Figure 3.7).
Table 3.5
Major Components of Food Inflation (M-on-M),
January -June 2016


Figure 3.5
Major Components of Food Inflation (M-on-M), Jan
- Jun 2016


3.1.3 Core Inflation

Core inflation (year-on-year) trended
upwards from 8.8 per cent in January to
16.2 per cent in June 2016, reflecting an
increase of 7.3 percentage points. The
increase was largely accounted for by
housing, water, elect., gas & other fuel
(4.02
percentage
points),
processed
food (1.43 percentage points), clothing
& foot wear (0.57 percentage point),
Transport (0.52 percentage point) and
furnishings,
household
equipment
maintenance (0.32 percentage points).
All
components
of
core
inflation
increased except restaurant and hotels
which declined by 0.01 percentage
point (Table 3.6 and Figure 3.8). The
increase in core inflation was largely
due to the removal of petroleum subsidy
as well as the depreciation of the Naira,
which
fed
into
higher
prices
and
pressured household spending.

Table 3.6
Major Components of Core Inflation
(Y-on-Y) January- June 2016


Jan.16
Feb.16
Mar.16
Apr.16
May.16
Jun.16
Change
Jan -
June

Food

Processed Food

Farm Produce

Yams, Potatoes & Other Tubers

Meat

Vegetables

Fish & Sea Food

YEAR-ON-YEAR (CORE)
Weights
J an-16
Feb-16
Mar-16
Apr-16
May-16
J un-16
Change btw Jan. to
Jun. 2016
ALL ITEMS LESS FARM
PRODUCE CPI

Processed Food

Milk,Cheese & Eggs

Sugar,Jam,Honey,etc

Non-Alcoholic Beverages

Alcoholic Bev. Tobacco & Kola

Clothing & footwear

Housing,Water, Elect.Gas &
Other Fuel

Furnishings, Household Equip
&HH Maint.

Health

Transport

Communication

Recreation & culture

Education

Restaurant & Hotels

Miscellaneous Goods &
Services


CBN Monetary Policy Review

Figure 3.6
Major Components of Core Inflation
(Y-on-Y) January-June 2016


Core inflation, on a month-on-month
basis, rose by 0.99 percentage point
from 0.84 per cent in January to 1.83 per
cent in June 2016. Housing, water,
electricity gas & other fuel remained the
major driver of core inflation, increasing
from 0.15 per cent in January to 0.65 per
cent in June. This was followed by
processed food, which increased from
0.31 per cent in January to 0.51 per cent
in June. Clothing and footwear also
increased from 0.09 per cent in January
to 0.21 per cent in June 2016. Similarly,
transport increased from 0.09 per cent in
January to 0.19 per cent in June (Table
3.7 and Figure 3.9).


Table 3.7
Major Components of Core Inflation
(M-on-M) January- July 2016


Figure 3.7
Major Components of Core Inflation
(M-on-M) January-July 2016


3.1.4 Seasonally-Adjusted Inflation

Both
the
actual
and
seasonallyadjusted measures of headline inflation
trended upwards in the first half of 2016
(Table
3.8
and Figure 3.10). Actual
headline inflation extended its upward
trajectory during the period, reflecting
the general increase in domestic prices.
MONTH-ON-MONTH (CORE)
Weight
J an-16
Feb-16
Mar-16
Apr-16
May-16
J un-16
Change btw Jan. to
Jun. 2016
ALL ITEMS LESS FARM
PRODUCE CPI

Processed Food

Milk,Cheese & Eggs

Sugar,Jam,Honey,etc

Non-Alcoholic Beverages

Alcoholic Bev. Tobacco & Kola 10.87

Clothing & footwear

Housing,Water, Elect.Gas &
Other Fuel

Furnishings, Household Equip
&HH Maint.

Health

Transport

Communication

Recreation & culture

Education

Restaurant & Hotels

Miscellaneous Goods &
Services


CBN Monetary Policy Review

In the review period, the seasonallyadjusted
headline
inflation
rate
remained
below
actual
headline
inflation. This was an indication that
seasonality impacted inflation positively
in the first half of the year. The upward
trend in both the actual and seasonallyadjusted measures was primarily due to
the removal of petroleum subsidy as well
as the increase in electricity tariff. Other
factors were the significant pass-through
of the depreciation of the Naira to
domestic prices and the uncertainties
surrounding
the
late
passage
and
implementation of the 2016 budget.

Table 3.8
Actual and Seasonally Adjusted Headline Inflation
Jan -June 2016
Date
Inflation
S-A Inflation
Jan.16
9.60
9.53
Feb.16
11.40
10.20
Mar.16
12.80
11.27
Apr.16
13.70
12.63
May.16
15.60
14.03
Jun.16
16.50
15.27


Figure 3.8
Actual and Seasonally Adjusted Headline Inflation
January - June 2016


3.2
Key
Factors
that
Influenced
Domestic Prices

In the first half of 2016, the general
upward movements in all measures of
inflation reflected the combined effects
of
both
demand-
and
supply-side
factors.
These
factors
included
the
removal
of
subsidy
on
petroleum
products which resulted in the increase
of the official pump price of PMS; the
introduction of greater flexibility in the
foreign exchange market resulting in
increased costs of imported goods;
increase in electricity and energy tariff;
liquidity implications of the bailout of
state governments; the impact of festive
and other seasonal effects; the tomato
epidemic as well as the disruption to the
food supply chain by insurgency in the
North East.


Percent
Inflation
SA Inflation


CBN Monetary Policy Review

3.2.1 Demand-side Factors

Despite
the Bank‟s tight monetary
policy in the review period, a number of
demand-side factors exerted upward
pressure on domestic price levels. A
major
demand-side
factor
which
significantly influenced prices was the
strong pass-through of the depreciation
of
the Naira.
This was caused by
demand pressure, accentuated by the
recent introduction of greater flexibility
in the foreign exchange market. The
depreciation of the Naira thus exerted
significant pressure on consumer prices.
In addition, the bailout of sub-national
governments
and
the
associated
increase in aggregate demand exerted
further pressure on prices. Also, spending
related to Christian and Muslim festivities
further influenced domestic prices.

3.2.2 Supply-side Factors

The removal of subsidy on petroleum
products, resulting in the increase of the
official pump price of PMS, coupled with
the increase in electricity and energy
tariffs were the major supply-side factors
in the review period. These factors
contributed significantly to domestic
and business costs, exerting upward
pressure
on
domestic
price
levels.
Despite the success so far recorded in
tackling insurgency in the North East,
attacks against soft targets remained,
causing disruptions to the food supply
chain. In addition, the onset of the
planting season, along with the tomato
epidemic in the later part of the review
period, affected food supply.

3.2.3 Moderating Factors

In the first half of 2016, domestic price
developments were moderated by a
number of factors. On the demand-side,
the Bank adopted a tight monetary
policy stance by increasing the MPR
and CRR to manage banking system
liquidity. In addition, there was a general
reduction in government spending due
to lower oil receipts, delayed passage
and implementation of the 2016 Federal
Government budget as well as the nonpayment of salaries by sub-national
governments. The full implementation of
the TSA which led to the withdrawal of
government funds from the banking
system
also
moderated
demand
pressure. On the supply-side, the effects
of the recent reforms in the foreign
exchange market, expected to reduce
the supply gap as well as the persisting
low
inflation
in
the
advanced
economies
continued
to
moderate
domestic prices.


CBN Monetary Policy Review

CHAPTER FOUR

4.0
MONETARY
POLICY
AND
LIQUIDITY MANAGEMENT

onetary policy in the first half of

remained
challenging
following developments in the
global
and
domestic
economic
and
financial
environment. On the global front, the
key
challenges
were the continued
rebalancing of the Chinese economy
and the associated financial market
volatility, the buildup of uncertainties
surrounding the British referendum to exit
the
European
Union
(Brexit)
and
deepening
deflation in Europe and
Japan. Others included deep recession
in
Russia
and
Brazil,
widening
divergence
in
monetary
policies
of
some major advanced economies due
to the expectation of further rate hikes
by the US Federal Reserve Bank and
sustained
softness
in
oil and other
commodity prices. These developments
led to persistent tepid recovery in global
output and sluggish global trade.

On the domestic front, monetary policy
was
significantly
influenced
by
the
removal of petroleum subsidy as well as
the increase in electricity tariff. Other
factors were the reform towards greater
flexibility
in
the
foreign
exchange
market,
which
led
to
substantial
depreciation of the exchange rate,
generating a significant pass-through to
domestic
prices.
In
addition,
the
uncertainty
surrounding
the
late
passage and implementation of the
2016 budget impacted adversely on
business confidence and investment.
The low crude oil prices manifested in
the domestic economy as low foreign
exchange
receipts
and revenue for
government,
leading
to
low
fiscal
activities
and
foreign
exchange
shortages.
The
net
effect
of
these
developments was that the economy
slipped into recession during the first half
of 2016. These challenges and the need
to rapidly restart growth under an
environment of stable prices provided
the
context
for
monetary
policy
decisions and actions in the review
period.

4.1
Decisions of the Monetary Policy
Committee (MPC)

In the first half of 2016, decisions of the
Monetary Policy Committee (MPC) were
shaped by key global and domestic
developments.
The
global
developments were the divergence in
monetary policy between the US and
the Euro Area and Japan; sluggish
recovery
of
the
global
economy;
weakening macroeconomic conditions
in China; softening crude oil and other
commodity prices; and the gradual
normalization of the US monetary policy.
Other global issues included the threat
of
deflation
in
some
advanced
economies;
tight
external
financial
conditions, deteriorating global trade
and geopolitical tensions.
M


CBN Monetary Policy Review

On
the
domestic
front,
the
major
concerns were low accretion to external
reserves leading to pressures on the
exchange rate, declining oil revenue
from lower crude oil prices; persistent
liquidity surfeit in the banking system and
high costs of liquidity management;
perennial
shortage
of
petroleum
products and heightened inflationary
pressures as well as security challenges
in some parts of the country.

4.1.1
January 2016 MPC Meeting

The
January

MPC
meeting
reviewed the weakening international
economic environment and the fragile
prospects for global recovery with the
increasing
spillover
of
risks
to
the
domestic economy.

On the external front, the key challenges
were
widespread
stock
market
weakness
and
worsening
macroeconomic conditions in China
which exacerbated the already slow
global economic recovery; increased
uncertainties and geopolitical tensions in
the international crude oil market likely
to
prolong
the
prospects
of
price
recovery;
and
feeble
response
to
monetary and fiscal stimuli in some
major
advanced
economies.
Also,
growth in the emerging market and
developing
economies
remained
challenged by low commodity prices,
slowing productivity, weak global trade,
financial market volatility and policy
uncertainty, which were eroding policy
buffers.

At the domestic front, the Committee
noted that the economy grew by 2.84
per cent in the third quarter of 2015, up
from
2.35 per cent in the second
quarter. The economy was expected to
continue on its moderate growth path in
the first quarter of 2016, predicated on
current low global oil prices projected to
hold over the medium-to long term. The
downside risks to growth in 2016 were
identified
as:
declining
government
revenue and foreign exchange receipts,
capital flow reversals, high lending rates,
sluggish credit to private sector and
bearish trends in the equities market. In
terms
of
price
developments,
the
Committee observed the slight uptick in
year-on-year headline inflation to 9.6
per cent in December, from 9.4 per cent
in November 2015. The observed price
development
was
in
spite
of
key
monetary aggregates performing below
their benchmarks. The MPC noted that
growth
in
aggregate
credit
mainly
reflected
credit
to
the
Federal
Government, which grew by 151.56 per
cent
in
December
2015,
partly
attributable to the need for borrowing to
implement
the

supplementary
budget. Other concerns expressed by
the Committee included the bearish
movement in the equities segment of
the
capital
market,
prevailing
low
money
market
interest
rates
and
activities in the informal segment of the
foreign exchange market, which led to


CBN Monetary Policy Review

the stoppage of dollar sales to BDCs.
The
Committee
underscored
the
necessity of improving the supply of
foreign
exchange
to
the
market,
especially from autonomous sources.
Accordingly, the Bank is fine-tuning the
framework
for
foreign
exchange
management with a view to ensuring a
more
effective
and
liquid
foreign
exchange market.

In its considerations, the Committee was
of the view that given sound and
properly coordinated monetary, fiscal,
and external sector policies, there was
room for optimism about the medium to
long term macroeconomic prospects for
the Nigerian economy, given the clarity
in
the
policy
direction
of
the
administration. It acknowledged the
continuous
banking
system
liquidity
surfeit stemming partly from the recent
growth-stimulating
monetary
policy
measures, as well as the tendency of the
banks
to
invest
excess
reserves
in
government
securities,
rather
than
channel credit to the real economy. In
this regard, the MPC urged deposit
money banks (DMBs) to improve lending
to the real economy, as part of their
patriotic obligations to the country and
enjoined the CBN to continue to explore
ways
of
incentivizing
lending
to
employment-
and
growth-generating
sectors. It further noted that given the
current realities of dwindling oil revenue
and the unclear outlook for commodity
prices, there would be need for a
recalibration of the fiscal strategy to
explore
opportunities
in
non-oil
tax
revenue.

In consideration of the headwinds in the
domestic
economy
and
the
uncertainties in the global environment
as well as the need to allow previous
policy measures to fully work through the
economy,
the
MPC
decided
unanimously to retain: the Monetary
Policy Rate (MPR) at 11.0 per cent, Cash
Reserve Requirement (CRR) at 20.0 per
cent, Liquidity Ratio (LR) at 30.0 per cent
and the asymmetric corridor of +200
basis points and -700 basis points around
the MPR.

4.1.2
March 2016 MPC Meeting

The
March

Monetary
Policy
Committee held within the context of
uncertain global economic prospects
and
continuing
challenges
in
the
domestic economy. Accordingly, the
Committee appraised the international
and domestic economic and financial
environments in the first two months of
2016 as well as the outlook for the rest of
the year.

Persistence
of
decelerating
growth
remained
a
key
challenge
on the
external
front.
The
deceleration
stemmed from the continuous slowdown
of growth in the emerging market
economies, worsened by deteriorating
conditions in the Euro area and China as
well
as
key
emerging
market
economies.
In
addition,
the


CBN Monetary Policy Review

normalization of monetary policy in the
US, depressed global oil market and
persistently
weakened
global
aggregate demand continued to exert
pressure on global financial markets.
Downside risks to growth prospects in
the
in
the
Emerging
Market
Development
Economies
(EMDEs)
include low commodity prices, troubled
financial markets, tepid global demand,
policy uncertainty as well as feeble
global trade. Others are diminished
capital inflows, rising borrowing costs
and geopolitical factors.

At the domestic front, growth remained
subdued, with GDP growing by 2.11 per
cent
in
the
last
quarter
of
2015,
compared with 2.84 per cent in the third
quarter
and
5.94
per
cent
in the
corresponding
period
of
2014.
The
Committee noted that the tepid growth
performance was in spite of the Bank‟s
accommodative monetary policy since
July 2015 in the hope of addressing
growth concerns in the economy, by
lowering
both
CRR
and
MPR.
Notwithstanding,
DMBs
remained
cautious in lending, and did not grant
credit as envisaged, preferring to build
liquidity
profiles
in
anticipation
of
government borrowing. Moreover, the
delay in passage of the 2016 Budget
further
accentuated
the
difficult
financial condition of economic agents
as output continued to decline due to
low investment and weak demand.

The Committee identified the downside
risks
to
growth
to
include
fiscal
uncertainties,
fuel scarcity, increased
energy tariffs, foreign exchange scarcity
as well as slow growth in credit to
private sector in preference to high
credit growth to the public sector. Given
that many of these factors are structural
and outside the purview of monetary
policy,
the
Committee
advocated
complementary
fiscal
and
structural
policies as essential for reinvigorating
growth.

In terms of price developments, the
Committee observed that year-on-year
headline inflation increased markedly to
11.38 per cent in February 2016, from
9.62 per cent in January and 9.55 per
cent
in
December,
2015,
reflecting
increases
in
both
food
and
core
components
of
inflation.
The
rising
inflationary
pressure
was
traced
to
mainly structural factors, such as the
lingering scarcity of refined petroleum
products, exchange rate pass through
from imported goods, seasonal factors
and increase in electricity tariff. The
Committee was also concerned about
the dismal performance of growth in
credit to the private sector, in spite of
growth in broad money aggregates,
noting that even at that, credit went
primarily to low employment intensive
sectors of the economy.

The
Committee
expressed
concerns
over the reluctance of deposit money
banks to grant new credit despite the


CBN Monetary Policy Review

observed liquidity surfeit in the banking
system. This was traced to the rising
incidence
of
non-performing
loans
(NPLs), mainly in the oil sector. While the
average Naira exchange rate remained
stable at the inter-bank segment of the
foreign exchange market, the MPC was
concerned that activities in the foreign
exchange
market
remained
overshadowed by speculative demand,
hence the need to speed up reforms of
the
market
to
improve
certainty,
eliminate
noise
and
arbitrage
opportunities.

The Committee was worried that the
conflicting signals from slowing growth
and rising inflation presented a daunting
challenge to policy. While being mindful
of the limitations of monetary policy in
influencing the drivers of the current
tepid growth and price spiral, the MPC
stressed the need to urgently address
the
key
structural
sources
of
the
pressures. In this regard, the Committee
reaffirmed its commitment to closely
monitor
developments
while
encouraging
relevant
authorities
to
address the structural bottlenecks.

The MPC equally noted that excess
liquidity in the banking system was
contributing to the current pressure in
the foreign exchange market with a
strong pass-through to consumer prices.
The surfeit of liquidity in the interbank
market emanated from previous efforts
to reflate the economy in order to spur
growth, which did not elicit the required
response from DMBs, hence the need for
the Bank to explore innovative ways of
ensuring the unhindered flow of credit to
key growth sectors of the economy.

The Committee, in its assessment of
relevant internal and external indices,
concluded that the balance of risks was
tilted against price stability. The MPC
therefore, voted to tighten the stance of
monetary
policy.
Consequently,
the
MPC decided to: raise MPR by 100 basis
points from 11.00 per cent to 12.00 per
cent; raise CRR by 250 basis points from
20.00 to 22.50 per cent; retain Liquidity
Ratio at 30.00 per cent; and narrow the
asymmetric corridor from +200 and -700
basis points to +200 and -500 basis
points.

4.1.3
May 2016 MPC Meeting

The May 2016 MPC was held against a
backdrop of challenging global and
domestic
economic
and
financial
conditions.

On the external front, continued decline
in
global
output
remained
a
key
challenge to monetary policy. Prospects
for global growth recovery remained
weak as weaknesses in major EMDEs,
including adverse commodity prices,
low capital inflows, rising costs of funds
and
continuing
geopolitical
factors
continued to provide strong headwinds
against growth.


