CENTRAL BANK OF NIGERIA
MONETARY
POLICY REVIEW
MONETARY
POLICY REVIEW
February 2013
February 2013
Central Bank of Nigeria
www.cbn.gov.ng
E-mail:
33 Tafawa Balewa Way
Central Business District
P.M.B. 0187, Garki,
Abuja
Phone: +234 (0)9 462 36011
Website
©2012 Central Bank of Nigeria
:
ISSN: 2141-6281
Mandate
Vision
Mission Statement
§Ensure monetary and price stability
§Issue legal tender currency in Nigeria
§Promote a sound financial system in Nigeria
§Maintain external reserves to safeguard the international
value of the legal tender currency
§Act as banker and provide economic and financial
advice to the Federal Government
“By 2015, be the model Central Bank delivering Price and
Financial System Stability and promoting
Sustainable Economic Development"
“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
CBN Monetary Policy Review
CBN Monetary Policy Review
CONTENTS
Page
v
CBN Monetary Policy Review
CBN Monetary Policy Review
Table of Contents
List of Tables
Statement by the Governor

ix
Chapter 1
Overview


Chapter 2
Domestic Price Developments and the Real Economy

Chapter 3
Monetary Policy


Chapter 4
Domestic Financial Markets


Chapter 5
Economic Outlook


Table 2.1:
Inflation Rate (December 2011 - December 2012)
..

Table 2.2:
Quarterly Consumer Price Development
(November 2009=100)..


Table 2.3:
Selected CPI Components' Contribution to Food Inflation
(Year-On-Year) (July - December 2012)
..
..

Table 2.4:
Selected CPI Components' Contribution to Core Inflation
(Year-On-Year) (July - December 2012)
..
..

Table 3.1:
MPC Decisions (July - November, 2012)
..
..

Table 3.2:
CBN OMO Bills Auction (N'million)
(January 2009-December 2012)
..
..
..

Table 3.3:
CBN Standing Lending Facility (N'billion)
(January 2009- December 2012)
..
..
..

Table 3.4:
CBN Standing Deposit Facility (N'billion)
(January 2009-December 2012)
..
..
..

Table 3.5:
Foreign Exchange Supply by the CBN US$ million
(January 2009-December 2012)
..
..
..

Table 3.6:
Performance of Monetary Aggregates
(December 2011and December 2012)
..
..

Table 4.1:
Weighted Average Money Market Interest Rates (%)
(June 2012 – December 2012)..
..
..
..

Table 4.2:
Average Monthly Spot Exchange Rates (N/US$)
(July 2011 – December 2012) ..
..
..
..

Table 4.3:
End-Month Exchange Rate Movements
(July 2011 – December 2012) ..
..
..
..

Table 4.4:
Nominal and Real Effective Exchange Rate Indices
(July 2011 – December 2012) ..
..
..
..

Table 4.5:
Foreign Exchange Demand and Supply (US Dollar Million)
(July 2011- December 2012)


Table 4.6:
CBN Monthly Foreign Exchange Flows (US/$ Million)
(July 2011 - December 2012) ..
..
..
..

Table 4.7:
Monthly Foreign Exchange Flows through the Economy
(US$ million) (July 2011 – December 2012)
..
..

Table 4.8:
NSE All-Share Index (ASI) and Market Capitalization (MC)
(December 2011 – December 2012) ..
..
..

Table 5.1:
FGN Bond Yield 2012


Table 5.2:
World Economic Outlook


Table 5.3:
Confidence Interval Estimates for the Forecast of
2013 Inflation at 10% and 90% Confidence Band
..

vi
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Page
List of Figures
List of Boxes
Figure 2.1:
Headline Inflation (December 2011 - December 2012)

Figure 2.2:
Headline, Core and Food Inflation (Y-Y)
(December 2011 - December 2012)
..
..
..

Figure 2.3:
Selected CPI Components' Contribution to Food Inflation
(Year-On-Year) (July - December 2012)
..
..

Figure 2.4:
Selected CPI Components' Contribution to Core Inflation
(Year-On-Year) (July - December 2012)
..
..

Figure 2.5:
Actual and Seasonally Adjusted Headline Inflation
(December 2011 – December 2012) ..
..
..

Figure 2.6:
Oil Price (Bonny Light) (December 2011 – December 2012) 15
Figure 3.1:
The performance of M2, M1 and RM (2011 and 2012)

Figure 3.2:
The performance of NDC, Cg and Cp (2011 and 2012)

Figure 4.1:
Weighted Average Money Market Rates (%)
(June 2012 - December 2012) ..
..
..
..

Figure 4.2:
Daily Interbank Call Rate (June - December 2012)
..