CBN Monetary Policy Review

At the domestic front, the economy
witnessed the first negative growth in
many years, contracting by 0.36 per
cent in Q1, 2016. This represents a drop
of 2.47 percentage points in output from
the 2.11 per cent reported in the last
quarter of 2015, and 4.32 percentage
point lower than the 3.96 per cent
recorded in the corresponding period of
2015. The Committee noted that the
contraction in growth performance was
due to severe shocks suffered by the
economy from factors related to energy
shortages and price hikes, scarcity of
foreign
exchange
and
depressed
consumer demand, among others. In
addition to these, the prolonged budget
impasse denied the economy the timely
intervention of complementary fiscal
policy to stimulate economic activity in
the face of dwindling foreign capital
inflows. The Committee noted a further
increase
in
year-on-year
headline
inflation to 12.77 per cent and 13.72
percent
in
March
and
April
2016,
respectively, from 11.38 per cent in
February
2016. The rising inflationary
pressure was traced to key monetary
aggregates
performing
above
their
benchmarks and being accentuated by
other legacy factors including energy
crisis reflected in incessant scarcity of
refined petroleum products, exchange
rate pass through from imported goods,
high cost of electricity, high transport
cost, reduction in food output, high cost
of inputs and low industrial output.

The Committee observed with concern,
the continuous dismal performance of
growth in credit to the private sector,
noting that in spite of the Bank‟s efforts,
DMBs continued to direct credit largely
to low employment elastic sectors of the
economy, a phenomenon that had
significantly
contributed
to the low
performance
of
the
economy.
The
Committee
interrogated
the
issues
around the existing foreign exchange
market regime, tracing them to the low
foreign
exchange
earnings
of
the
economy. In the Committee‟s opinion,
the key issue remained how to increase
the supply of foreign exchange to the
economy.
Accordingly,
the
MPC
decided that the Bank should embrace
some level of flexibility in the foreign
exchange market and directed the
Bank to work out the modalities and
timeline for implementation of the new
framework.

The
Committee
conducted
the risk
assessment
and
concluded
that
although, the balance of risks was tilted
against
growth,
previous
decisions
needed
time
to
crystallize.
Consequently, in a period of stagflation,
policy options are very limited. To avoid
complicating economic conditions, the
Committee decided on the least risky
option
which
was
to
“hold”.
Consequently,
the
MPC
voted
unanimously to adopt greater flexibility
in exchange rate policy to restore the
automatic adjustment properties of the
exchange rate.


CBN Monetary Policy Review

The MPC decided to retain: the MPR at
12.00 per cent; the CRR at 22.50 per
cent; the Liquidity Ratio at 30.00 per
cent; and the asymmetric Window at
+200 and -500 basis points around the
MPR.

4.2
Instruments
of
Liquidity
Management

During the review period, the Bank
deployed various instruments in the
conduct of monetary policy to achieve
the
objectives
of
price
and
macroeconomic
stability.
The
key
instruments were the Monetary Policy
Rate (MPR), the Cash Reserve Ratio
(CRR), Open Market Operations (OMO)
and
Discount
Window
Operations,
supported by foreign exchange market
interventions.

4.2.1 Monetary Policy Rate (MPR)

The MPR continued to be the main
instrument for monetary management in
the review period. The MPR, which was
11.0 per cent in January 2016, was
reviewed upwards by 100 basis points to
12.0
per
cent
in
March
2016.
The
asymmetric corridor around the MPR
was also adjusted to +200 and -500 basis
points from +200 and -700 basis points.
The
adjustments
were
intended
essentially to reduce the excess liquidity
in
the
banking
system
that
was
contributing
to the pressure in the
foreign exchange market, culminating in
a
strong
pass-through to consumer
prices.

4.2.2 Open Market Operations (OMO)

Contrary to what was witnessed in the
second half of 2015, the Bank increased
its reliance on Open Market Operations
(OMO) as the main tool for managing
banking system liquidity in the first half of
2016. As a result, actual OMO sales
increased by 34.47 per cent to N2,329.75
billion in the first half of 2016 from
N1,732.55 billion in the second half of
2015. This was targeted at moderating
the level of liquidity in the banking
system in order to stem inflationary
pressure.
On
a
year-on-year
basis,
however,
OMO
sales
decreased
by
45.33 per cent below the level in the first
half of 2015 (Table 4.1).


CBN Monetary Policy Review

Table 4.1
OMO Bills Auction (January 2015 – June 2016)
(N’million)
Date

%
Change
Jan
1,295.88
698.42

Feb
217.33
509.23

Mar
543.86
394.63

Apr
933.74
363.72

May
524.54
64.63

Jun
746.37
299.12

1st Half
4,261.72
2,329.75
-45.33
Jul
366.87


Aug
257.61


Sep
315.35


Oct
265.25


Nov
242.9


Dec
284.57


2nd Half
1,732.55


Cumulative
Figure
4,261.72


Source: Financial Market Department

Figure 4.1
OMO Sales (January - June 2016)


4.2.3 Reserve Requirements

In
the
review
period,
the
Bank
deployed
the
CRR
as
a
macroprudential and liquidity management
tool to complement the MPR and OMO
as instruments of monetary policy. The
Monetary Policy Committee reviewed
the CRR upwards to 22.5 per cent from
20.0 per cent. This policy measure was
intended to address the excess liquidity
in the banking system arising from DMBs
cautious approach to lending, owing to
the rising incidence of non-performing
loans (NPLs), especially in the oil sector.
The liquidity ratio remained unchanged
at 30.0 per cent in the first half of 2016.

4.2.4 Standing Facilities

The Bank continued to use the standing
facilities (lending/deposit) window to
meet
daily
liquidity requirements of
DMBs and a Discount House (DH) during
the
period
under
review.
The
asymmetric corridor of +200/-700 basis
points was narrowed to +200/-500 basis
points around the MPR during the MPC
meeting in March 2016. The requests for
standing lending facility (SLF) increased
significantly
by
44.49
per
cent
to
N5,137.66 billion in the first half of 2016
from N3,555.62 billion in the second half
of 2015. The volume of SLF increased by
104.28 per cent (year-on-year) at endJune 2016 compared with N2,515.05
billion in the corresponding period of
2015 (Table 4.2).

N'Billion
OMO Sales


CBN Monetary Policy Review

In contrast to the volume of demand at
the SLF window, total deposits at the SDF
window decreased by 0.85 per cent to
N13,112.23 billion in the first half of 2016
from N13,224.91 billion in the second half
of 2015. This, however, represented an
increase of 41.64 per cent compared
with N9,257.46 in the corresponding
period
of

(Table
4.3).
The
transactions at the two windows resulted
in a net deposit of N7,974.57 billion in the
second half of 2016. This development
was
associated
with
the
sustained
liquidity overhang in the banking system
and the DMBs‟ cautious approach to
lending during the review period.

Table 4.2
CBN Standing Lending Facility (January 2015 –
June 2016) (N’billion)
Date

% Change
Jan
104.75
84.26

Feb
922.28
4.11

Mar
541.13
474.75

Apr
529.77
942.66

May
229.36
869.52

Jun
187.76
2,762.36

1st Half
2,515.05
5,137.66
104.28
Jul
48.75


Aug
1,415.06


Sep
1,154.96


Oct
667.62


Nov
207.39


Dec
61.84


2nd Half
3,555.62
113.68


Total
6,070.67


Source: Financial Market Department


Figure 4.2
Standing Lending Facility (January - June 2016)


Table 4.3
CBN Standing Deposit Facility (January 2015 – June
2016) (N’billion)
Date

%
Change
Jan
2,562.15

2,369.31

Feb
862.15

2,553.89

Mar
1,298.46

1,635.43

Apr
864.11

2,971.33

May
1,958.72

1,760.02

Jun
1,711.87

1,822.25

1st Half
9,257.46

13,112.23

41.64
Jul
2,005.52


Aug
752.78


Sep
1,928.37


Oct
2,625.93


Nov
3,035.04


Dec
2,877.27


2nd Half
13,224.91


Total
9,257.46


Source: Financial Market Department

N'Billion
SLF


CBN Monetary Policy Review

Figure 4.3
Standing Deposit Facility (January - June 2016)


4.2.5 Foreign Exchange Intervention
In the first half of 2016, the Bank
introduced
greater
flexibility
in
the
foreign exchange market to improve
liquidity, transparency and efficiency all
aimed at easing pressure on the Naira.
The Bank adopted a single market
structure for the implementation of the
new
policy
measure,
with
CBN
participating either directly in the interbank market or through a dynamic
secondary market mechanism. In order
to
deepen
the
market,
the
Bank
introduced the Naira-Settled Over-TheCounter (OTC) FX Futures Market, where
contracts are agreed between parties
for
an
exchange
rate
at
a
predetermined future date without the
obligation to deliver the underlying US
dollar
(notional
amount)
on
the
settlement date. In addition, the Bank
introduced
the
FX
Primary
Dealers
(FXPDs)
system
to
improve
the
effectiveness of CBN interventions to
boost market liquidity. The Authorized
Dealers
were
accorded
access
to
transact FX products directly with the
CBN.

In the review period, total supply of
foreign exchange declined by 58.99 per
cent to US$5,731.40 million in the first half
of 2016 from US$13,974.24 million in the
corresponding period of 2015. This also
represented a decline of 47.26 per cent
compared with US$10,867.47 million in
the second half of 2015 (Table 4.4). The
significant decrease in the supply of
foreign exchange was largely due to
lower accretion to external reserves
caused by the dwindling oil receipts and
reduced
capital
inflows.
The
Bank,
however,
introduced
a
number
of
administrative measures to moderate
speculation in the foreign exchange
market, restore investor confidence and
stem the depletion of external reserves.
The measures were the suspension of the
Bank‟s
funding
of
BDCs
and
the
directive
to
DMBs
to
accept cash
deposits into domiciliary accounts.

Table 4.4
Foreign Exchange Supply by the CBN (US$ Million)

N'Billion
SDF

Sales to rDAS
Sales to interbank
Sales to BDC
Total
Supply
(rDAS+inte
rbank +
BDC)
Jan
1,987.40

N/a
184.70

2,172.10

973.57

Feb
1,197.10

2,334.90

371.40

3,903.40

895.77

Mar
1,866.10

301.60

2167.7
1,093.05

Apr
1,375.70

370.40

1746.1
727.69

May
1,856.60

309.90

2166.5
617.50

Jun
1,448.50

369.97

1818.47
1,423.81

1st Half
3,184.50

8,881.80

1,907.97

13,974.27

5,731.40

Jul
1,801.97

399.99

2,201.96

Aug
1,694.74

385.51

2,080.25

Sep
1,348.02

485.04

1,833.06

Oct
1,220.96

530.09

1,751.05

Nov
1,545.21

330.74

1,875.95

Dec
1,018.88

106.32

1,125.20

2nd Half
-

8,629.78

2,237.69

10,867.47

Total
3,184.50

17,511.58

4,145.66

24,841.74

CBN Monetary Policy Review

Figure 4.4
Foreign Exchange Sales (January - June 2016)


Dollars
Foreign Exchange Sales


CBN Monetary Policy Review

The New Flexible Exchange Rate Regime in Nigeria
Exchange rate regimes can be represented according to the degree of fixity of
exchange rates. Using this as a yardstick, exchange rate regimes can be
characterized on a spectrum that constitutes hard pegs (currency union,
dollarization, and currency board), conventional fixed peg, intermediate regimes
(band, basket peg, and crawling peg), managed floating, and independent
floating. Prior to the announcement of the new flexible exchange rate regime,
CBN had operated a managed floating exchange rate regime.
Exchange rate management by the CBN was challenged by the steep decline in
foreign currency earnings, occasioned by the continuing fall in global oil prices
and accentuated by the spates of militancy in the oil-rich Niger Delta. The CBN
had instituted series of exchange rate management measures. First, in November
2014, the peg was removed from about from about 160 to 176 to the US$. This was
again followed in February 2015 with the suspension of the dollar auction system
and a further devaluation to N196.5 per US$ at the interbank segment. The Naira
devaluation could not ease the pressure on the foreign exchange market,
necessitating further administrative measures aimed at sustaining the currency
stability.
In April 2015, relying on Section 20 of the CBN Act (2007) the Bank issued a circular
prohibiting pricing of goods and services in any other currency besides the Naira
with the exemptions of certain organizations, including revenue agencies,
operators in the oil and gas industry, maritime, aviation and operators in the free
trade zones. Further administrative measures included the exclusion of a list of 41
prohibited items by the CBN circular of 30 June, 2015 from eligibility in accessing
foreign exchange in the Nigerian foreign exchange market i.e. through interbank,
exports proceeds and Bureau de Change (BDC). These measures were aimed at
encouraging local production and to preserve the dwindling foreign reserves.
The periods leading to the MPC meeting of May 2016 had signposted the
unsustainability of the exchange rate managemnt regime in Nigeria. The
attenuating earnings of foreign reserves had put enormous pressures on foreign
exchange management, with the attendant uncertainties about investments
prospects in the economy, particularly on the part of savvy foreign investors. In
addition, the widening gaps between the official and parallel markets rates
increased rent-seeking and price arbitrage tendencies that undermined the
managed floating regime. It was against the foregoing background that the
Monetary Policy Committee of May 2016 undertook reforms to engender greater


CBN Monetary Policy Review

flexibility and transparency in the operation and management of the inter-bank
foreign exchange transactions by introducing greater flexibility to the market. A
flexible market allows a free float of the exchange rate, a mechanism that
enables the Naira find its equilibrium with minimal intervention from the monetary
authority.
On 15th June 2016, guidelines for the implementation of the new flexible
exchange rate regime was published by the CBN. The guidelines made provision
for a single Inter-Bank Foreign Exchange Market structure with the CBN
participating in the market through interventions, either directly in the inter-bank
market or through dynamic Secondary Market Intervention Mechanisms.
The guidelines made provisions for the appointment and registration of foreign
exchange (FX) Primary Dealers (FXPDs) which would deal with the CBN on twoway quote basis for large trade FX transactions. Participants in the inter-bank FX
market would include Authorised Dealers, Authorised Buyers, Oil Companies, Oil
Service Companies, Exporters, End-users and any other entity the CBN may
designate from time to time. Transanctions in the FX market among participants
would be on a two-way quote basis via the financial market dealers quotations
(FMDQ) Thomson Reuters FX Trading Systems or any other system approved by the
CBN. In addition a futures market that enables buyers and sellers to hedge by
locking in current prices for future sale was also introduced.
While the implementation of the new flexible exchange rate regime portends
greater transparency and efficiency in the management of scarce foreign
reserves, the challenge of adequate supply to the market remained daunting, as
the CBN continued to be the major source of supply to the market. Uncertainties
and risk perceptions of the market by investors remained high, delaying the much
anticipated foreign inflows from manifesting. The situation was further worsened by
depleting foreign reserve earnings, accentuated by production disruptions and
restiveness in the Niger Delta region. Another challenge to the operation of the
new regime is the existence and widening gap between the interbank and
parallel market rates, contrary to a single market structure expected under a fully
flexible regime. This still provides incentives for arbitrage and rent seeking activities.


CBN Monetary Policy Review

4.3
Developments
in
Monetary
Aggregates

In the first half of 2016, monetary
aggregates generally underperformed
relative to their targets, due largely to
the significant drop in government
borrowing, although the Net Foreign
Assets
(NFA)
improved
following
modest recovery in oil price. However,
monetary
aggregates
showed
improved
performance
when
compared with the preceding and the
corresponding periods of 2015.

4.3.1
Broad Money (M2)

Broad Money (M2) increased by 8.26
per cent to N21,684.97 billion at endJune 2016 from N20,029.83 billion at
end-December 2015. Compared with
the end-June 2015 level of N18,811.43
billion, M2 grew by 15.28 per cent. The
year-on-year growth in M2 of 15.28 per
cent was above the 2016 indicative
growth target of 10.98 per cent.

Figure 4.5
Money Supply (M1) and (M2) (Dec 2015 – June

N ’Billio ns
Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16
M2 20,029.8 19,799.4 20,620.8 20,470.4 20,727.9 20,721.9 21,684.9
M1 8,571.70 8,250.77 9,066.71 9,040.82 9,136.07 9,391.87 9,125.93
M2
M1


Figure 4.6
Growth in Money Supply (M1) and (M2) (Dec
2015 – June 2016)


4.3.2
Narrow Money (M1)

Narrow Money (M1) grew by 6.47 per
cent to N9,125.93 billion at end-June
2016 from N8,571.7 billion at endDecember 2015. When compared with
the end-June 2015 figure of N6,542.39
billion, M1 grew by 39.49 per cent. The
year-on-year growth in M1 of 39.49 per
cent was above the indicative growth
target of 11.34 per cent for 2016
(Figures 4.4 and 4.5).

4.3.3 Net Foreign Assets (NFA)

Net Foreign Assets (NFA) increased by
25.69 per cent to N7,105.66 billion at
end-June 2016 from N5,653.32 billion at
end-December 2015. Compared with
the end-June 2015 figure of N5,951.45
billion, the NFA grew by 19.39 per cent,
which was above the 2016 growth
target of -40.58 per cent. The improved
performance was attributed to the
Percentage
M2
M1


CBN Monetary Policy Review

significant increase in Petroleum Profit
Tax receipts and improved oil prices.

4.3.4
Net Domestic Assets (NDA)
Net Domestic Assets (NDA) grew by
1.41 per cent to N14,579.30 billion at
end-June 2016 from N14,376.51billion
at end-December 2015. Compared
with
the
end-June

figure of
N12,859.97 billion, NDA increased by
13.37 per cent which was below the
growth benchmark of 25.88 per cent.

Figure 4.7
Net Domestic Asset (NDA) (Dec 2015 – June

N'Billion
Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16
Net Domestic Assets 14,376.514,406.815,149.414,918.715,681.915,515.114,579.3
NDA(December 2015 - June 2016)

Figure 4.8
NDA, NDC and Other Assets (net) (Dec 2015 –
June 2016)


4.3.5
Credit to the Government (Cg)

Credit to government (Cg) remained
at N2,893.19 billion in the first half of
2016, the same as the figure at endDecember 2015. Cg, however, grew
by 15.15 per cent compared with the
end-June

figure
of
N2,512.46
billion, which was significantly below
the 2016 growth benchmark of 47.43
per cent. This development was largely
attributable to the full implementation
of the TSA, delayed passage and
implementation of the 2016 Federal
Government
budget,
improved
generation of revenue from non-oil
sources as well as depreciation of the
naira.

4.3.6
Credit to the Private Sector (Cp)

Credit to the private sector (Cp) grew
by 14.45 per cent to N21,424.95 billion
at end-June 2016 from N18,719 billion
at end-December 2015. Compared
with
the
end-June

figure of
N18,897.31 billion, Cp rose by 13.38 per
cent, which met the indicative growth
target of 13.38 per cent for 2016. The
improvement in credit to the private
sector,
despite
weak
economic
indices, can be partly attributed to
sustained CBN intervention initiatives to
enhance the flow of lending to the real
sector.


CBN Monetary Policy Review

Figure 4.9
Domestic Credit to Private Sector (Dec 2015 –
June 2016)

4.3.7
Reserve Money (RM)

Reserve Money (RM), decreased by
7.58 per cent to N5,372.01 billion at
end-June 2016 from N5,812.74 billion at
end-December 2015. On a year-onyear basis, RM decreased by 9.65 per
cent when compared with its endJune 2015 level of N5,945.76 billion and
was
below
the
benchmark
of
N6,574.74 billion by 18.36 per cent. The
year-on-year decrease in RM was due
to the decline in DMBs deposits on
account of the withdrawal of public
sector
funds
following
the
full
implementation of the Treasury Single
Account (TSA) as well as the effect of
the increase in CRR by 250 basis points
in March 2016. A summary of the major
monetary aggregates and provisional
outcomes as at end-June 2016 are
presented in Table 4.5.


CBN Monetary Policy Review

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


Change in
H1 2016

Actual
Actual
Actual
Benchmark
Deviation
(N'b)
Actual
June
Dec
June

M2 (N'b)

M2 (%)

M1 (N'b)

M1 (%)

RM (N'b)

RM (%)

NDC
(N'b)

NDC (%)

Cg (N'b)

Cg (%)

Cp (N'b)

Cp (%)

NFA (N'b)

NFA (%)


CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER FIVE

5.0
DEVELOPMENTS
IN
THE
FINANCIAL MARKETS

he performance of the Nigerian
financial
market
was
largely
shaped by a number of global
and
domestic
economic
developments
in
the
review
period. The developments included
uncertainties arising from the buildup
of expectations surrounding a further
US rate hike, the ongoing transition of
the Chinese economy to a balanced
growth path and the general instability
in global financial markets. In addition,
the unexpected outcome of the Brexit
referendum led to high market volatility
and
subdued
global
activity
and
trade.
These
developments
heightened global market risks thereby
impacting on financing conditions in
the emerging market and developing
economies.
However,
the
largely
accommodative monetary policy in
the advanced economies as well as
firming oil prices generally improved
market sentiment.

Money market rates were generally
stable
during
the
review
period.
However, the Bank‟s tight monetary
policy stance which included raising
the MPR from 11.0 to 12.0 per cent and
a 250 basis point increase in the CRR
from 20.0 to 22.5 per cent resulted in
rate spikes in the later part of the
review period. In the foreign exchange
market, the spread between the rates
at the interbank and the parallel
segments,
however,
continued
to
widen. This reflected the heightened
demand pressure in the market, fuelled
by
speculative
activities,
capital
reversals as well as increasing import
requirements in the face of declining
external reserves. In order to restore
stability
in
the
foreign
exchange
market, the Bank adopted a number
of policy measures which included the
suspension of foreign exchange sales
to the BDCs and the introduction of
greater
flexibility
in
the
foreign
exchange
market.
These
developments moderated the bullish
trend in the equities market during the
review period.

5.1
The Money Market

Activities
in
the
money
market
generally reflected the banking system
liquidity
during
the
period
under
review. The key MPC decisions which
influenced
market
developments
included raising the MPR from 11.0 to
12.0
per
cent, a 250 basis point
increase in the CRR from 20.0 to 22.5
per cent and the introduction of
greater
flexibility
in
the
foreign
exchange
market.
Others
were
narrowing
the
asymmetric
corridor
from +200/-700 basis points to +200/-
500 basis points around the MPR, as
well as the retention of the liquidity
ratio of 30.0 per cent. Money market
rates
which
were
relatively
stable
T


CBN Monetary Policy Review

initially, witnessed occasional spikes
during
the
review
period.
This
development
reflected
effects
of
fluctuations in the banking system
liquidity, increased OMO transactions,
maturing of government securities and
intensified implementation of the TSA.
The interbank and OBB rates remained
largely
below
the
floor
of
the
asymmetric corridor around the MPR
for most of the period. The interbank
and OBB rates, however, rose above
the corridor in the later part of the
review period. Market activities were
dominated principally by transactions
in
OMO
instruments
employed
to
manage
liquidity
surfeit
associated
with the monthly Federation Account
Allocation
Committee
(FAAC)
injections. In addition, low transaction
levels were recorded in both the
collaterized
and
uncollaterized
segments of the money market initially,
though transactions picked up in May
and June due to the introduction of
the new flexible exchange rate policy.

5.1.1
Short-term
Interest
Rate
Developments

The
money
market
interest
rates
reflected the liquidity conditions in the
banking system during the first half of
2016. The liquidity condition was largely
driven by the effects of increased
OMO
transactions,
maturing
government
securities,
intensified
implementation of the TSA and the
monthly FAAC injections. The Bank also
adopted
a tight
monetary
policy
stance during the period by raising the
MPR
from 11.0 to 12.0 per cent,
increasing the CRR from 20.0 to 22.5
per
cent
and
narrowing
the
asymmetric corridor to +200/-500 basis
points around the MPR as well as the
introduction of greater flexibility in the
foreign exchange market. There was,
however,
reduced
appetite
for
transactions in both segments of the
money market between January and
April.
Activities
only
picked
up
between May and June, 2016, helped
by the introduction of the flexible
exchange rate system.

The average interbank call rate rose
from 2.04 per cent in January to 4.32
per cent in March, and decreased
marginally to 3.75 per cent in April. It,
however, rebounded to 7.67 per cent
in May and peaked at 35.26 per cent
in June. The average OBB rate rose
from 1.95 per cent in January to 3.55
per cent in March. It further rose to
10.00 per cent in May and peaked at
21.75 per cent in June. The average
OBB rate which was 7.34 per cent,
ranged between 1.95 and 21.75 per
cent, while the average interbank call
rate at 9.28 per cent, ranged between
2.04 per cent and 35.26 per cent
during
the
review
period.
Consequently, the interbank call rate
was generally higher than the OBB. The
30-day NIBOR ranged between 6.21
and 17.62 per cent during the review
period.


CBN Monetary Policy Review

Table 5.1
Weighted Average Monthly Money Market
Interest Rates (January –June 2016)
Date
Inter
Bank
OBB
MPR
*30
Day
NIBOR
Jan
2.04
1.95

8.28
Feb
2.67
3.25

7.84
Mar
4.32
3.55

7.94
Apr
3.75
3.55

6.29
May
7.67
10.00

6.21
Jun
35.26
21.75

17.62
Ave
9.28
7.34

9.03
Source: (Statistics Dept., CBN)

Figure 5.1
Weighted Average Monthly Money Market
Interest Rates (Jan.–Jun 2016)


(i)
The Interbank Call Rate

During the first half of 2016, activity in
the interbank market was generally
sluggish, ranging from 2.04 per cent in
January to 3.75 per cent in April,
reflecting
the
lagged
effects
of
monetary
easing
adopted
at
the
November MPC meeting as well as
maturing NTB/OMO instruments. The
rate, however, spiked to 7.67 and 35.20
per
cent in May and June 2016,
respectively,
on
account
of
the
introduction of the flexible exchange
rate
system
in
June
2016,
which
stimulated activities in the market. In
addition, the Bank‟s tight monetary
policy
stance
impacted
banking
system liquidity and money market
rates.

Figure 5.2
Weekly Interbank Call Rate (Jan – Jun 2016)


(ii)
The Open Buy Back Rate

The OBB rate fluctuated between 1.95
per cent and 21.75 per cent, at an
average of 6.75 per cent in the review
period. Activity in the OBB segment of
the money market was initially sluggish,
with the weighted average OBB rate
at 1.95 per cent in January rising to 3.55
per cent in March. The moderate
activity
in
the
segment
reflected
general liquidity surfeit in the banking


CBN Monetary Policy Review

system and the lagged effects of the
accommodative
monetary
policy
stance of the Bank. There was no
activity in April, as a result of the
general preference for transactions in
the uncollaterized segment of the
market. Activity, however, resumed in
May with the rate rising to 10.00 per
cent and peaked at 21.75 per cent in
June 2016, largely as a result of the
introduction of the flexible exchange
rate
mechanism.
In
addition,
the
Bank‟s tight monetary policy stance
including the increase in MPR and the
CRR as well as the narrowing of the
asymmetric corridor impacted banking
system liquidity and money market
rates.

Figure 5.3
Weekly Open Buy Back Rate (January-June
2016)


(iii)
The Nigeria Interbank Offered
Rate (NIBOR)

The Nigerian money market reference
rate, the NIBOR, was relatively stable
across all tenors during the review
period. The weighted average 30-day
NIBOR, fluctuated downwards from
8.28 per cent in January to 6.21 per
cent in May and spiked at 17.62 per
cent
in
June,
2016.
It
decreased
progressively to 7.94 per cent and 6.21
per cent in March and May 2016,
respectively, on account of general
liquidity surfeit in the banking system.
The NIBOR, however, rose significantly
to 17.62 per cent in June, owing largely
to the introduction of the flexible
exchange rate system (Table 5.1).

5.2
Foreign Exchange Market

During the review period, the Bank
adopted a number of policy measures
to
restore
stability
in
the
foreign
exchange
market.
The
spread
between the rates at the interbank
and the parallel segments, however,
continued
to
widen,
reflecting
excessive
demand
pressure
in
the
market.
The
persistent
demand
pressure was driven by speculative
activities, capital reversals due to the
US monetary policy normalization as
well as increasing import requirements
in
the
face
of
declining
external
reserves. These factors coupled with
the
dwindling
foreign
exchange
receipts as a result of low crude oil
prices, further increased the pressure in
the
foreign exchange market. The
Bank
observed
that
the
official
exchange rate of N197/US$ and its
corridor of +/-5.00 per cent was no
longer
sustainable
in the face of


CBN Monetary Policy Review

increasing
demand
pressure
and
supply shortages. Consequently, at its
May 2016 meeting, the MPC decided
to introduce more flexibility in the
exchange rate management, which
came into effect on June 20, 2016. The
regime
is
a
market-determined
exchange rate system, involving spot
and forward instruments, aimed at
stemming further depreciation of the
Naira
and
preserve the dwindling
external reserves.

Figure 5.4
Daily Naira/US Dollar Exchange Rate (January -
June 2016)


5.2.1
Average Exchange Rates

The Interbank foreign exchange rate,
at
an
average
of
N202.79/US$
depreciated by 2.86 per cent in the
first half of 2016 from N196.99/US$ in the
second half of 2015. During the same
period,
the
BDC
rate
significantly
depreciated by 28.64 per cent from an
average
of
N231.93/US$
to
N325.00/US$ (Table 5.2).
Table 5.2
Average Monthly Spot Exchange Rates (July
2015 – June 2016) (N/US$)


5.2.2
End-Period (Month) Exchange
Rates

The Naira depreciated at the two
segments of the foreign exchange
market
at
end-June
2016. At the
interbank foreign exchange market,
the Naira depreciated by 44.04 per
cent to N283.76/US$ at end-June, 2016
from N197.00/US$ at end-December
2015. At the BDC segment, it also
significantly depreciated by 30.33 per
cent to N348.00/US$ at end-June, 2016
from N267.00/US$ at end-December,
2015 (Figure 5.5 and Table 5.3).


Rates
Interbank
Month/Year
Interbank Rate
BDC 'B' Rate
2015: Jul
196.97
236.65
Aug
197.00
216.58
Sep
197.00
222.68
Oct
196.99
224.98
Nov
196.99
232.38
Dec
196.99
258.30
Average
196.99
231.93
2016: Jan
197.00
289.78
Feb
197.00
329.83
Mar
197.00
320.93
Apr
197.00
320.71
May
197.00
336.93
Jun
231.76
351.82
Average
202.79
325.00


CBN Monetary Policy Review

Table 5.3
End-Month Exchange Rates (July 2015 – June
2016) (N/US$)


Figure 5.5
End-Month Exchange Rates (July 2015 – June,
2016) (N/U$$)

5.2.3
Nominal and Real Effective
Exchange Rates

The Nominal Effective Exchange Rate
(NEER) appreciated by 1.89 per cent to
an average of 104.88 in the first half of
2016 from an average of 106.86 in the
second
half
of
2015.
It
also
appreciated marginally by 0.02 per
cent
when
compared
with
the
corresponding period of 2015. The REER
appreciated by 10.20 per cent from an
average of 71.86 in the second half of
2015 to average 65.21 in the first half
2016.

When compared with the
corresponding
period of 2015, the
average REER depreciated by 4.77 per
cent (Table 5.4). In general, the Naira
depreciated in both nominal and real
terms relative to the currencies of
Nigeria‟s major trading partners in the
review period (table 5.4 and figure
5.6).


Month/Year
Interbank Rate
BDC 'B' Rate
2015: Jul
197.00
229.00
Aug
197.00
218.00
Sep
196.95
223.00
Oct
197.00
225.00
Nov
197.00
242.00
Dec
197.00
267.00
Average
196.99
234.00
2016: Jan
197.00
305.00
Feb
197.00
325.00
Mar
197.00
322.00
Apr
197.00
320.50
May
197.00
350.00
Jun
283.76
348.00
Average
211.46
328.42


CBN Monetary Policy Review

Table 5.4
Nominal and Real Effective Exchange Rates
Indices (January 2015 – June 2016)
Date
NEER
REER
Jan-15

96.53

57.69
Feb-15

95.77

57.09
Mar-15

108.55

64.52
Apr-15

110.20

65.25
May-15

108.87

64.04
Jun-15

109.45

64.03
2015: H1
Average

104.90

62.10
Jul-15

108.89

74.22
Aug-15

107.79

73.05
Sep-15

106.76

71.91
Oct-15

106.70

71.74
Nov-15

105.42

70.43
Dec-15

105.58

69.78
2015: H2
Average

106.86

71.86
Jan-16

104.63

66.41
Feb-16

104.64

65.05
Mar-16

107.51

67.51
Apr-16

107.94

66.76
May-16

108.05

67.83
Jun-16

96.53

57.69
2016: H1
Average

104.88

65.21
2016: Average

104.88

65.21


Figure: 5.6
Nominal and Real Effective Exchange Rates
Indices (July 2015 – June 2016)


5.2.5 Foreign
Exchange
Flows
through the CBN

Foreign exchange inflows through the
CBN significantly decreased by 52.19
per cent to US$8,713.12 million in the
first half of 2016, from US$18,226.31
million in the second half of 2015. It also
decreased by 42.99 per cent when
compared with US$15,283.00 million in
the
corresponding period of 2015.
Similarly, the gross foreign exchange
outflows decreased by 37.84 per cent
to US$10,742.86 million in the first half of
2016, from US$17,281.62 million in the
second half of 2015. When compared
with
US$21,070.40
million
in
the
corresponding
period
of
2015,
it
decreased significantly by 49.01 per
cent. Thus, in the review period, there
was a net outflow of US$2,029.74
million, compared with net inflow of
US$944.69
million
and
(US$5,787.40)
million
in
the
preceding
and


CBN Monetary Policy Review

corresponding halves of 2015 (Table
5.5 and Figure 5.7).

Table 5.5
Monthly Foreign Exchange Flows through the
CBN (January 2015 – June 2016)
Dates
Inflow
(CBN)
Total
Outflow
(CBN)
Net Flow
(CBN)
Jan-15

4108.1
-1666.1
Feb-15
2554.5

-2783.5
Mar-15
3310.5
3429.7
-119.2
Apr-15
2859.5
2569.1
290.4
May-15
1744.5
2916.4
-1171.9
Jun-15

2709.1
-337.1
2015 H1
Total

15,283.00

21,070.40

(5,787.40)
Jul-15
6312.16
3383.08
2929.08
Aug-15
2598.05
3153.98
-555.93
Sep-15
2180.69
2987.06
-806.37
Oct-15
2821.22
2341.09
480.13
Nov-15
2481.21
2499.76
-18.55
Dec-15
1832.98
2916.65
-1083.67
2015 H2
Total

18,226.31

17,281.62

944.69
Jan-16
1329.4
1687.59
-358.19
Feb-16
1221.53
1025.73
195.8
Mar-16
1611.38
1764.89
-153.51
Apr-16
900.51
2053.33
-1152.82
May-16
1779.42
1690.29
89.13
Jun-16
1870.88
2521.03
-650.15
2016 H1
Total

8,713.12

10,742.86

(2,029.74)


Figure 5.7
Monthly Foreign Exchange Flows through the
CBN (Jan 2015 – June 2016)


CBN Monetary Policy Review

5.2.6 Foreign Exchange Flow through
the Economy

Gross foreign exchange inflow to the
economy
significantly
declined
by
38.76 per cent to US$29,159.54 million,
from US$47, 610.47 million in the second
half
of
2015.
It
also
decreased
significantly by 44.12 per cent when
compared with US$52,172.80 million in
the
corresponding period of 2015.
Similarly,
gross
foreign
exchange
outflow declined by 39.26 per cent to
US$11,880.53 million in the first half of
2016, from US$19,559.89 million in the
second half of 2015. When compared
with
US$21,837.20
million
in
the
corresponding
period
of
2015,
it
declined
significantly
by
45.59
per
cent.
Thus, during the first half of 2016, the
total foreign exchange flows through
the economy resulted in a lower net
inflow
of
US$17,273.96
million,
compared with US$28.050.58 million in
the
preceding
half
year,
and
US$30,335.60
million
in
the
corresponding
period of 2015. This
represented decreases of 38.42 and
43.06 per cent in the preceding and
corresponding
periods,
respectively.
The reduced net inflow during the
period reflected the decline in foreign
exchange
receipts,
due
largely to
lower global crude oil prices as well as
production
shortfalls
caused
by
militancy and illegal bunkering in the
Niger Delta region. In addition, the
inflows from autonomous sources also
declined during the period, reflecting
the general weakness in the global
economy (Table 5.6 and Figure 5.8).


CBN Monetary Policy Review

Table 5.6
Monthly Foreign Exchange Flows through the Economy (Jan 2015 – Jun 2016) (US$ Million)
Dates
Total
Inflow
Inflow
(CBN)
Inflow
(Autonomo
us)
Total
Outflow
Total
Outflow
(CBN)
Total
Outflow
(Autono
mous)
Net
Flow
Net
Flow
(CBN)
Net
Flow
(Autonomous
)
Jan-15
8861.7


Feb-15
9091.5
2554.5

5415.2


Mar-15

Apr-15


290.4
5224.7
May-15

Jun-15
9001.9


H1
Total

52,172.80

15,283.00

36,889.80

21,837.20

21,070.40

766.90

30,335.

(5,787.40)

36,122.90
Jul-15

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15


H2
Total

47,610.47

18,226.31

29,384.15

19,559.89

17,281.62

2,278.2

28,050.

944.69

27,105.88
Jan-16

Feb-16

Mar-16

Apr-16

May-16
4331.42
1779.42


Jun-16


H1
Total

29,154.54

8,713.12

20,441.42

11,880.58

10,742.86

1,137.7

17,273.

(2,029.74)

19,303.69


CBN Monetary Policy Review

Figure 5.8
Monthly Foreign Exchange Flows through the
Economy (Jan 2015 – Jun 2016) (US$ Million)


5.3
Capital Market

During the first half of 2016, the
Nigerian
capital
market
was
moderately
bullish,
reflecting
the
combined
effects
of
global
and
domestic
factors.
The
key
factors
responsible
for
this
development
included
the
modest
recovery
in
crude oil prices, slowing pace of the
US monetary policy normalization and
the
continuing
monetary
policy
divergence in advanced economies.
In addition, the introduction of flexible
exchange
rate
system
and
the
reduction of insurgent activities in the
North
East
bolstered
investor
confidence and spurred activities in
the market. However, militancy in the
Niger Delta region and communal
tensions in some parts of the country,
weak corporate earnings as well as
the
general
contraction
in
the
economy
moderated
investor
sentiments and outlook on the Nigeria
capital market.