Figure 4.3:
Daily Open - Buy – Back Rates (June – December 2012)

Figure 4.4:
Daily Exchange Rate (July 2011 – December 2012)
..

Figure 4.5:
End - Month Exchange Rate (July 2011 - December 2012)

Figure 4.6:
Nominal and Real Exchange Rate Indices
(July 2011 - December 2012) ..
..
..
..

Figure 4.7:
Demand and Supply of Foreign Exchange at wDAS
(July 2011 - December 2012) ..
..
..
..

Figure 4.8:
Foreign Exchange Flows through the CBN
(July 2011 – December 2012) ..
..
..
..

Figure 4.9:
Foreign Exchange Flows through the Economy
(July 2011 – December 2012) ..
..
..
..

Figure 4.10:
NSE ASI and MC (December 2011 – December 2012)

Figure 4.11:
NSE ASI and MC (July 2011 – December 2012)
..

Figure 4.12:
NSE Market Capitalisation by Sector as at
End - June, 2012


Figure 4.13:
NSE Market Capitalisation by Sector as at
End - December, 2012..


Figure 4.14:
Volume and value of FGN Bonds (2011 – 2012)
..

Figure 4.15:
10-Year U.S. Dollar-denominated Bond Yields for Nigeria
(January 24, 2011 – December 31, 2012)
..
..

Figure 4.16:
FGN Bond Yield Curves (End- December 2011 vs
End-Jun 2012 vs End-December 2012)
..
..

Figure 5.1:
Fan Chart for Headline Inflation
..
..
..

Figure 5.2:
Fan Chart for Core Inflation


Figure 5.3:
Fan Chart for Food Inflation


Box 2.1:
The Nigerian 2012 Flood Disaster and Monetary Policy

Box 4.1:
Inclusion of Federal Government of Nigeria (FGN)
bonds on the JP Morgan's Government Bond Index
of Emerging Markets (GBI-EM)..
..
..
..

Page
vii
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Appendices
Communiqué No. 84, July 23 - 24, 2012


Communiqué No. 85, September 17 - 18, 2012
..
..
..

Communiqué No. 86, November 19 - 20, 2012
..
..
..

ix
CBN Monetary Policy Review
CBN Monetary Policy Review
STATEMENT BY THE GOVERNOR
Monetary policy environment in the review period was characterized by the
complex challenge of managing the threat of inflationary pressure in the face of
slowdown in output. It had been anticipated that movements in prices would show
reasonable deceleration towards the end of the second half of 2012 as the effects
of the partial removal of fuel subsidy in January 2012 waned. Against expectations,
there was renewed threat to price stability as the economy was confronted with
additional shocks in form of unprecedented and highly devastating flood,
reinforced by other upside risks including upward adjustment in electricity and
import tariffs in the second half 2012.
Liquidity surfeit in the banking system resulting from fiscal expansion and general
improvements in DMB balance sheets found outlet in the foreign exchange market
exerting pressure on the naira. At the same time, dark clouds continued to dot the
global economy creating uncertainty over the fiscal cliff in the US and the euro zone,
which was declared officially to be in recession. The domestic financial market,
however, benefited from the third round quantitative easing in the US and the
monetary easing of some major central banks through portfolio flows although with
heightened apprehension about the risk of capital reversal.
In the light of these developments, therefore, the use of monetary policy as a
stabilization instrument almost reached its limit, requiring strong complimentary
measures including broad structural reforms that could address the various
bottlenecks in the production and distribution process. Given the preference for
financial stability in relation to growth, the monetary authority strengthened the
tightening stance which commenced in the third quarter of 2010 by raising the Cash
Ratio Requirement (CRR) by 400 basis points while the Net Open Position (NOP) for
authorized dealers was reduced by 200 basis points.
There could be some grounds to express skepticism about the gains of the various
measures relative to the cost in terms of persistent elevated lending rates but the
success story in the period could better be appreciated through a counterfactual
analysis. Despite the rising global food and energy prices, core inflation was largely
subdued by end-December 2012 due mainly to the low pass-through on imported
foods resulting from the relative stability in the exchange rate. Furthermore, the
confidence of the global community in Nigeria's macroeconomic environment led
to the inclusion of the FGN bond in the JP Morgan bond Index for emerging
economies with the attendant decline in yield.
On the whole, the entire process of monetary policy process was fraught with
difficult choices in the review period but it is heartwarming that the outcomes
x
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considerably justified the enormous resources invested thereon. Evolving signals
from both the international and domestic environments do not suggest much
optimism in the near to medium term but the monetary authority would continue to
proactively respond to the various challenges with a view to fostering a stable and
robust macroeconomic environment.
Sanusi Lamido Sanusi, CON
Governor,
Central Bank of Nigeria.