5.3.1
Equities Market

The All-Share Index (ASI) recovered
moderately
by
3.49
per
cent
to
29,597.79
at
end-June
2016,
from
28,642.25 at end-December 2015. It,
however, declined by 11.40 per cent
compared with 33,456.83 at end-June
2015. Market Capitalization (MC) also
increased by 3.25 per cent to N10.17
trillion at end-June 2016, from N9.85
trillion at end-December 2015, but
decreased by 10.95 per cent when
compared with N11.42 trillion at endJune 2015 (Table 5.7 and Figure 5.9).
The year-on-year decline of 11.53 per
cent in the ASI was driven mainly by
weak performance in the banking,
consumer goods, insurance and oil
and gas sectors, which declined by
18.9, 12.6, 2.5 and 12.1 per cent,
respectively, below their levels at endJune 2015.


CBN Monetary Policy Review

Table 5.7
NSE All-Share Index (ASI) and Market
Capitalization (MC) (June 2015 – June 2016)
Date
ASI
MC (Equities)
(N’ Trillion)
Jun-15
33,456.83
11.42
Jul-15
30,180.27
10.34
Aug-15
29,684.84
10.21
Sep-15
31,217.77
10.73
Oct-15
29,177.72
10.03
Nov-15
27,385.69
9.42
Dec-15
28,642.25
9.85
Jan-16
23,916.15
8.23
Feb-16
24,570.73
8.45
Mar-16
25,306.22
8.70
Apr-16
25,062.41
8.62
May-16
27,663.16
9.50
Jun-16
29,597.79
10.17
Source: NSE

Figure 5.9
NSE ASI and MC (June 2015 – June 2016)

MC
ASI
ASI
MC (Equities) (N’ Trillion)
Source: NSE


Figure 5.10
NSE ASI and MC (June 2015 – December 2015)
Source: NSE 2016

5.3.2 Market Turnover
Aggregate stock market turnover in
the first half of 2016 increased by 47.09
per cent to 61.97 billion shares (valued
at N312.21 billion in 454,290 deals)
compared with 42.13 billion shares
(valued at N395.83 billion in 409,818
deals) in the second half of 2015.
When compared with the first half of
2015, market turnover increased by
22.71 per cent from 50.50 billion shares
(valued at N556.99 billion in 534,624
deals). Foreign portfolio investment
inflow exceeded outflow by N15.71
billion in the first half of 2016, indicating
moderate investor confidence in the
market.

5.3.3 Sectoral Contribution to Equities
Market Capitalization

Construction remained the dominant
sector
by
market
capitalization,

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


CBN Monetary Policy Review

primarily
due
to
activities
in
the
building materials sub-sector. The subsector‟s
share
in
overall
market
capitalization increased to 37.02 per
cent at end-June 2016 from 36.9 per
cent in the second half of 2015. This
was due primarily to the market share
of Dangote cement. Other major subsectors were banking, breweries, and
food & beverages, with respective
market shares of 15.83, 13.52 and 9.97
per cent, at end-June 2016 (Figure
5.12).

Figure 5.11
NSE Market Capitalisation by Sector as at EndDecember 2015
Breweries
13.6%
Banking
19.2%
Food &
Beverages
11.3%
Conglomerat
es
1.1%
Insurance
1.6%
Oil and Gas
7.7%
Building
Materials
36.9%
Other
Sectors
8.7%
Source: NSE


Figure 5.12
NSE Market Capitalisation by Sector as at EndJune 2016

Source: NSE 2016

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

Based on Warren Buffett valuation
metric, the Nigerian stock market in
the
first
quarter
of

was
undervalued at 54.43 per cent, which
was below the threshold of 75.0 to
115.0 per cent. The metric measures
the market value of securities as a
ratio of GDP. In the second quarter of
2016, the metric stood at 63.04 per
cent,
also
indicating
an
undervaluation. This development was
attributed to a number of factors,
including weak corporate earnings, US
monetary
policy
normalization
accentuating capital reversals as well
as the general contraction in the
domestic
economy.
The
undervaluation of equities continues to
Food and
Beverages
9.97%
Banking
15.83%
Insurance
1.43%
Breweries
13.52%
Conglomerat
es
1.18%
Oil and Gas
6.70%
Building
Materials
37.02%
Other
Sectors
14.36%


CBN Monetary Policy Review

present
attractive
investment
opportunities for domestic and foreign
investors as the market recovers.

Figure 5.13
Warren Buffett Valuation of Nigerian Equities
Market


5.3.5 Bond Market

In the period under review, activities
in
the
bonds
market
remained
dominated by Federal Government of
Nigeria (FGN) securities. Sub-national
government
and
corporate bonds
also recorded some activity, with the
corporate bonds recording the least
share by market volume.

5.3.5.1 FGN Eurobond

The
yield
on
the
10-year
dollardenominated
bond
recorded
a
decrease of 1.74 percentage points to
6.74 per cent at end-June 2016, from
8.48 per cent at end-December 2015.
It, however, showed an increase when
compared
with
5.91
per
cent
recorded at end-June 2015 (Figure
5.14).
This
development
was
attributable
to
improved
investor
perception of the country‟s sovereign
risk as well as the correction of market
reaction that followed the delisting of
Nigeria
from
the
JP
Morgan‟s
Government Bond Index for Emerging
Markets (GBI-EM) in September, 2015.

Figure 5.14
10-Year U.S. Dollar-denominated Bond Yield for
Nigeria (Jan 1, 2014 – Jun 30, 2016)

The FGN bond yield curve as at endJune 2016 trended upwards by 352
basis
points
to
13.31
per
cent
compared with 9.80 per cent at endDecember 2015. It, however, trended
downwards by 180 basis points when
compared with 15.11 per cent at endJune

(Figure
5.15).
This
development implied that FGN bond
yields were negative and below the
end-June 2016 inflation figure of 16.5
per cent.


Per cent
WARREN BUFFET INDICATOR

Yi ld


CBN Monetary Policy Review

Figure 5.15
FGN Bonds Yield Curves: end-Jun. 2015 vs. endDec. 2015 vs. end- Jun. 2016

5.3.5.2 State/Local Government Bonds

During the review period, the subnational bonds market recorded low
activity. At end-June 2016, the total
value
of
outstanding
state/local
governments bonds stood at N535.08
billion, compared with N536.47 billion
at end-December 2015 and N544.43
billion at end-June 2015.

5.3.5.3 Corporate Bonds

Activity
in
the
corporate
bonds
segment improved during the review
period.
The
value
of
outstanding
corporate bonds at end-June 2016
was N224.91 billion, compared with
N205.89 billion at end-December 2015
and N220.39 billion at end-June 2015.
The improvement in activity was due
largely to modest recovery in crude oil
prices, improved sovereign risk of the
country and reduced pace of US
monetary policy normalization.

5.3.5.4 Overall Analysis of the Nigerian
Capital Market

The value of FGN bonds decreased
by 2.62 per cent to N6.32 trillion at
end-June 2016 from N6.49 trillion at
end-December 2015, and by 31.94 per
cent when compared with the level at
end-June 2015. FGN bonds accounted
for 37.0 per cent of aggregate market
capitalization as at end-June 2016. The
value
of
state/municipal
bonds,
corporate bonds and supranational
bonds were N535.08 billion, N224.91
billion and N24.95 billion, accounting
for 3.0, 1.3 and 0.1 per cent of
aggregate
market
capitalization,
respectively.
The
equity
market
constituted
58.5
per
cent
of
aggregate market capitalization at
end-June 2016, while the combined
shares of FGN bonds, state/municipal
bonds,
corporate
bonds
and
supranational bonds accounted for
the balance of 41.5 per cent (Figure
5.16).


Yield
Years to Maturity
Jun 30, 2016
Jun 30, 2015
Dec 31,


CBN Monetary Policy Review

Figure 5.16
Structure of the Nigerian Capital Market (June,
2016)

5.4
Global
Financial
Market
Developments

In the review period, the global
financial market was characterized by
uncertainties,
arising
from
the
expectation of further US rate hike, the
ongoing rebalancing of the Chinese
economy,especially
following
the
Chinese stock market turmoil earlier in
the year, and general instability in
global
financial
markets..
The
unexpected outcome of the Brexit
referendum also led to high market
volatility and subdued global activity
and
trade.
These
developments
heightened
global
market
risks,
particularly
in
the
advanced
economies
due
to
elevated
uncertainty,
weakened
confidence
and persisting growth slowdown. These
developments impacted on financing
conditions in the emerging market and
developing
economies.
Persistently
low commodity prices, in particular
crude
oil,
and
slowing economic
activity, elevated risks in emerging
market and developing economies. In
most advanced economies, monetary
policy
remained
largely
accommodative, as the ECB, BoE and
BoJ sustained their quantitative easing
programmes.
Consequently,
the
currencies of emerging market and
developing economies continue to
depreciate, owing to the sustained
appreciation of the dollar and dollar
denominated
assets.
These
developments
created
an
environment
of
subdued
market
confidence
resulting
in
a
mixed
performance of major global stock
markets.

5.4.1 Money Market and Central
Bank Policy Rates

Global
liquidity
conditions
were
largely shaped by the monetary policy
stance of the advanced economies.
In the US, monetary policy remained
largely accommodative, as the Fed
refrained from further rate hikes in
response
to
developments
in
the
domestic
and
global
economies.
Similarly, the ECB extended its QE
programme to March 2017, and the
Bank of England sustained its QE
programme with a commitment to
support the British economy in the
buildup to the BREXIT referendum. In
addition, the Bank of Japan (BoJ)
continued its QE programme while
FGN Bonds
37.0%
State/Municipal
bonds
3.0%
Corporate bonds
1.3%
Supranational bonds
0.1%
Equities
58.5%


CBN Monetary Policy Review

considering additional strategies such
as helicopter money to help lift the
economy out of deflation. Another
development
that affected global
liquidity conditions was the sell-off in
the Chinese stock market earlier in the
review period, which depressed asset
prices across major markets.

In view of the above developments,
central
banks
in
the
advanced
economies
kept
their
policy rates
unchanged except in the euro area,
where the ECB reduced its policy rate
from 0.05 per cent to 0.00 per cent in
March 2016. In the emerging market
and
developing
economies,
rates
were also held constant in China and
Brazil
and
lowered
moderately
in
Russia and India. The policy action in
Russia reflected early signs of recovery
from the long standing recession, while
Brazil
continued
to
grapple
with
political
issues
in
addition
to
its
recession. In Kenya, the policy rate
was
lowered
to
accommodate
growth while it was held constant in
Ghana. In Nigeria, the policy rate was
raised slightly to curtail inflationary
pressure
and
slow
down
capital
outflows.


Table 5.8
Policy Rates of Selected Countries July 2015 -
June 2016
Country
Jan.

Feb.

Mar.

Apr.

May

June

USA

UK

Euro
Area

Japan

S. Africa

Kenya

Ghana

Russia

China

India

Brazil

Indonesia

Nigeria


5.4.2 Capital Market

Major
global
stock
exchanges
recorded mixed performance during
the review period. In Europe, the UK
FTSE 100 and Russian MICEX indices
increased by 4.2 and 7.4 per cent,
respectively, while the French CAC 40
and German DAX indices declined by
8.6 and 9.9 per cent, respectively. In
North America, the United States S&P
500,
Canadian S&P/TSX Composite
and Mexican Bolsa indices increased
by
2.7,
8.1
and
7.0
per
cent,
respectively.


CBN Monetary Policy Review

In Asia, the Indian BSE Sensex index
increased by 3.4 per cent, while the
Japanese
Nikkei
225 and Chinese
Shanghai SE indices declined by 18.2
and 17.2 per cent, respectively. In
Africa, the Nigerian NSE All-Share and
South
African
JSE All-Share indices
increased by 3.3 and 3.0 per cent,
respectively, while Kenyan Nairobi NSE
20,
Egyptian
EGX
CASE

and
Ghanaian
GSE
All
Share
indices
declined by 9.9, 0.9 and 10.4 per cent,
respectively.

Table 5.9
Selected International Stock Market Indices as
at June 30, 2016


5.4.3 Commodities

Globally commodity prices recorded
modest recovery in the first half of 2016
from their declines in the second half
of 2015, due to improved market
sentiment as supply tightened. The
largely
accommodative
monetary
policy in the advanced economies
and a firming of oil prices generally
improved
market
sentiment.
In
addition, the supply disruptions due to
wildfires in Canada, militant attacks on
oil infrastructure in Nigeria, reduced
supply of shale oil, especially in the US,
and the geopolitical tensions in the
Middle East led to a modest recovery
in oil and other commodity prices.

The Energy Price Index rose by 21.19
per cent to 88.03 points in June 2016
from 72.64 points in December 2015.
The average price of oil was $47.70
per barrel in the second quarter of
2016, which was 37.0 per cent above
its
first
quarter
average.
This
development
reflected
supply
disruptions
in
a
number
of
oil
producing countries such as Canada,
Nigeria, Kuwait, Iraq and Libya.

Non-fuel commodity price index also
rose by 10.79 percent to 134.80 points
in June 2016 from 121.67 points in
December 2015, owing to improved
global demand. Metals prices rose by
8.10 per cent to113.57 points in June
2016 from 105.06 points in December
2015. Precious metals prices rose 8.0
Country
Index
End-June, 2015
End-December,

End-June, 2016

% Change
Dec 15 - Jun

AFRICA
Nigeria
ASI

South Africa
JSE African AS

Kenya
Nairobi NSE 20

Egypt
EGX CSE 30

Ghana
GSE All Share

NORTH AMERICA
US
S&P 500

Canada
S&P/TSX Composite

Mexico
Mexico Bolsa (IPC)

SOUTH AMERICA
Brazil
Bovespa Stock

Argentina
Merval

Colombia
COLCAP

EUROPE
UK
FTSE 100

France
CAC 40

Germany
DAX

Russia
MICEX

ASIA
Japan
NIKKEI 225

China
Shanghai SE A

India
BSE Sensex

Source: Bloomberg


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percent
due
to
strong
investor
demand
prompted
by
growing
concerns about global growth.

The Food and Agriculture Organization
(FAO) Food Price Index rose by 6.84
per cent from 153.40 in December
2015 to 163.90 in June 2016. All the subindices of meat, dairy, vegetable oil
and sugar rose, while cereals fell
during the review period. Overall, the
commodity index rose by 16.05 per
cent from 90.73 points in December
2015 to 105.29 points in June 2016.

Figure 5.17
Indices of Primary Commodity Prices June 2015 –
June 2016 (2005=100 US$)
Source: IMF

5.4.4 Foreign Exchange market
During the first half of 2016, most
currencies appreciated against the US
dollar, due to a slowdown in output in
the United States in the first quarter, as
private
consumption
expenditure
(PCE)
and
non-residential
fixed
investments declined. In addition, the
firming of oil and other commodity
prices, improved market sentiment
and waning effects of the ongoing
transition of the Chinese economy to a
balanced growth path, helped to
strengthen most currencies against the
US dollar. Consequently, the euro,
Canadian dollar and Japanese yen
appreciated against the US dollar by
2.22,
6.15
and
16.48
per
cent,
respectively, while the British pound
depreciated by 9.33 per cent, largely
due to the BREXIT referendum.

In
the
emerging
market
and
developing economies, the Russian
ruble, Brazilian real and Colombian
peso
appreciated
against
the
US
dollar by 13.93, 23.36 and 8.70 per
cent, respectively, while the Chinese
yuan, Indian rupee, Mexican peso
and Argentine peso depreciated by
2.41, 2.04, 6.71 and 14.09 per cent,
respectively. In sub-Saharan Africa, the
South African rand and Kenyan shilling
appreciated against the US dollar by
6.32 and 1.19 per cent, respectively,
while the Nigerian naira, Egyptian
pound
and
Ghanaian
cedi
depreciated by 30.39, 11.92 and 3.54
per cent, respectively(see table 1a).


Trends of Primary Commodity Prices January, 2015-July,
2016(2005=100 US$)
Commodities
Food
Metal
Energy


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Table 5.10
Exchange Rates of Selected Countries (Value in currency units to US$)


Currency
31-Dec-15
30-Jun-16
EndDecember,
2015 - EndJun, 2016
AFRICA
Nigeria
Naira
197.00
283.00
-30.39
South Africa
Rand
15.48
14.56
6.32
Kenya
Shilling
102.30
101.10
1.19
Egypt
Pound
7.83
8.89
-11.92
Ghana
Cedi
3.81
3.95
-3.54
NORTH
AMERICA
Canada
Dollar
1.38
1.30
6.15
Mexico
Peso
17.23
18.47
-6.71
SOUTH
AMERICA
Brazil
Real
3.96
3.21
23.36
Argentina
Peso
12.93
15.05
-14.09
Colombia
Peso
3174.50
2920.35
8.70
EUROPE
UK
Pound
0.68
0.75
-9.33
Euro Area
Euro
0.92
0.90
2.22
Russia
Ruble
72.85
63.94
13.93
ASIA
Japan
Yen
120.20
103.19
16.48
China
Yuan
6.49
6.65
-2.41
India
Rupee
66.15
67.53
-2.04
Source: bloomberg


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BREXIT – THE REFERENDUM BY THE UNITED KINGDOM TO EXIT THE EUROPEAN UNION

The United Kingdom of Great Britain and Northern Ireland is a political union of four
countries, England, Scotland, Wales and Northern Ireland. Great Britain is made up
of these three original countries, England, Scotland and Wales. The political union
is a parliamentary democracy of equals, with each country headed by a First
Minister and the entire Union headed by a Prime Minister who is the Head of
Government and sits in England, the capital of the Union. The Queen of England is
the overall Ceremonial Head of the political union, having jurisdiction over all
machineries of government in all four countries.

The United Kingdom joined the European Union (EU) in 1973, forty three years ago.
European integration is stratified into three distinct layers, the outermost European
Economic Community (EEC), the inner European Union (EU) and the nucleus or
core European Monetary Union (EMU). Members of the EMU have a common
monetary policy conducted by the European Central Bank (ECB) and also use a
single currency, the euro. These countries are bound by the Maastricht treaty
which is the legal document establishing the ECB and the single currency. The EU
comprises of all the members of the EMU plus other European countries subscribing
to access the European single market but not adopting the euro as their
currency. These group of countries are bound by the Lisbon treaty which is the
legal document setting up the single market. Members of the EU commit to free
movement of labor, goods and services across their borders for citizens of member
countries. The EEC comprises of all EU members and all other European countries
with a less binding trade agreement and limited access to the single market.

On 23rd June, 2016, citizens and residents of the United Kingdom voted in a
European Union membership referendum. In 1975, just two years after joining the
EU, the British public voted in a similar referendum, resulting in a „remain‟ vote of
over 68 per cent. In the 23rd June, 2016 vote however,the „leave‟ camp won by a
majority of 51.9 per cent, while the „remain‟ camp had 48.1 per cent of the votes.
In the wake of the victory of „leave‟ referendum, the then British Prime Minister,
David Cameron announced his resignation and departure from government
before the Conservative Party Conference in October 2016, to make way for a
new Prime Minister to lead the country through the negotiations with the European
Council (EC) on Britain‟s final exit from the EU. The Party leadership hinted that a
new Prime Minister and government will be in place by the first week of September
2016. In order to commence the negotiations for final exit, article 50 of the Lisbon
treaty must be triggered by the new British Prime Minister. This action will signal to


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the European Council, a member‟s intention to start the two year process of exit
from the Union.

A huge controversy however erupted in the wake of the referendum; Scotland,
the second largest economy in the Union voted with a 68 per cent majority to
remain in the EU. Northern Ireland also voted with a majority to remain in the EU
while Wales voted with a narrow margin to leave the EU. In England the capital of
the Union, the overall vote was in favor of leaving the EU. In London, the capital
city of England, home to the country‟s major financial markets and institutions,
there was an overwhelming vote to remain in the EU. The Scottish First Minister,
Nicola Sturgeon and Leader of Sinn Fein, Northern Ireland‟s majority party, Gerry
Adams, both called for a disintegration of the United Kingdom of Great Britain and
Northern Ireland to allow their people continue their desired membership of the
EU, should the government in Westminster decide to trigger article 50 of the Lisbon
treaty. Scotland is proposing to go as an independent nation, to enable it
continue its membership of the EU while Northern Ireland is proposing to join
borders with Ireland which is currently a member of the European Monetary Union.
This implies that Northern Ireland and Scotland may eventually join the EMU and
adopt the euro as their currency.

The likely consequence, therefore, of eventual exit from the EU include but is not
limited to: a much smaller United Kingdom without Scotland and Northern Ireland;
a weakened London financial market as jobs may be exported to continental
Europe; withdrawal of Britain‟s access to the European single market, leading to
more expensive imports and exports; considerable weakening of the British
housing market as a sizeable number of immigrant population expected to leave
the country; increased taxes as the economy‟s tax base reduces due to EU
migrants leaving the UK; weakening of the pound sterling as investors sell off
pound sterling assets; decline of the FTSE 100 and other related stock market
indices; and likely recession over the next few months. In a similar manner,
prospective investors in UK assets are likely to hold off investment in such assets
until the BREXIT storm looming over the United Kingdom calms down. For example,
a major investment deal to take over the UK steel company, TATA, has been
suspended until the investment horizon clears up. The negotiations following the
trigger of article 50 may likely persist for a few years to come as a minimum period
of two years is required after the trigger before a country finally exits the EU.
Negotiations could however drag on for upward of five years, creating further
uncertainty and economic slowdown.


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Following these likely consequences, the credit rating of the United Kingdom was
downgraded from AAA to AA and may face further downgrade as developments
unfold.

After „day one‟ of the announcement of the outcome of the referendum,
financial markets across the globe recorded a total loss of over two trillion United
States dollars. The pound sterling, which appreciated against the U.S dollar in the
days before the referendum, (selling at GBP1.00:USD1.55) experienced a sharp fall
to GBP1.00:USD1.30 in the hours and days after the announcement, losing a total
of 12 per cent of its value, the lowest value recorded in the last thirty one years.
Analysts were initially of the view that If the attack on the pound sterling
continued, the Bank of England (BoE) may be forced to raise its policy rate at a
time that inflation and GDP were performing well below expectation. The UK being
a country of home owners is very sensitive to interest rate movements as it causes
home mortgages to become considerably more expensive. The likely outcome of
this development will be the beginning of a long and deep recession with far
reaching consequences for the global economy. Simultaneously raising of tax
rates and the policy rate is expected to further slowdown economic activities
while deepening the recession and driving the economy into deflation. On
Monday 27th June, 2016, HSBC and the Royal Bank of Scotland lost 12 and 14 per
cent respectively of their market capitalization amongst other significant losses on
the stock exchange. The 5 per cent loss provision in stock value was therefore
triggered on the London Stock Exchange (LSE) to halt trading in several stocks as
the market tumbled aggressively.

Because the referendum did not record a 60 per cent majority on either side
[48.1(Remain) versus 51.9(Leave)], the likelihood that those who voted to remain in
the EU may call for another referendum, remains a possibility. In addition, the
Scottish First Minister has signaled strongly of her intentions to commence
negotiations with the EU, for Scotland to remain in the EU as an independent
nation and is working with the Scottish Parliament to pave way for an
independence referendum for Scotland to leave the United Kingdom. Pockets of
crisis have also erupted in the British Labour Party, Britain‟s leading left wing
opposition party, where calls have gone out to the party leader, Jeremy Corbyn
to step down for fresh leadership as members of this left wing party were of the
view that their leader failed to deliver victory to their populist „remain‟ agenda
and may thus not be in a position to lead the party to victory in the next general
election before December 2016. Corbyn was however returned as the party
leader with a bigger mandate in a recently conducted leadership referendum.


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Across Europe and the United States of America, financial markets opened on
Friday 24th June, 2016 looking southwards and continued after the ensuing
weekend. The attack on the pound sterling showed very little sign of abating even
after the UK Finance Minister and Chancellor of the Exchequer, George Osborne
appealed to markets that the government had a robust plan to stem the turmoil.
The Governor of the Bank of England (BoE), Mark Carney also hinted that the BoE
was set to increase the quantum of the Bank‟s quantitative easing programme, by
up to an additional 350 billion pounds sterling, to help provide some stability as he
urged investors to remain calm. This was in addition to the 375 billion pounds
quantitative easing program currently in progress. The BoE also responded to
weakening fundamentals by lowering the policy rate from 0.5 per cent to an alltime low of 0.25 per cent. Given that Europe had slipped into deflation, and the
euro remains weak compared to other major currencies, the euro area may also
be confronted with a recession in the near future as the euro and euro area may
also be faced with divestment challenges. This will likely depend on how well the
leaders of the other 27 EU member countries handle the impending exit of the
United Kingdom.

From all indications, BREXIT brings with it far reaching consequences for the United
Kingdom, Europe and the global economy which is set to slow down further, if the
crisis continues to be fuelled by uncertainty and speculative trading. Emerging
Markets and Developing Economies may however be the medium to long term
beneficiaries of capital flows if they align their macroeconomic and political
environments to the unfolding developments in these advanced economies,
bearing in mind that the US dollar may continue to appreciate as a result of the
unfolding European crisis.

In Europe, the European Council, speaking through the Finance Ministers of the six
(6) founding Member States has urged the British Government to speedily invoke
article 50 of the Lisbon treaty to enable a swift disengagement from the Union.
Indications suggest that the EU leaders are set to cut a very raw severance deal
for Britain in order to discourage other countries from leaving the Union. As part of
the restructuring of the EU, the European Council stated that it will consider
dropping English as the official language of the European Union in favor of
another European language.
The British Prime Minister, David Cameron, attended the European Council
Meeting in Brussels on 28th June, 2016 to formally inform the Council members of
current developments before his final disengagement from government. The new
Prime Minister, Theresa May, has reiterated her commitment to maintain the


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position of the referendum and has commenced informal negotiations with
European leaders while planning a strategy for disengagement.

IMPLICATIONS OF BREXIT TO THE NIGERIAN BANKING SECTOR

The implication of BREXIT to the Nigerian Banking Sector is best viewed through its
impact on the real economy vis-a-vis the role of the banking sector in the
transmission mechanism between central bank policy and developments in the
real economy. Capital flows, inflation, market capitalization (stock, bond and
money markets), the exchange rate (dollar, euro and pound sterling), accretion to
external reserves, balance of payments, trade linkages (exports and imports) and
GDP are aspects of the macro-economy that may be directly affected.

Foreign Direct Investment and Portfolio Capital Flows: In the aftermath of the UK-EU
exit referendum, the pound sterling as demonstrated above has come under
severe pressure as investors sell off pound sterling denominated assets in favor of
US dollar denominated assets. This development has caused and will continue to
fuel the appreciation of the US dollar, a situation which will result in the
competitiveness of US exports and the subsequent dampening of its economic
recovery. If the US maintains a low policy rate (slows down normalization of
monetary policy) to allow its economy recover, investors will soon begin to look for
alternative investment destinations such as emerging market economies with
higher policy rates. Portfolio capital will thus likely flow into the stock and money
markets while foreign direct investment will flow into manufacturing and
agriculture.

Inflation: For Nigeria to benefit from this redirection of investment capital flow,
certain macroeconomic and structural fundamentals need to be adjusted in
order to drive down the current high rate of inflation and reverse the ongoing
negative real rate of interest. As has been previously identified, a significant
component of the current high level of inflation is due to structural rigidities in the
supply side of the real economy. Recent hikes in electricity tariff and the removal
of subsidies on imported petroleum products have contributed significantly to the
rising level of inflation. With inflation rising at its current trend, Nigeria will be in a
difficult position to attract foreign direct or portfolio investment. Government must
therefore direct its resources towards economic activities that can help
breakdown these supply side constraints, such as the building of refineries to curb
importation of fuels, building of roads to improve the transportation of goods and
services and provision of incentives to help attract talents and capital to the
agricultural sector.


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Market Capitalization (Stock, Bond and Money Markets): An attractive array of
instruments in the stock, bond and money markets will help attract investors
divesting out of Britain and the United States to Nigeria. Policy must however
ensure that the new influx of capital is not followed by a rapid reversal in the near
future as was experienced between 2014 and 2015.

The Exchange Rate (dollar, euro and pound sterling): With a fast depreciating
pound sterling and appreciating dollar, the naira is not likely to strengthen in the
short term due to the newly introduced, foreign exchange market system. This will,
however, depend on the size of the trade between Nigeria and UK. Going by the
statement of the outgoing British Prime Minister on the future direction of trade for
the UK, he noted that the country will begin to explore the renewal of trade
linkages with members of its commonwealth as access to the European single
market may become limited as soon as article 50 of the Lisbon Treaty is fully
implemented. In the event of increased trade with the United Kingdom, a weak
naira will therefore be more favorable to exports from Nigeria to the UK. This implies
that we revamp our export sector in order to fully benefit from the emerging
opportunities.

Accretion to External Reserves and Adjustment of Balance of Payment Accounts:
Capital flows into Nigeria will simultaneously improve the accretion to external
reserves and the Balance of Payments (BOP) as investors move capital into the
Nigerian economy. Once again, policy must be able to address key issues like the
exchange rate, entry and exit barriers (such that the economy derives a real
benefit from these capital inflows) and most importantly, friendliness of the
investment climate for longer term foreign direct investment. For example,
attraction of capital into the Nigerian steel industry is essential at a time that steel
investors are divesting out of the United Kingdom. For Nigeria to be able to redirect
this investment over the two year period of uncertainty that article 50 of the Lisbon
Treaty will impose on UK markets, both monetary and fiscal policy must be well
positioned to provide the enabling environment for such investments.

Improved Trade Linkages (exports and imports): One of the overriding arguments
by British Eurosceptics is that the fast pace of growth of emerging market
economies implies that there is a bigger market for Britain to key into, if it frees itself
from the regulatory shackles posed by membership of the European Union. With
the fast pace of growth in these emerging market economies, the proportion of
British trade outside the EU will no doubt rise in the event of a fully implemented
BREXIT, as Britain will be free to negotiate more trade deals as a sovereign State.


CBN Monetary Policy Review

Trade with the United Kingdom can blossom in the area of agricultural exports to
the UK. Agricultural products like oranges, pineapples, potatoes etc. previously
imported from the EU can now be imported from Nigeria and other countries.
Other raw materials such as mineral resources can also be exported to the EU to fill
up the gap left by the United Kingdom. In the area of manufacturing,
technological knowledge transfers can be encouraged between Nigeria, the
United Kingdom, the European Union and the United States. Under this model,
these countries will be encouraged to set up manufacturing plants specific to their
product needs, to take advantage of the cheaper labor in Nigeria. Goods
ranging from small household utensils to heavy consumer goods like cars can be
produced through this technology transfer scheme thus boosting domestic
growth, rapidly lowering unemployment and raising the skill level of the workforce.
These goods will then be exported back to the country that shared technological
knowledge with Nigeria. Over the years, Nigerian workers will gain expertise in
these technologies thus providing the opportunity to expand the Nigerian market
to other regions such as the ECOWAS single market. This is the basic model China
adopted in developing its manufacturing capacity. Nigerian products may
however require some improvement in quality to meet UK importation standards.

Conclusion

One fact we must acknowledge is that BREXIT has brought with it, a permanent
change to the international financial architecture, direction of trade and
relevance of some world currencies. As it stands, uncertainty will loom over the
future of the United Kingdom as an investment and export destination due to its
impending exit from the EU single market and the likelihood of disintegration if
Scotland and Northern Ireland decide to remain in the EU.

The Nigerian banking sector is therefore expected to experience an upsurge in
liquidity in the medium term as capital flows into emerging markets and
developing economies in the likely event that the US Federal Reserve Bank fails to
raise its policy rate in response to the appreciating dollar, driven by divestments
from pound sterling and euro denominated assets.

Deposit money banks exposed to the Eurobond market will see an improvement in
their statements of financial position (balance sheets) considering that the
depreciating pound and euro will minimize their obligations in this market.
Benefiting from these developments depends on how quickly the Nigerian policy
environment is strategically re-tuned to attract foreign investors.


CBN Monetary Policy Review

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CHAPTER 6
ECONOMIC OUTLOOK

6.1
OVERVIEW

he global economic growth in
2016 was revised downwards to 3.1
per cent from its earlier projection
of 3.2 per cent by the International
Monetary Fund (WEO Report, July
2016).
The
revised
estimate
was
unchanged from the growth of 3.1 per
cent recorded in 2015. The downward
revision to global growth was due
largely
to
the
impact
of
weak
aggregate demand, sustained fall in
crude oil and other commodity prices,
US
monetary
policy
normalization,
macroeconomic weakness in the euro
area as well as China‟s transition to a
balanced growth path.

In advanced economies, growth was
projected at 1.8 per cent in 2016 from
1.9 per cent in 2015. This development
was driven largely by slowdown in
consumer demand in the US as well as
the impact of BREXIT. Growth in the
United States declined to 2.2 per cent
in 2016 from 2.4 per cent in 2015. In the
Euro area, growth was projected at 1.6
per cent in 2016 from 1.7 per cent in
2015,
driven
by
sustained
private
consumption, supported by exchange
rate depreciation, quantitative easing,
and lower oil prices.

In emerging markets and developing
economies, growth was projected to
rise to 4.1 per cent in 2016 from 4.0 per
cent
in
2015,
due
to
improved
consumer and business confidence,
especially in countries previously in
deep recession. Among the emerging
markets,
growth
in
China
was
projected at 6.6 per cent in 2016 from
6.9 per cent in 2015. The Russian
economy was projected to record a
milder contracted of 1.2 per cent in
2016 from a contraction of 3.7 per cent
in 2015, this will, however, weaken the
performance of other economies in
the Commonwealth of Independent
States (CIS). In Latin America and the
Caribbean,
growth
in
Brazil
was
projected to contract by 3.3 per cent
in 2016 compared with a contraction
of 3.8 per cent in 2015.

In sub-Saharan Africa (SSA), growth
was projected to decline to 1.6 per
cent in 2016 from 3.3 per cent in 2015.
The slowdown reflected the continued
adjustment to lower commodity prices,
currency
depreciations
and
weak
aggregate demand as tighter external
financing conditions persist. In Nigeria,
the
economy
was
projected
to
contract by 1.8 per cent in 2016 from
2.7
per
cent
in
2015,
owing to
continued weakness in oil price as well
as production challenges. In South
Africa,
growth
was
projected
to
decline to 0.1 per cent in 2016 down
from 1.3 per cent in 2015, due to
continuing
challenges
in
electricity
supply
and
labour
market,
and
weakening business confidence.


T


CBN Monetary Policy Review

6.2
Outlook for Global Output

Growth outlook for global economy
for the rest of the year and 2017 is
expected to remain weak and uneven
in most advanced economies, with
output gaps gradually closing across
countries. Growth in the emerging and
developing economies is expected to
improve, with India and China leading
growth, while Brazil and Russia are
expected
to
record
significant
improvement
in
their
growth
outcomes. However, the slow recovery
in
prices
of
global
commodities,
uncertainties surrounding the Brexit as
well as the rebalancing of the Chinese
economy will continue to weigh on
global outlook in 2016 and 2017. As a
result, the global economy is forecast
to grow at 3.1 per cent in 2016 and 3.4
per
cent
in
2017.
This
growth
is
expected to be driven by gradual
recovery in the advanced economies,
improved labour market conditions in
the
US
and
euro
area,
rising
consumption as well as persisting lower
energy costs.

In advanced economies, growth is
forecast to moderate to 1.8 per cent in
2016 and 2017 from 1.9 per cent in
2015, due largely to the impact of
Britain‟s exit from the European Union.
The UK economy is projected to slow to
1.7 and 1.3 per cent in 2016 and 2017,
respectively, from 2.2 per cent in 2015.
This development will be as a result of
increased
uncertainties
following
BREXIT which is expected to weaken
domestic demand. In the US, growth is
forecast to decline to 2.2 per cent in
2016 from 2.4 per cent in 2015, and
rebound to 2.5 per cent in 2017. The
rebound is expected to be driven by
improvement in private consumption
and labour market conditions. Growth
in
the
euro
area
is
forecast
to
moderate to 1.6 and 1.4 per cent in
2016 and 2017, respectively, from 1.7
per cent in 2015. The moderation is
expected from increased uncertainties
and weak consumer and business
confidence
following
BREXIT
referendum. Similarly, growth in Japan
is forecast to slow to 0.3 and 0.1 per
cent in 2016 and 2017, respectively,
from 0.5 per cent in 2015, as domestic
demand remains weak.

Growth
in
emerging
markets and
developing
economies
(EMDEs)
is
forecast to rise to 4.1 and 4.6 per cent
in 2016 and 2017, respectively, from 4.0
per cent in 2015, driven by China and
India
as
well
as
the
expected
improvement in economic conditions
in Russia and Brazil. In China, growth is
forecast to moderate to 6.6 and 6.2
per
cent
in

and
2017,
respectively, from 6.9 per cent in 2015,
reflecting slow investment growth as
the economy continues to transit to a
more balanced growth path. Growth
in India is forecast to moderate to 7.4
per cent in 2016 and 2017 from 7.6 per
cent in 2015, owing to slow investment
growth. In Brazil, growth is projected to
rise to 0.5 per cent in 2017 from
contractions of 3.8 and 3.3 per cent in


CBN Monetary Policy Review

2015 and 2016 respectively, due to
expected
recovery
in
commodity
prices and the gradual improvement in
consumer and business confidence.

In
sub-Saharan
Africa,
growth
is,
however, projected to decelerate to
1.6 per cent in 2016 from 3.3 per cent in
2015,
reflecting
macroeconomic
challenges
in
the
group‟s
largest
economies, as they adjust to low
commodity receipts. In 2017, however,
growth is expected to strengthen to 3.3
per cent. Growth in South Africa is
forecast to slow to 0.1 per cent in 2016,
but rise to 1.0 per cent in 2017, from 1.3
per cent in 2015. Nigeria‟s economy,
however, is projected to contract by
1.8 per cent in 2016 and rebound to 1.1
per cent in 2017, from a growth of 2.7
per cent in 2015.

Growth in the Middle East and North
Africa (MENA) region is forecast at 3.4
and 3.3 per cent in 2016 and 2017,
respectively, from 2.3 per cent in 2015,
driven by expected recovery in oil
prices
and
continuing
fiscal
consolidation (Table 6.1).

6.3
Downside
Risks
to
Global
Outlook

Risk
to
global
outlook
include
uncertainties
surrounding
Brexit,
protracted
financial
market
turbulence, rising global risk aversion,
absence of sizeable fiscal adjustments
in
some
emerging
market
and
developing economies in the face of
lower commodity prices as well as
geopolitical tensions. Global economic
growth
will
be
affected
if
these
headwinds and other developments
are not appropriately managed. In the
euro
area,
the
uncertainties
surrounding the outcome of the Brexit
vote, which accentuated global risk
aversion,
weakened
business
confidence and tightened financing
conditions, are expected to affect
growth negatively.