CBN Monetary Policy Review

CHAPTER 1
OVERVIEW

The monetary policy environment in the second half of 2012
was characterized by continuing threat of inflationary
pressures against the backdrop of declining trend in output
growth. Other key concerns included sustaining a stable
exchange rate for the naira, creating a buffer for the external
reserves, sustaining stability in money market rates, narrowing
the spread between the lending and deposit rates and
mitigating the impact of the continued slowdown in global
economic activities on the domestic economy. In view of
these multi-dimensional challenges, monetary policy during
the period focused on deploying the mix of appropriate
instruments to deliver on price stability. In addition, the slow
pace of recovery in the advanced economies, the reduced
growth momentum in the emerging economies and the
prolonged financial fragilities in the Euro Area were some of
the key considerations that defined the thrust of monetary
policy in the period

Accordingly, the Bank continued with its tight monetary policy
stance, which commenced in the third quarter of 2010, using
the Monetary Policy Rate (MPR) as the signaling interest rate to
affect money supply and rein-in inflation expectations. Open
Market Operations (OMO) continued to be used as the main
instrument of monetary policy, supplemented by Repurchase
Agreements and Discount Window Operations to ensure
optimal
liquidity
management.
These
tools
were
complemented with prudential requirements such as cash
reserve requirement (CRR), liquidity ratio (LR) and foreign
exchange Net Open Position (NOP) limit for Deposit Money
Banks. Primary market transactions in government securities
and foreign exchange market interventions were also used for
monetary management. The Bank sustained efforts towards
improving communication with market operators and other
stakeholders.

The Monetary Policy Committee (MPC) held three regular
meetings in the review period, during which it maintained the
...monetary
policy
environment in
the second half
of 2012 was
characterized
by the need to
strike a delicate
balance
between halting
the declining
trend in output
growth and rising
inflationary
pressures.
The Bank
continued with
tight monetary
policy stance,
which
commenced in
the fourth
quarter of 2011...


CBN Monetary Policy Review

MPR at 12.0 per cent with a symmetric corridor of +/- 200 basis
points. To further sustain the tightening stance, CRR was raised
from 8.0 to 12.0 per cent and NOP limit reduced from 3.0 to 1.0
per cent at the July 2012 meeting. The LR was retained at 30.0
per cent with the mid-point of exchange rate maintained at
N155/US$ within a band of +/-3.0 per cent.

Growth in the monetary aggregates was generally below the
benchmark during the period. Broad money (M2) grew by
13.72 per cent as at end-December 2012 which was lower
than the target of 24.64 per cent and 15.43 per cent at endDecember 2011. This development reflected the contraction in
net domestic assets, particularly credit to government, which
declined substantially in the review period relative to the endDecember 2011 level. The phenomenon was as a result of the
persistence of government as a net creditor to the banking
system due to more prudent fiscal measures and the
introduction of the Treasury Single Account (TSA). The sluggish
growth in the overall monetary aggregates notwithstanding,
the net foreign asset (NFA) recorded a significant growth of
27.46 per cent which was higher than the benchmark of 6.6
per cent. The impressive growth rate in the NFA was as a result
of the high price of crude oil throughout the year, relaxation of
regulation on capital flows and the relatively high rate of
returns on domestic fixed income financial assets.

Headline inflation moderated slightly during the review period
relative to the first half of the year. Headline inflation, however,
remained generally high with the pressure originating mostly
from its core component. Both pull and push factors were at
play in driving up domestic prices during the period. The
demand pull factors were mainly from fiscal operations of the
Federal Government and monetized capital inflows following
the third quantitative easing in the US and ECB which resulted
in substantial increase in domestic liquidity. The cost-push
factors included the lagged effects of the partial removal of
petroleum subsidy in the first half of the year, upward review of
electricity tariff and import duty on wheat and rice. Added to
these was the supply shock due to the highly devastating flood
that ravaged most parts of the country especially the food
producing belt during the review period.
Growth in the
monetary
aggregates was
generally below
the benchmark
during the
period.
Inflation
environment
remained
uncertain and
unlike in the past
trend, the
pressures
emanated
mostly from the
core
component.


CBN Monetary Policy Review

Headline inflation (year-on-year) stood at 12.0 per cent at endDecember 2012, slightly lower than 12.9 per cent at the end of
first half of the year, but higher than the level recorded in the
corresponding period of 2011 by 1.7 percentage points.
Similarly, core Inflation which stood at 13.7 per cent was lower
than the 15.2 per cent recorded at the end of first half of the
year, but higher than the level recorded in the corresponding
period of 2011 by 2.9 percentage points. Unlike headline and
core inflation, food Inflation at 10.2 per cent was 1.8 and 0.8
percentage points lower than the levels at the end of first half
and
the
corresponding
period
of
2011,
respectively.
Nonetheless, the relatively stable naira exchange rate, the
lower-than-programmed
expansion
in
the
monetary
aggregates and the generally tight monetary policy stance
had moderating effects on consumer prices during the period.