The continuing normalization of the US
monetary policy, added to the policy
divergence that has been created in
the advanced economies, remain a
threat to growth, especially in the
emerging
market
and
developing
economies. This development could
heighten capital reversals from EMDEs
and further weaken their currencies.
Although global crude oil prices have
recovered modestly, oil and other
commodity
exporters
continue
to
grapple with the task of undertaking
sizeable fiscal adjustments given lower
commodity
revenues.
In
addition,
geopolitical tensions in Middle East
and other parts of the world remain a
major threat to business confidence
and global growth.

In order to mitigate the risks to global
outlook, the IMF suggests the need for
policy makers in the UK and the EU to
ensure smooth transition to a new set
of agreements in the post-exit trading
and financial environment that will be
mutually beneficial. There is also a


CBN Monetary Policy Review

strong
recommendation
for
policy
makers
to
exploit
greater
synergy
among
available
policy
tools,
as
central banks alone do not have the
suite of policies required to mitigate
current and potential threats to the
global
economy.
In
addition,
the
legacy issues in the euro area banking
sector, especially in Italy and Portugal,
which
are
largely
responsible
for
financial sector vulnerabilities in the
area must be tackled. In particular,
policies
are needed to strengthen
country
defenses
against
possible
global financial turbulence. To further
enhance global business confidence,
advanced
economies
with
policy
space need to implement measures to
stimulate
domestic
demand
and
reduce global imbalances. Emerging
markets and developing economies
need
to
adopt
sizeable
fiscal
adjustments in the face of softening
commodity prices, declining foreign
exchange
receipts
and
weakening
currencies.


Table 6.1
Global Output and Inflation Outlook

A. World Output


W orld Output

Advanced
Economies

USA

Euro Area

Japan

UK

Canada

Advanced Economies

Emerging &
Developing
Economies

Commonw ealth
of Independent
States

Latin America
and the Caribbean

Middle East and
North Africa

Sub-Saharan
Africa

B. Commodity
Prices (US' Dollars)


Oil

Non-fuel

C. Consumer Prices


Advanced
Economies

Emerging &
Developing
Economies

Source: IMF WEO Update, July 2016


6.5
Global Inflation Outlook

Global inflation is expected to remain
subdued in 2016, due primarily to
persistent softening of oil and other


CBN Monetary Policy Review

commodity prices on account of the
strong
pass-through
to
consumer
prices.
In
advanced
economies,
inflation is projected to rise but below
central banks‟ targets in 2016, owing to
slack in commodity prices. In emerging
markets and developing economies,
inflation outlook remains diverse. While
oil importing countries would continue
to experience low inflation, owing to
low oil and other commodity prices, oil
exporters would largely be confronted
with higher inflation as their currencies
depreciate.

In advanced economies, inflation is
projected to rise to 0.7 and 1.7 per
cent in 2016 and 2017, respectively
from 0.3 per cent in 2015, due to the
expansion
of
quantitative
easing
programmes in the euro area, the UK
and Japan as well as the delayed
implementation of the US rate hikes.

In
the
United
States,
inflation
is
projected to rise to 0.8 per cent in
2016, from 0.1 per cent in 2015. In the
euro
area,
headline
inflation
is
projected to rise to 0.4 per cent in 2016
from 0.2 per cent in 2015 and to further
increase to 1.1 per cent in 2017. In
Japan, the consumer price index is
expected to fall by 0.2 per cent in
2016, from 0.7 per cent in 2015, driven
by the impact of lower energy prices
and the appreciation of the yen.

In
the
emerging
market
and
developing
economies,
inflation
is
projected to fall to 4.6 and 4.4 per cent
in 2016 and 2017, respectively from 4.7
per cent in 2015. In China, inflation is
forecast to remain low at 1.8 per cent
in 2016, from 1.5 per cent in 2015,
reflecting
the
effects
of
modest
recovery in oil and other commodity
prices. In India, inflation is forecast to
rise to 5.5 per cent in 2016 from 5.4 per
cent in 2015. In Brazil, average inflation
is projected to fall slightly to 8.7 per
cent in 2016 from 9.0 per cent in 2015,
as the effects of the large administered
price
adjustments
and
currency
depreciation in 2015 wears off. In
Russia, inflation is expected to decline
to 8.4 per cent in 2016 from 15.5 per
cent in 2015.

In
sub-Saharan
Africa,
inflation
is
projected to rise to 7.3 per cent in
2016, from 6.9 per cent in 2015, driven
by strong pass-through of currency
depreciations to domestic prices.

Outlook for Domestic Output Growth
Domestic output in the first half of

began
a
negative
trend.
According to the National Bureau of
Statistics
(NBS),
Gross
Domestic
Product (GDP) contracted 0.36 per
cent (year-on-year) in real terms in first
quarter of 2016, 2.47per cent points
lower than the figure recorded in the
preceding quarter and 4.32per cent
points lower than in the corresponding
quarter of 2015. In the second quarter,
GDP contracted further by 2.06 per
cent
from
-0.36
per
cent
in
the
preceding quarter and growth of 2.35


CBN Monetary Policy Review

per cent in the corresponding quarter
of 2015.
The contraction in growth has been
attributed to decline in oil prices and
oil production, hence decline in oil
revenue which remains a major source
of government revenue. As a share of
the
economy,
the
Oil
sector
contributed 10.29 and 8.26 per cent in
the first and second quarter of 2016,
respectively, of total real GDP, lower
than in the corresponding periods of
2015. The contraction in GDP growth
was
further
due
to
declines
in
Manufacturing,
Financial
Institutions,
and Real Estate.

The economy is projected to return to
growth path in the third and fourth
quarters of 2016 with less robustness
than it did in the corresponding period
of 2015. The relatively weak growth
outlook is based largely on the current
low oil price which is projected to
continue over the medium to long
term with the attendant implications
for
government
oil
revenue.
The
International Monetary Fund cut its
forecasts for global economic growth
as the unexpected U.K. vote to leave
the European Union creates a wave of
uncertainty
amid
already-fragile
business and consumer confidence.
Growth projections were revised down
substantially
in
sub-Saharan
Africa,
reflecting
challenging
macroeconomic
conditions
in
its
largest economies, which are adjusting
to
lower
commodity
revenues.
Consequently, Nigeria's GDP growth
projection
for

was
revised
downward to -1.8per cent from the
earlier forecast of 2.3 per cent in April
2016, before the Brexit vote.

Given
the
current macroeconomic
fundamentals, economic activity in
Nigeria is projected to contract in 2016,
as the economy adjusts to foreign
currency shortages as a result of lower
oil receipts. The naira has weakened
sharply since the Central Bank allowed
the currency to freely float in the
foreign
exchange markets in June
2016.
The
value
of
the
Naira
depreciated from N199 per USD to
N282 by half year 2016, in the Interbank
market and is expected to
remain under pressure given the severe
distress in the oil sector occasioned by
weak global oil prices and security
challenges to oil production in Nigeria.

The 2016 outlook tend towards slow
economic recovery as some of the
reforms begin to take effect and
measures to boost the economy, such
as
increased
spending
on
infrastructure,
are
implemented.
Specific reforms pursued by the new
administration to lay a foundation for
renewed
growth
include
the
rationalisation of the public sector in
order to cut the cost of governance;
enforcement of the single treasury
account to block financial leakages;
renewed efforts at enforcement of tax
compliance;
preparation
for
zerobudgeting
starting
in
2016;
and


CBN Monetary Policy Review

increasing the ratio of capital to
recurrent spending.
The risk to the outlook continues to be
developments
in
the
external
environment,
particularly the weak
global economic recovery, declining
demand for Nigeria‟s crude oil and
slow accretion to reserves. However,
the
renew
focus
of
the
recently
approved
budget
by
the
Federal
Government
in
favour
of
capital
expenditure
and
the
commitment
towards timely release of funds for
capital projects will spur economic
activities in the short-to-medium term.

Outlook for Domestic Inflation
Headline
inflation
sustained
its
upward trend in the first half of 2016.
It remained above the upper band of
the Bank‟s inflation threshold of 6 - 9
per cent, despite the Bank‟s overall
tight monetary policy stance. Prior to
February
2016,
headline
inflation
(year-on-year) was within the single
digit range.

Headline
inflation
increased
significantly from 9.6 per cent in
January to 16.5 per cent in June,
2016, indicating an increase of 6.9
percentage points. The Bank‟s major
focus, however, remains subduing
inflation to a single digit, given
current global imbalances.
The IMF forecasts inflation to rise to
17.1 per cent in 2017 from 15.4 per
cent in 2016 (WEO, October 2016).
The
CBN
projects
year-on-year
headline inflation to remain in double
digits throughout 2016, closing at
16.83 per cent in December 2016. The
anticipated increase would be due,
primarily, to the effects of exchange
rate
depreciation
owing
to
the
introduction of greater flexibility in
foreign exchange management, as
well as the increases in prices of
petroleum products and energy, on
account of recent policy reforms.

The low global inflation continues to
moderate the influence of import costs
on domestic prices. The Bank‟s tight
monetary policy stance, added to its
use of a number of administrative
measures, is expected to help manage
excess liquidity and rein-in on domestic
prices.

Table 6.2
Inflation Forecasts (Staff Estimates)

YEAR-ON-YEAR INFLATION RATE
Status
Month
Headline
inflation
Food
inflation
Core
inflation
Actual
Jan-16
9.62
10.64
8.80
Feb-16
11.38
11.35
11.00
Mar-16
12.77
12.74
12.17
Apr-16
13.72
13.19
13.35
May-

15.58
14.86
15.05
Jun-16
16.48
15.30
16.22
Forecast
Jul-16
16.59
15.53
16.37
Aug-16
15.95
15.18
16.19
Sep-16
16.15
15.31
16.28
Oct-16
16.15
14.94
16.56
Nov-16
16.67
16.55
16.44
Dec-16
16.83
16.54
16.71
Source: CBN Statistics Dept.


CBN Monetary Policy Review

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

Outlook for Monetary Policy in 2016
On-going
macroeconomic
imbalances
especially
the
recent
“BREXIT”
referendum
has
created
significant uncertainty and challenges
to the global economy. Britain leaving
the EU is expected to dampen growth
in the near term, particularly in the UK,
but with repercussions also for Europe
and elsewhere. In Nigeria, declining oil
prices
have
impacted
sharply
on
revenue
and
public
expenditure
resulting
in
lower
than
expected
growth figures. Unemployment and
under-employment continue to pose
serious
concerns.
The
trend
in
International oil market pose a great
challenge
to
monetary
policy
management in Nigeria as oil receipt
has strong implications for external
reserves, fiscal position, and price level.
Robust monetary and financial policy
measures are, therefore, necessary to
checkmate the after effects of such
shocks.
Near-term risks to monetary policy
environment
in

include
low
potential
output
growth
in
both
advanced
and
emerging
market
economies, the continued divergence
of monetary policy in the advanced
economies,
weakening
of
fiscal
positions following the slide in oil prices.
With the continued rise in domestic
inflation, policy focus may continue to
shift from growth to inflation thus stifling
growth further in the face of rising
inflation.

Others
challenges
to
monetary policy include: exchange
rate
volatility,
financial
market
instabilities, constrained credit growth,
rising trade imbalance and declining
external
reserves.
These
issues
will
continue to demand close attention
and monitoring for monetary policy
management in the second half of
2016.


Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-1 4
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-1 5
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-1 6
Nov-16
Dec-16
Headline Inflation (Y/Y) in %
Headline Inflation (Y/Y) in %
Month
Actual
Forecast


CBN Monetary Policy Review

Appendices

Central Bank of Nigeria Communiqué’
No.

of
the
Monetary
Policy
Committee Meeting of Monday and
Tuesday, January 25 and 26, 2016
The Monetary Policy Committee met
on 25th and 26th January, 2016 against
the backdrop of weakening global
economic
prospects
as
well
as
increased
risks
in
the
domestic
economic environment. In attendance
at the meeting were 10 out of the 12
members. The Committee reviewed
the ensuing international and domestic
economic and financial environments
in 2015 as well as the outlook for the
first half of 2016.

On the global front, uncertainties and
geopolitical tensions have increased in
the Middle East, leading to a major
standoff
between
two
major
oil
producers; Saudi Arabia and Iran, in
the
face
of
improving
relations
between the United States (US) and
Iran. In the global oil market, both Iran
and the US are emerging as new
suppliers while OPEC appears to have
shifted
from
protecting
price
to
defending
market
share.
These
developments
underscore
the
conclusion that the current global oil
prices would remain for a much longer
period.
Widespread
stock
market
weaknesses
and
worsening
macroeconomic conditions in China
have further exacerbated the already
stifling global economic challenges.
These uncertainties have blended well
with domestic vulnerabilities to affect
the monetary policy environment in
Nigeria.

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

International Economic Developments

The
Committee
noted
the
considerable
divergence
in
global
output recovery in 2015, as growth
picked-up
in
the
most
advanced
countries compared with slowdown in
majority of emerging and developing
economies. Following the slowdown in
the emerging market economies, the
IMF in its January 2016 World Economic
Outlook
(WEO),
revised
its
global
growth estimate from 3.4 to 3.1 per
cent and 3.4 per cent in 2015 and
2016, respectively.

In
the
United
States,
growth
has
remained relatively firm with 2015 third
quarter growth rate revised to 2.1 per
cent from an earlier estimate of 1.5 per
cent. The country‟s overall growth in
2015 is expected to be the strongest
since the post-crisis recovery began in
2010. Likewise, 2016 growth rate has
been projected at 2.6 per cent. The


CBN Monetary Policy Review

major drivers of this growth remained
improvements
in
consumption
spending supported by a robust labor
market
recovery;
low
inflation
stemming from soft global crude oil
prices;
massive
and
dynamic
investments
in
the
non-oil
private
sector, improved foreign investment
demand
due
to
the
recent
normalization of monetary policy by
the Fed, as well as housing market
recovery.

Japan‟s recovery in 2015 remained
fragile despite the continuous policy
stimulus by the Bank of Japan. The
Bank‟s asset purchase program injects
¥6.7 trillion ($56.71 billion) monthly into
the economy, with the possibility of
expansion. However, this has done little
to restart growth which is estimated at
0.8
per
cent
in
2015.
Private
consumption and investment spending
remained modest in 2015, worsened by
rising skill shortages. Japan‟s outlook for
2016 remains dampened by the feeble
response of the economy to monetary
and fiscal stimuli.

In the Euro area, weakening fiscal
consolidation
and improving labor
market conditions generated 1.5 per
cent growth in 2015 with prospects for
achieving 1.7 per cent in 2016. The
European Central Bank (ECB) further
eased its monetary policy stance in
December 2015, despite the Bank‟s
continuous monthly asset purchase of
€60
billion
($64.8 billion), as both
inflation and wage growth remained
subdued. In the same vein, the Bank of
England continued its accommodative
monetary policy through its ₤375 billion
($540 billion) asset purchase program,
even as it announced a decision to
reinvest
another
₤6.3 billion ($9.07
billion),
being
the
proceeds
of
redemption of the December 2015 gilt
(government securities) held in the
Asset Purchase Program. The Bank also
maintained its core rate at 0.5 per cent
in an attempt to herd inflation towards
its target rate. Growth in the emerging
markets and developing economies
(EMDEs) decelerated to 4.0 per cent in
2015, the lowest since 2009, as both
external
and
domestic
challenges
continued; owing to low commodity
prices,
financial
market
volatility,
slowing productivity, policy uncertainty
and eroding policy buffers as well as
weak global trade. The slowdown in
the majority of EMDEs has also been
attributed
to
spillovers
from
weaknesses
in
major
emerging
economies, diminishing capital inflows,
rising
borrowing
costs
and
other
geopolitical factors.

The stance of monetary policy in the
advanced economies is expected to
remain
largely
accommodative
in
2016, except for the United States
where monetary policy normalization
has
commenced.
Against
the
background of suppressed commodity
prices
and
slow
recovery,
global
inflation
is
expected
to
remain
moderate through 2016.


CBN Monetary Policy Review

Domestic
Economic
and
Financial
Developments Output

Domestic
output
growth
in

remained moderate. According to the
National Bureau of Statistics (NBS), real
GDP grew by 2.84 per cent in the third
quarter
of
2015,
almost
half
a
percentage point higher than the 2.35
per
cent recorded in the second
quarter.
However,
third
quarter
expansion
remained
substantially
below the 3.96 and 6.23 per cent in the
first quarter of 2015 and corresponding
period of 2014, respectively. The major
impetus to growth continued to come
from the non-oil sector which grew by
3.05 per cent compared with the
growth of 3.46 per cent posted in the
preceding quarter. The major drivers of
expansion in the non-oil sector were
Services,
Agriculture
and
Trade;
contributing
1.42,
1.03
and
0.79
percentage points, respectively. The
outlook for the fourth quarter of 2015,
based on staff estimates, suggests
further improvements over the third
quarter growth level.

The economy is expected to continue
on its growth path in the first quarter
2016, albeit less robust than in the
corresponding
period of 2015. This
expectation
is
predicated
on
the
current low global oil price trend which
is projected to hold low over the
medium-to
long
term,
and
with
attendant implications for government
revenue
and
foreign
exchange
earnings.
Other
downside
risks
to
growth in 2016 include: capital flow
reversal, high lending rates, sluggish
credit to private sector and bearish
trends in the equities market.

However,
the
Committee
remains
optimistic about a gradual recovery in
economic activity due to notable
improvements in power and supply of
refined petroleum products, improved
policy
recalibration
aimed
at
improving
the
flow
of
financing
resources
to
the
real
sector
and
suppression of internal insurgencies,
which will boost general agricultural
activity.

Prices

The Committee noted the slight uptick
in year-on-year headline inflation to 9.6
per cent in December, from 9.4 per
cent in November and 9.2 per cent in
October,
2015.
The
increase
in
headline inflation in November 2015
reflected an increase in the food
component, even though the core
component remained unchanged at
8.70 per cent. Core inflation declined
for the third consecutive month to 8.70
per cent in November and December
from 8.74 per cent in October 2015,
while food inflation inched up to 10.32
per cent from 10.13 and 10.2 per cent
over the same period. Consistent with
its primary mandate, the Committee
would continue to monitor consumer
price developments with a view to
formulating policies that will keep
inflation in check.


CBN Monetary Policy Review

Monetary,
Credit
and
Financial
Markets Developments

Broad money supply (M2) rose by 5.90
per cent in December 2015, over the
level at end-December 2014, although
below the growth benchmark of 15.24
per cent for 2015. Net domestic credit
(NDC) grew by 12.13 per cent in the
same period, but remained below the
provisional benchmark of 29.30 per
cent for 2015. Growth in aggregate
credit reflected mainly growth in credit
to the Federal Government by 151.56
per cent in December 2015 compared
with
145.74
per
cent
in
the
corresponding
period of 2014. The
renewed
increase
in
credit
to
government may be partly attributable
to increased government borrowing to
implement
the 2015 supplementary
budget.

During the period under review, money
market
interest
rates
generally
reflected the level of liquidity in the
banking system. Average inter-bank
call and OBB rates, which stood at 1.00
and 1.50 per cent on 25 November
2015, closed at 4.75 and 4.50 per cent,
respectively,
on
January
21,
2016.
Between the November 2015 and endDecember 2015, interbank call and
OBB rates averaged 0.81 and 0.98 per
cent, respectively.

The Committee noted the bearish
movement in the equities segment of
the capital market during the review
period.
The
All-Share
Index
(ASI)
decreased by 13.15 per cent from
27,435.56 on November 30, 2015 to
23,826.50 on January 22, 2016. Similarly,
Market Capitalization (MC) fell by 13.06
per cent from N9.42 trillion to N8.19
trillion
during
the
same
period.
However, relative to end-December
2014, the indices declined by 31.25 per
cent and 28.66 per cent, respectively.
This
development
reflected
capital
flow reversals accentuated by soft
commodity
prices
and
monetary
policy
normalization
in the United
States.

External Sector Developments

The Committee noted the ongoing
activities in the informal segment of the
foreign exchange market, which led to
the stoppage of dollar sales to BDCs,
even as the average naira exchange
rate remained relatively stable at the
inter-bank segment during the review
period. The exchange rate at the
interbank
market
opened
at
N197.00/US$ and closed at N197.00,
with a daily average of N196.99/US$
between November 23 and January
11, 2015. The Committee underscored
the necessity of improving the supply
of foreign exchange to the market,
especially from autonomous sources. It
also
reiterated its commitment to
maintaining
stability
in
the
naira
exchange rate.

Committee’s Considerations

The Committee observed that the last
episode of low oil prices in 2005 lasted
for a maximum period of 8 months.


CBN Monetary Policy Review

However, the current episode of lower
oil prices is projected to remain over a
very long period. Consequently, it is
imperative to brace up for a longer
period of low government revenues
from
oil
sources,
which
would
necessitate hard and uncomfortable
choices as the economy transits to
more sustainable sources of revenue,
consistent with the economic realities
and
strategic
objectives
of
the
country. In the circumstance, certain
tradeoffs must be envisaged and duly
accommodated.

In
view
of
the
foregoing,
the
imperative for consistently sound and
coordinated macroeconomic policy
has become inevitable. In the medium
term within which monetary policy is
cast, the need to allow policy to
produce
the
desired
outcomes
becomes a key consideration in the
policy mix. Consequently, the Bank is
fine-tuning the framework for foreign
exchange management with a view to
ensuring a more effective and liquid
foreign exchange market, taking into
account
Nigeria‟s
strategic
development
priorities;
with
the
policies
being
designed within an
environment
of
regularly
ensuring
consistency with monetary and fiscal
policies.

The Committee noted that at its
November 2015 meeting, it eased
monetary
policy
with
a
view
to
increasing the liquidity of the banking
system. This was aimed at moderating
domestic
interest
rates
so
as
to
encourage indigenous businesses to
borrow.
While
the
objective
of
stabilizing the financial system in the
aftermath
of
the
Treasury
Single
Account (TSA) withdrawals and J. P.
Morgan delisting of Nigeria have been
largely
achieved,
the
goal
of
increasing lending to key sectors of the
economy is yet to be achieved as the
Bank continues to adopt moral suasion
to encourage the DMBs to support
targeted lending to the real sector
including
agriculture, solid minerals
and SMEs sub-sectors of the Nigerian
economy.

Despite
current
challenges,
the
Committee
remains
guided
by
evidence
underpinned
by
credible
data in its holistic evaluation of the
emerging
scenario
and
in
its
assessment
of
policy
choices.
Consequently, the Committee believes
that
given
sound
and
properly
coordinated
monetary,
fiscal,
and
external sector policies, there is wide
room for optimism about the medium
to
long
term
macroeconomic
prospects for the Nigerian economy,
especially, given the clarity in the
policy direction of the administration,
the various interventions in the real
sector; gradual rovement in the power
sector, and the reinvigorated fight
against corruption.

The Committee also believes that the
effect of the softer monetary policy
stance adopted at the last MPC,


CBN Monetary Policy Review

should start crystalizing soon through
expansion of credit to critical sectors of
the economy. In addition, the unveiling
of
the
Federal
budget,
oriented
towards
socioeconomic
and
infrastructural
development
is
expected to provide the necessary
impetus for growth. The Committee
acknowledged the continuous liquidity
surfeit in the system stemming partly
from
the recent growth-stimulating
monetary policy measures, as well as
the tendency of the banks to invest
excess
reserves
in
government
securities, rather than extend credit to
the needed sectors of the economy.
To this end, the Committee once again
urged the deposit money banks to
improve lending to the real sector, as
part of their patriotic obligations to the
country
and
enjoined
the
Management of the Bank to continue
to explore ways of incentivizing lending
to
employment-
and
growthgenerating sectors, particularly SMEs.
The
MPC
also
emphasized
the
necessity
of
coordination
between
monetary and fiscal policies as a
prerequisite for resolving the nation‟s
economic
problems,
particularly,
steering the economy away from oil
dependency.
In
particular,
the
Committee stressed the need for the
fiscal authorities to compliment the
Bank‟s
low
interest
rate
policy
orientation by properly coordinating its
borrowing activities (and rates) with
the Bank in order to push the common
objective of stimulating banking system
credit delivery at low interest rates to
the
key
sectors
of
the
Nigerian
economy. It noted that given the
current economic reality of dwindling
oil revenue and the rather unclear
outlook for commodity prices, there
would be need for a recalibration of
the
fiscal
strategy
to
increasingly
explore opportunities in non-oil tax
revenue.

Finally, the Committee reiterated its
unyielding
commitment
towards
achieving a stable exchange rate
regime to ensure more flexibility for
sustainable inclusive economic growth
in the medium to long term.

The Committee’s Decisions
The Committee, in consideration of the
headwinds in the domestic economy
and the uncertainties in the global
environment decided by a unanimous
vote to retain the Monetary Policy Rate
(MPR),
Cash
Reserve
Requirement
(CRR), Liquidity Ratio (LR) and the
asymmetric corridor of +2/-7 around
the MPR.
In summary, the MPC voted to retain:
(i) The CRR at 20.0 per cent;
(ii) MPR at 11.0 per cent;
(iii) Liquidity Ratio at 30 per cent;
(iii) The asymmetric corridor at +200
basis points and -700 basis points.
Thank you for listening.
Godwin I. Emefiele, CON
Governor, Central Bank of Nigeria
26th January, 2016


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué
No.

of
the
Monetary
Policy
Committee Meeting of Monday and
Tuesday, March 21 and 22, 2016
The Monetary Policy Committee met
on 21st and 22nd March 2016 amidst
uncertain global economic prospects
and
continuing
challenges
in
the
domestic
economy.
In attendance
were 8 out of the 12 members. The
Committee appraised the international
and domestic economic and financial
environments in the first two months of
2016 as well as the outlook for the rest
of the year.

International Economic Developments
The Committee noted with concern
the further decline in global output at
the end of 2015, which grew at 2.3 per
cent, year-on-year in Q4, its slowest in
three
years,
representing
a
0.3
percentage point decline compared
with
2.6
per
cent
in
Q3.
This
deceleration
stemmed
from
the
continuous slowdown of growth in the
emerging
market
economies,
worsened by deteriorating conditions
in the Euro area and China as well as
key
emerging
market
economies.
Other
factors
include
sustained
pressure in global financial markets
arising
from
US
monetary
policy
normalization, depressed global oil
market
and
persistently
weakened
global aggregate demand.

The slowdown in growth in the United
States to 1.0 per cent in Q4 from 2.0
per cent in Q3 was attributed to
slowdown
in
private
consumption
expenditure (PCE) and non-residential
fixed investments. In Japan, output
declined by 1.4 percentage points in
Q4, 2015 in contrast to the 1.3 per cent
growth recorded in Q3. The Bank of
Japan‟s
monthly
asset
purchase
program of ¥6.7 trillion ($56.71 billion)
remains substantially sub-optimal, as
the
economy
continues
to
lurch
between contraction and expansion,
with the adoption of a negative
interest rate policy in January 2016.

In the Euro area, GDP grew by 1.5 per
cent in Q4 of 2015, and projected to
grow at 1.7 per cent in 2016. The
European Central Bank (ECB), at its
meeting on 10th of March, 2016 eased
monetary policy by further reducing its
refinancing rate to 0.0 per cent and
deposit rate to -0.4 per cent. The Bank
also
expanded
its
monthly
asset
purchase program from €60 billion
($65.4 billion) to €80 billion ($87.2 billion)
to further stimulate output growth and
move inflation towards its long term
objective of 2.0 per cent.

On the other hand, the Bank of
England (BoE) sustained its stock of
assets purchase, financed through the
issuance of reserves at ₤375 billion
($536.25
billion), while retaining its
policy rate at 0.5 per cent. The BoE
further committed to investing ₤8.4
billion ($12.01 billion) of cash flows
associated with redemption of the
January 2016 government securities
held in the Asset Purchase Facility, with


CBN Monetary Policy Review

a commitment to bring inflation closer
to the 2.0 per cent target, reducing
unemployment and promoting growth.
Uncertainties and geo-political tensions
in
the
Middle
East,
including
a
negotiated
ceasefire
agreement in
Syria
and
Iran‟s
re-entry
into
mainstream international oil market
may have further redefined conditions
in the oil market. The market witnessed
some uptick in prices following the
resolve of the Organization of the
Petroleum Exporting Countries (OPEC)
and
some non-OPEC members to
pursue a higher anchor price, coupled
with smaller-than-anticipated build-up
in stocks at the Cushing Oklahoma
delivery hub for United States crude
futures.

The Emerging markets and developing
economies (EMDEs) were forecast to
grow at 4.3 per cent in 2016, an
improvement over the 4.0 per cent
recorded in 2015. However, external
and
domestic
challenges
have
persisted,
stemming
from
low
commodity prices, troubled financial
markets, tepid global demand, policy
uncertainty as well as continuously
feeble growth in global trade. In
addition,
weaknesses
in
major
emerging
market
economies,
diminished
capital
inflows,
rising
borrowing
costs
and
geopolitical
factors
have
been
identified
as
possible deterrents to growth in the
EMDEs.
In
the
environment
of
suppressed inflation, slow growth, weak
global demand and volatile financial
markets, the stance of monetary policy
in
the
advanced
economies
is
expected to remain accommodative
in 2016, while in the EMDEs, it is
expected
to
be
underpinned
by
currency
adjustments
and
other
complementary policies.

Domestic
Economic
and
Financial
Developments Output
The
Bank
had
adopted
accommodative
monetary
policy
since
July

in
the
hope
of
addressing growth concerns in the
economy, effectively freeing up more
funds for DMBs by lowering both CRR
and MPR, with excess liquidity arising
from the lower CRR warehoused at the
CBN. DMBs were to access these funds
by
submitting
verifiable investment
proposals in the real sector of the
economy.
The
funds
have
not
impacted the market yet because the
CBN was still processing some of the
proposals submitted by the DMBs. In
the
first
episode of easing which
resulted in injecting liquidity into the
Banking system, DMBs did not grant
credit as envisaged. Moreover, the
delay in passage of the 2016 Budget
has further accentuated the difficult
financial
condition
of
economic
agents as output continues to decline
due to low investment arising from
weak demand. The cautious approach
to lending by the banking system
underpinned
by a strict regulatory
regime
conditioned
by
the
Basel
Committee in the post global financial
crisis era has further alienated investors


CBN Monetary Policy Review

from access to credit as banks prefer
to build liquidity profiles in anticipation
of government borrowing.

In the light of these developments,
domestic
output
growth
in

remained subdued as reported by the
National Bureau of Statistics (NBS).
Consequently, real GDP grew by 2.11
per cent in the last quarter of 2015,
more than half a percentage point
lower than the 2.84 per cent recorded
in
the
third
quarter
and
3.83
percentage
points
in
the
corresponding period of 2014. Overall,
growth in 2015 was estimated at 2.79
per cent, compared with 6.22 per cent
in 2014. The major impetus for growth
continued to come from the non-oil
sector which grew by 3.14 per cent in
Q4, 2015 compared with 3.05 per cent
in the preceding quarter. The key
drivers of growth in the non-oil sector
were Services, Agriculture and Trade;
contributing
1.23,
0.83
and
0.76
percentage points, respectively.

The Committee noted that the sluggish
growth
in
output
was
directly
attributable
to
certain
fiscal
uncertainties,
which
inadvertently
hampered movement of labor and
goods; fuel scarcity, increased energy
tariffs, foreign exchange scarcity as
well as slow growth in credit to private
sector in preference to high credit
growth
to
the
public sector. The
Committee noted that many of these
factors were outside the control of
monetary
policy
and
given
these
limitations,
in
the
absence
of
complementary fiscal and structural
policies,
the
only
option
was
to
continue with the existing measures.
The MPC believes that complementary
fiscal
and
structural
policies
are
essential for reinvigorating growth.

Prices
The Committee noted the increase in
year-on-year headline inflation to 11.38
per cent in February 2016, from 9.62
per cent in January and 9.55 per cent
in December, 2015. The increase in
headline inflation in February reflected
increases
in
both
food and core
components of inflation. Core inflation
rose sharply for the first time to 11.00
per cent from 8.80 per cent in January
after a lull of three consecutive months
at 8.70 per cent through December,
2015. Food inflation also inched up to
11.35 per cent from 10.64 per cent in
January
and
10.59
per
cent
in
December, 2015. The rising inflationary
pressure was traced to the lingering
scarcity of refined petroleum products,
exchange
rate
pass
through from
imported goods, seasonal factors and
increase
in
electricity
tariff.
The
Committee noted that the factors
responsible for rising inflation were
more
structural
in
nature
than
monetary,
but
reaffirmed
its
commitment
to
monitor
the
developments closely and to work with
the relevant authorities to address the
underlying drivers of the upward price
movements.


CBN Monetary Policy Review

Monetary,
Credit
and
Financial
Markets Developments
Broad money supply (M2) grew by 2.29
per cent in February, 2016 in contrast
to 1.69 and 0.25 per cent in January
2016 and February 2015, respectively.
When annualized, M2 grew by 13.74
per cent in February 2016 against the
provisional growth benchmark of 10.98
per cent for 2016. Net domestic credit
(NDC) grew by 3.71 per cent in the
same period, annualized, at 22.26 per
cent. At this rate, the growth rate of
NDC
was
below
the
provisional
benchmark of 17.94 per cent for 2016.
Credit to the private sector grew by
1.45 per cent in February 2016, which
annualized to a growth of 8.70 per
cent, below the benchmark growth of
13.28 per cent. The Committee noted
with concern, the dismal performance
of growth in credit to the private
sector, noting that even at that, credit
went primarily to low employment
elasticity sectors of the economy. This
had a significant negative impact on
output growth.

Money market interest rates reflected
the liquidity situation in the banking
system. Average inter-bank call and
OBB rates, which stood at 0.5 and 2.77
per cent on 25 January 2016, closed at
4.00 and 5.00 per cent, respectively, on
March 9, 2016. Between January 25th
and end-February 2015, interbank call
and OBB rates averaged 1.43 and 2.68
per cent, respectively. This was traced
to liquidity surfeit in the banking system.
The
deposit
money
banks
were,
however, reluctant to grant new credit
because of rising non-performing loans
(NPLs), mainly in the oil sector, amongst
other reasons.

The Committee also noted the slight
improvement in the equities segment
of the capital market during the review
period. The All-Share Index (ASI) rose by
8.1 per cent from 23,916.15 on January
29, 2016 to 25,853.58 on March 14,
2016. Similarly, Market Capitalization
(MC) rose by 8.02 per cent from N8.23
trillion to N8.89 trillion during the same
period.
However,
relative
to endDecember 2015, the indices declined
by 9.73 per cent and 9.74 per cent,
respectively.

External Sector Developments
The
average
naira
exchange rate
remained
stable at the inter-bank
segment
of
the
foreign exchange
market during the review period. The
exchange rate at the interbank market
opened at N197.00/US$ and closed at
N197.00/US$, with a daily average of
N196.99/US$ between January 25 and
March
14,
2016.
The
Committee
reiterated
its
commitment
to
maintaining a stable naira exchange
rate. The MPC took note of the level of
activity in the autonomous foreign
exchange market as well as the rising
demand in the interbank market but
observed that the data on demand for
foreign
exchange,
was
being
overshadowed
by
speculative
demand. However, the Committee
charged the Bank to speed up reforms


CBN Monetary Policy Review

of the foreign exchange market to
improve certainty and eliminate noise
and opportunities for arbitrage.

The Committee’s Considerations
The Committee noted the weakening
macroeconomic
environment,
reflected
particularly
in
foreign
exchange
shortages,
slowing
GDP
growth rate and rising inflation. Overall
economic growth slowed significantly
in 2015, particularly in Q4. Apparently,
the
conditions
responsible
for
the
slowdown – uncertainty around fiscal
policy, adverse external environment,
security challenges in some parts of the
country
affecting
production
and
distribution of agricultural produce, low
electricity supply, fuel shortages, and
sluggish growth in credit to the private
sector – have continued in the first
quarter of 2016. On the monetary side,
contrary to the notion of liquidity
overhang in the financial system, the
wider economy appears starved of the
needed liquidity to spur growth and
employment. Recent performance of
the
monetary
aggregates
lends
credence
to
this
fact.
With
the
exception of credit to government,
growth in all the monetary aggregates
remained largely below their indicative
benchmarks,
yet; headline inflation
spiked to 11.38 per cent in February
2016, substantially breaching the policy
reference band of 6 - 9 per cent. Apart
from liquidity, the increase in inflation
was driven by structural factors such as
fuel scarcity, increased electricity tariff,
persistent
insecurity,
exchange
rate
pass
through
and
seasonality
of
agricultural produce. The conflicting
signals from slowing growth and rising
inflation
present
a
difficult
policy
challenge.
Though
mindful
of
the
limitations
of
monetary
policy
in
influencing the drivers of the current
price spiral, the Committee stressed
the need to urgently address the key
sources of the pressures. In this regard,
the
Committee
reaffirmed
its
commitment to closely monitor the
development
while
encouraging
relevant authorities to address the
structural bottlenecks.

From
the
monetary
data,
the
Committee noted that the excess
liquidity in the banking system was
contributing to the current pressure in
the foreign exchange market with a
strong
pass-through
to
consumer
prices. The Committee further noted
that previous efforts to reflate the
economy in order to spur growth did
not elicit the required response from
DMBs, hence; the surfeit of liquidity in
the interbank market. Obviously, the
attendant low rates at that market
have not transmitted to the term
structure of interest rates. Concerned
about the need for low interest rates to
support growth and employment, the
Committee urged the CBN to explore
innovative
ways
of
ensuring
the
unhindered flow of credit at low cost to
key growth sectors even as monetary
policy has to, under the circumstance,
address
the liquidity surfeit in the
banking system as well as the pressure


CBN Monetary Policy Review

on
exchange
rate
and
consumer
prices. The Committee hopes that
fiscal
and
other
structural policies
would soon be deployed to strengthen
the
overall
response
of
macroeconomic policy to the shocks.

The Committee was also concerned
that with headline inflation at 11.38 per
cent, noting that the policy rate had
become negative in real terms. This
development has the potential of
keeping both foreign and domestic
investments
on
hold.
As
part
of
measures
to
address
the
supply
constraint in the foreign exchange
market, yields on domestic instruments
have to be competitive to attract the
much needed foreign inflows.

On the administrative side, this will
have to be complemented by a
comprehensive reform of the foreign
exchange market which is currently
being undertaken. For the avoidance
of doubt, the Bank would continue to
allow
domiciliary
account
holders
unfettered access to funds in their
accounts. The Committee also urged
speedy passage of the 2016 Budget in
order to halt the depressing effect of
the uncertainty that engulfs the waiting
period,
hoping
that
the
implementation of the budget would
go a long way in boosting business
confidence,
and reinvigorating the
financial markets. In the circumstance,
the Committee urged the Bank to
continue to upscale its surveillance of
the financial system with the aim of
promptly detecting and managing
vulnerabilities
to
ensure
sustained
stability.

Finally,
the
Committee
remains
committed to price stability across the
range of consumer prices, exchange
rate
and
interest
rate,
which
is
fundamental to reviving economic
growth and employment generation.
In the meantime, the Bank would
continue to leverage its development
finance
policy
to
support
critical
sectors of the economy. The MPC also
stressed the need to sustain, deepen
and speed up reforms designed to
ensure
focused
coordination
of
monetary and fiscal policies.

The Committee’s Decision
The Committee, in its assessment of
relevant internal and external indices,
came to the conclusion that the
balance of risks is tilted against price
stability. The MPC therefore, voted to
tighten the stance of monetary policy.
One member voted to retain the CRR
at
20.00
per
cent
while
another
member voted to retain the current
width of the asymmetric corridor.

In summary, the MPC voted to:
(i)
Raise MPR by 100 basis points
from 11.00 per cent to 12.00 per
cent;
(ii)
Raise CRR by 250 basis points
from 20.00 to 22.50 per cent;
(iii)
Retain Liquidity Ratio at 30.00 per
cent; and


CBN Monetary Policy Review

(iv) Narrow the asymmetric corridor
from +200 and -700 basis points to
+200 and -500 basis points

Thank you for listening.

Godwin I. Emefiele
Governor, Central Bank of Nigeria
22nd March 2016.


CBN Monetary Policy Review

Central Bank of Nigeria Communique
No

of
the
Monetary
Policy
Committee Meeting of Monday and
Tuesday 23rd and 24th May 2016
The Monetary Policy Committee met
on 23rd and 24th May 2016 against a
backdrop of challenging global and
domestic
economic
and
financial
conditions. The Committee assessed
the
global
and
domestic
macroeconomic
and
financial
developments, the short-to mediumterm
prospects
for
the
domestic
economy and the outlook for the rest
of the year. In attendance were 9 out
of the 12 members.

International Economic Developments
The Committee noted with concern,
the tapered growth and continued
decline in global output since 2014. At
an estimated 3.2 per cent, global
output
in

was
only
0.1
percentage point below the 3.1 per
cent in the corresponding period of
2015. The sluggish global output was
traced to weak fundamentals in both
the
advanced
economies
and
Emerging
Markets
and
Developing
Economies
(EMDEs),
including
increased volatility in global financial
markets,
sustained
softness
in
commodity
prices,
sluggish
global
trade, resulting in persistent fragility,
particularly in the EMDEs.

The
United
States
(US)
economy
slowed to 0.5 per cent in Q1 2016, a
steep decline compared with the 1.4
per cent growth recorded in the last
quarter of 2015. The deceleration in US
growth was attributed to contraction in
non-residential fixed investment and
energy
businesses,
a
strong
dollar
which harmed exports, slowdown in
government spending and moderation
in private consumption expenditure
(PCE). Japan which is currently in
deflation is projected to grow by 0.5
per cent in 2016, the same as in 2015,
on the back of persistently weak
aggregate
demand.
The
Bank
of
Japan‟s (BoJ) monthly asset purchase
of ¥6.7 trillion (US$61.73 billion) resulted
in the Bank holding about one-third of
outstanding government bonds, while
the
economy
remained
largely
intractable
with
a
credit
crunch,
indicating that the programmme may
have lost its steam. In response to the
contraction
in
credit,
BoJ
since
January 2016, adopted a negative
interest rate policy.

Real GDP growth in the Euro area at
0.6 per cent in Q1, 2016 was a
phenomenal improvement compared
with the 0.3 per cent achieved in Q4
2015.
The
European
Central
Bank
(ECB), at its meeting of 21st April, 2016
maintained the soft policy stance by
holding its refinancing rate at 0.0 per
cent, lending rate at 0.25 per cent and
deposit rate at -0.4 per cent. The Bank
also
maintained
its
monthly
asset
purchase
program
of
€80
billion
(US$87.2
billion),
hoping
to
further
stimulate output growth and achieve
its 2 per cent inflation target.


CBN Monetary Policy Review

The
Bank
of
England
(BoE)
also
retained its monthly assets purchase
programme,
financed
through
the
issuance of reserves at ₤375 billion
(US$543.75 billion). At the end of its
April 13, 2016 meeting, BoE retained its
policy rate at 0.5 per cent, with a
commitment to raise inflation to its 2.0
per cent long run path.

Weaknesses in major EMDEs, including
low capital inflows, rising costs of funds
and continuing geopolitical factors,
have been identified as key constraints
to growth. Adverse commodity prices
continued
to
provide
strong
headwinds against growth, defining
other
economic
and
financial
conditions in the EMDEs. Consequently,
the
IMF
(WEO
April
2016 Update)
downgraded the 2016 growth forecast
for this group of countries from 4.3 to
4.1 per cent.

Disruptions to oil supply in Canada,
Nigeria and Kuwait and, demand
spikes following expectations of a US
interest rate hike and buildup of crude
oil inventories, contributed to mild oil
price recovery in April 2016. Inflation
remains
largely
suppressed
in
the
advanced
countries
but
tepid
consumption
spending
and
vulnerabilities in the financial markets
continue
to
hamper
financial
intermediation
and
growth.
Consequently,
the
monetary policy
stance in most advanced economies
remained largely accommodative and
most
likely
to
be
maintained
throughout 2016. On the contrary,
monetary policy in the EMDEs could
continue
to
diverge
substantially,
reflecting
the
diversity
of
shocks
confronting them.

Domestic
Economic
and
Financial
Developments Output
In
the
first
quarter
of
2016,
the
economy suffered from severe shocks
related to energy shortages and price
hikes, scarcity of foreign exchange
and
depressed consumer demand,
among
others.
Consequently
economic agents could not undertake
new investments or procure needed
raw materials. Shortage of foreign
exchange arising from low crude oil
prices manifested in low replacement
levels for raw materials, other inputs as
well as new investments. In addition,
the energy crisis experienced in the first
five months of the year, resulted in
increased power outages and higher
electricity
tariffs,
as
well
as
fuel
shortages;
which
led
to
factory
closures in some cases. The prolonged
budget impasse denied the economy
the
timely
intervention
of
complementary
fiscal
policy
to
stimulate economic activity in the face
of dwindling foreign capital inflows.
Aggregate credit to the private sector
remained highly tapered while credit
to
government
grew
beyond
the
programmed
benchmark
for
the
period.
The
Committee,
however,
noted that many of the prevailing
conditions in the economy during the
review period were outside the direct


CBN Monetary Policy Review

control of monetary policy, but hopes
that the implementation of the 2016
Federal Budget, supported by relevant
sectoral policies and easing supply
shocks in energy and critical inputs,
would provide the needed boost to
the economy.

Against this backdrop, data from the
National Bureau of Statistics (NBS) for
May 2016, indicated that domestic
output in Q1, 2016 contracted by 0.36
per cent, the first negative growth in
many years. This represents a drop of
2.47 percentage points in output from
the 2.11 per cent reported in the last
quarter of 2015, and 4.32 percentage
point lower than the 3.96 per cent
recorded in the corresponding period
of 2015. Aggregate output contracted
in almost all sectors of the economy,
with the non-oil sector declining by
about 0.18 per cent in Q1 2016,
compared
with
3.14
per
cent
expansion in the preceding quarter.
Only agriculture and trade grew by
0.68 per cent and 0.40 per cent,
respectively,
while
Industry,
Construction and Services recorded
negative growth of -0.93, -0.26 and -
0.08 percentage point, respectively.

Prices
The
Committee
noted
a
further
increase
in
year-on-year
headline
inflation to 12.77 per cent and 13.72
percent
in
March and April 2016,
respectively, from 11.38 per cent in
February 2016. The increase in headline
inflation in April reflected increases in
both food and core components of
inflation. Core inflation rose sharply for
the third time in a row to 13.35 per cent
in April from 12.17 per cent in March,
11.00 per cent in February and 8.80 per
cent in January having stayed at 8.70
per cent for three consecutive months
through
December,
2015.
Food
inflation also rose to 13.19 per cent
from 12.74 per cent in March, 11.35 per
cent in February, 10.64 per cent in
January
and
10.59
per
cent
in
December, 2015. The rising inflationary
pressure continued to be traced to
legacy factors including energy crisis
reflected
in
incessant
scarcity
of
refined petroleum products, exchange
rate
pass
through
from
imported
goods, high cost of electricity, high
transport
cost,
reduction
in
food
output, high cost of inputs and low
industrial output.

The Committee observed that in an
economy characterized by high import
dependence, the shortage of foreign
exchange provided some basis for
price
increases
as
currently
being
experienced. The Committee noted
that
the
economy
needed
to
aggressively earn and build up its stock
of foreign reserves in order to avoid
distortions when faced with severe
shocks. The Committee further noted
that the current inflation trend, being
largely a product of structural rigidities
and
inadequate
foreign
exchange
earnings would continue to be closely
monitored, and in coordination with
fiscal policy, with a view to addressing


CBN Monetary Policy Review

the underlying drivers of the upward
price movements.

Monetary,
Credit
and
Financial
Markets Developments
Broad money supply (M2) grew by 3.49
per
cent
in
April
2016,
a
1.29
percentage growth from the March
level of 2.20 per cent and compared
with the 3.67 per cent in April 2015.
When annualized, M2 grew by 10.47
per cent in April 2016 against the
provisional growth benchmark of 10.98
per cent for 2016. Net domestic credit
(NDC) grew by 7.87 per cent in the
same period and annualized at 23.61
per cent. At this rate, the growth rate
of NDC was above the provisional
benchmark of 17.94 per cent for 2016.
The development in NDC essentially
reflected
the significant growth in
credit to government of 35.97 per cent
in the month, annualized to 107.91 per
cent. Credit to the private sector grew
by 3.52 per cent in April 2016, which
annualized to a growth of 10.56 per
cent, below the benchmark growth of
13.28 per cent.

The
Committee
observed
with
concern,
the
continuous
dismal
performance of growth in credit to the
private sector, noting that in spite of
the Bank‟s efforts, DMBs continued to
direct
credit
largely
to
low
employment
elastic sectors of the
economy, a phenomenon that had
significantly contributed to the low
performance of the economy.
Money market interest rates reflected
the continuing liquidity surfeit in the
banking system. Average inter-bank
call rate, which stood at 4.50 per cent
on 21st March 2016, closed at 8.67 per
cent on March 18, 2016. Between
March
25th
and
14th
April
2016,
interbank call rate averaged 2.00 per
cent. The Committee noted a decline
in activity in the inter-bank market in
the period under review, which was
due to the payment of FAAC statutory
allocations and the maturity of CBN
securities.

The Committee also noted a further
improvement in the equities segment
of the capital market as the All-Share
Index (ASI) rose by 3.34 per cent from
25,899.91
on
March
24,

to
26,763.86 on May 18, 2016. Similarly,
Market Capitalization (MC) rose by
3.14 per cent from N8.91 trillion to N9.19
trillion
during
the
same
period.
However, relative to end-December
2015, the indices declined by 6.56 per
cent and 6.70 per cent, respectively.
Globally, however, the equities markets
were generally bearish.

External Sector Developments
The
average
naira
exchange rate
remained
stable at the inter-bank
segment
of
the
foreign exchange
market during the review period. The
exchange rate at the interbank market
opened at N197.00/US$ and closed at
N197.00/US$, with a daily average of
N197/US$ between March 25 and May
13, 2016. The Committee, therefore,


CBN Monetary Policy Review

remains committed to its mandate of
maintaining a stable naira exchange
rate. The MPC noted the level of
activity in the autonomous foreign
exchange market especially, following
the deregulation of the downstream
petroleum
sector
with
attendant
increased demand in the interbank
market, thus further exerting pressure
on the naira.

The Committee recalls that over the
last two consecutive meetings, it had
signaled the imperative of reform of
the foreign exchange market. In the
intervening
period, the Committee
interrogated the issues around the
current
foreign
exchange
market
regime, tracing them to the low foreign
exchange earnings of the economy.
Consequently,
in
the
Committee‟s
opinion, the key issue remains how to
increase
the
supply
of
foreign
exchange
to
the
economy.
The
Committee observed that while the
Bank has been working on a menu of
options to ensure increased supply of
foreign exchange, there was no easy
and quick fix to the foreign exchange
scarcity problem as supply remained
essentially a function of exports and
the investment climate.

The
Committee
is
aware
that
a
dynamic
foreign
exchange
management
framework
that
guarantees flexibility could not replace
the imperative for the economy to
increase its stock of foreign exchange
through enhanced export earnings.
Consequently, such a structure must
evolve to provide basis for radically
improved investment climate to attract
new
investments.
The
Committee
recognizes the exchange rate as a
very
important
macroeconomic
variable, which must be earned by
increased
productive
activity
and
exports, noting with satisfaction that
the Bank had made very significant
and
satisfactory
progress with the
reforms framework.

The Committee was of the view that
the
current
adverse
global
and
domestic
economic
and
financial
conditions and the imperative imposed
by the demand and supply shocks to
the
domestic
economy
and
considering the express intensions of
Government as enunciated in the 2016
budget,
policy
must
respond
appropriately as the market continues
to demonstrate confidence in the
Bank‟s ability to deliver a credible
foreign
exchange
market.
Accordingly, the MPC decided that
the Bank should embrace some level
of flexibility in the foreign exchange
market.
Given
the
imperative
for
growth, the Management of the Bank
has been given the mandate to work
out the modalities for achieving the
desired flexibility that is in the overall
interest of the Nigerian economy and
when the implementation of the new
framework would begin.


CBN Monetary Policy Review

The Committee’s Considerations
The Committee acknowledged the
severely weakened macroeconomic
environment, as reflected particularly
in
increased
inflationary
pressure,
contraction in real output and rising
unemployment. The Committee recalls
that in July 2015, it had hinted on the
possibility of the economy falling into
recession
unless
appropriate
complementary measures were taken
by the monetary and fiscal authorities.
Unfortunately the delayed passage of
the 2016 budget constrained the much
desired fiscal stimulus, thus edging the
economy
towards
contractionary
output. As a stop-gap measure, the
Central Bank continued to deploy all
the instruments within its control in the
hope of keeping the economy afloat.
The
actions,
however,
proved
insufficient to fully avert the impending
economic contraction. With some of
the
conditions
that
led
to
the
contraction in Q1, 2016 still largely
unresolved,
the
weak
outlook
for
growth which was signaled in July 2015
could extend to Q2. To this effect,
today‟s policy actions have to be
predicated on a less optimistic outlook
for the economy in the short term,
given that, even after the delayed
budgetary passage in May 2016, the
initial monetary injection approved by
the
Federal
Government may not
impact the economy soon, as the
processes involved in MDAs finalizing
procurement
contracts
before
the
disbursement
of funds may further
delay
the
much
needed
financial
stimulus to restart growth.

The Committee noted that the CBN
had
implemented
accommodative
monetary policy from July 2015, with
the hope of achieving growth, up until
March 2016, when the MPC switched
into a tightening mode. However, while
the underlying conditions necessitating
tight monetary policy remained largely
in
place,
sundry
administrative
measures implemented by the Bank
and
recent
macroeconomic
conditions on the back of the 2016
Budget are expected to significantly
dictate a key policy preference in the
dilemma now faced by monetary
policy - stagflation. Given the current
limited policy space, it is imperative to
balance stability with growth stance
while working on options that in the
short
term,
are certain to isolate
seasonal and transient factors fuelling
the current price spiral.

Other
than credit to government,
growth in all monetary aggregates
remained largely below their indicative
benchmarks,
yet; headline inflation
spiked in April 2016, far above the
upper limit of the policy reference
band. Inflation has continued to be
driven mainly by supply side factors
such as fuel scarcity, increase in tariff
and deterioration in electricity supply,
increase in the price of petrol, higher
input costs as a result of scarcity of
foreign exchange, persistent security
challenges and exchange rate pass-


CBN Monetary Policy Review

through to domestic prices of import.
While the Committee believed that the
recent
deregulation
of
the
downstream sector of the petroleum
sector was in the right direction and
would lead to increased supply, the
pass-through effect of prices to other
products has to be factored in policy
considerations.

Mindful
of
the
limitations
of
monetary
policy
in
influencing structural imbalances in the
economy, the Committee stressed the
need for policy coordination with the
fiscal authorities in order to effectively
address the identified pressure points.
The
Committee
noted
that
the
continued
excess
liquidity
in
the
banking system was responsible for the
low level of activity in the interbank
market.
This
is
in
addition
to
contributing to the sustained pressure
in the foreign exchange market. The
Committee
expressed
hope
that
efficient
implementation
of
the
recently passed 2016 Federal Budget,
especially;
the
capital
expenditure
portion, would help invigorate growth
in
the
economy
as
business
confidence rejuvenates.

The
Committee
expressed
concern
over sustained pressure in the foreign
exchange market and the necessity of
implementing
reforms
to engender
greater
flexibility
of
rate
and
transparency in the operation of the
inter-bank foreign exchange market.
Accordingly, the Committee noted
that it was time to introduce greater
flexibility in the management of the
foreign
exchange
market.
The
Committee
reaffirmed
commitment
towards maintenance of price stability
and reiterated the need to reappraise
the coordination mechanism between
monetary and fiscal policy and initiate
reforms,
for the purpose of more
efficient
policy synchronization and
management.

The Committee’s Decisions
The Committee, in its assessment of the
relevant risk profiles, came to the
conclusion that although, the balance
of risks remains tilted against growth;
previous
decisions
need
time
to
crystalize. Consequently, in a period of
stagflation, the policy options are very
limited. To avoid complicating the
conditions, the Committee decided on
the least risky option to hold. The
foreign exchange market framework,
now
ready,
the
MPC
voted
unanimously to adopt greater flexibility
in exchange rate policy to restore the
automatic adjustment properties of the
exchange rate. Consequently, all 9
members voted to hold and introduce
greater
flexibility
in managing the
foreign exchange rate. The Bank would
however, retain a small window for
funding critical transactions. Details of
operation of the market would be
released
by
the
Bank
at
an
appropriate time.

In summary, the MPC voted to:
(i) Retain the MPR at 12.00 per
cent;


CBN Monetary Policy Review

(ii) Retain the CRR at 22.50 per
cent;
(iii) Retain the Liquidity Ratio at
30.00 per cent; and
(iv) Retain the Asymmetric Window
at +200 and -500 basis points
around the MPR
(v) Introduce greater flexibility in
the
inter-bank
foreign
exchange market structure and
to retain a small window for
critical transactions.

Thank you for listening.

Godwin I. Emefiele
Governor, Central Bank of Nigeria
24th May 2016


CBN Monetary Policy Review