Following the success of the resolution of the banking system
crisis, the domestic financial markets stabilized to play key roles
in the transmission of monetary policy impulses to the real
economy. Thus, improved banking system stability helped to
promote the effectiveness of monetary policy during the
review period. As a direct consequence of the tight monetary
policy, short-term interest rates were largely within the MPR
corridor. With the standing lending facility at 14.0 per cent
(MPR+200 basis points), interbank interest rates were relatively
less volatile. In addition, the implementation of administrative
measures such as the prohibition of concurrent dealings in
wDAS and the Bank’s lending window had quite salutary
impact on market activities in the review period. The average
interbank call and open buy back (OBB) rates declined by 304
and 299 basis points to 11.88 and 11.73 per cent in December
2012 from 14.92 and 14.72 per cent in June 2012, respectively.

There was an upward movement in interest rates in the credit
market reflecting the tight stance of monetary policy. A major
challenge, however, was the sustained elevated lending rate
as well as the persistence of asymmetric response to policy
rate between deposit and lending rates. The prime lending
rate decreased marginally to 16.54 per cent at end-December
2012 from 16.75 per cent at end-December 2011. The average
maximum lending rate rose to 24.61 per cent in December
.. major
challenge,
however, was
the sustained
elevated lending
rate as well as
the persistence
of asymmetry in
deposit and
lending rates.
Demand
pressure
moderated
considerably at
the wholesale
Dutch Auction
System (wDAS)
segment...
exchange rate
experienced
appreciation at
the wDAS,
Interbank and
BDC’s
segments...


CBN Monetary Policy Review

2012 from 23.21 per cent in December 2011. The average
consolidated deposit rate rose to 3.77 per cent in December
2012 from 3.09 per cent in December 2011; thus widening the
spread between the maximum lending and consolidated
deposit rates to 20.84 from 20.12 per cent in the review period.

Demand pressure moderated considerably at the wholesale
Dutch Auction System (wDAS) segment of the foreign
exchange market. In the review period, total demand at the
wDAS segment reduced by 25.9 per cent compared with the
first half of 2012 and by 56.5 per cent compared with the
corresponding period of 2011. The development was due to
the effectiveness of monetary policy instruments deployed
during the period. In particular, the reduction in the NOP from
3.0 to 1.0 per cent and increase in CRR from 8.0 to 12.0 per
cent succeeded in reducing speculative demand. In addition,
the restriction of authorised dealers from accessing the
standing lending facility and the wDAS concurrently had
moderating effect on the demand for foreign exchange. As a
result, the exchange rate appreciated by 0.11, 3.56 and 3.14
per cent at the wDAS, Interbank and Bureau de Change
(BDC) segments, respectively.

During the second half of 2012, the Federal Government of
Nigeria (FGN) bonds and Nigerian Treasury Bills (NTBs) auctions
were over-subscribed due to the attractive yields on the
instruments and the increased appetite of local and foreign
investors in the Nigerian government-issued fixed income
securities. This positive development was due to improvements
in macroeconomic management. In addition, the inclusion of
FGN bonds in the JP Morgan Government Bonds Index of
Emerging Markets (GBI-EM) and other international rating
agencies substantially improved investor confidence in the
sovereign securities.

There was significant improvement in stock market activities
during the review period. The Nigerian Stock Exchange All-
Share Index (ASI) increased by 30.0 per cent compared with
the end-June 2012 level and by 35.45 per cent compared with
the end-December 2011 level. Similarly, Market Capitalisation
(MC) for equities increased by 30.0 per cent compared with


CBN Monetary Policy Review

the end-June 2012 level and by 37.37 per cent compared with
the end-December 2011 level. The development resulted from
the salutary impact of the regulatory reforms and the
accompanying significant capital inflows traced to the
favourable macroeconomic environment.

Domestic output growth remained resilient despite the severe
weaknesses in the global economy. However, real sector
performance showed a slight decline in the review period as
data from the National Bureau of Statistics (NBS) indicated that
GDP growth rate slowed to 6.99 per cent in second half of 2012
from 7.76 per cent in the second half of 2011. Although, the
non-oil sector remained the major driver of growth during the
period, it exhibited a declining trend in its contribution to
overall GDP. In particular, the agricultural; and wholesale and
retail trade sectors experienced declining growth due to flood
and security challenges which affected economic activities in
most parts of the country. In view of the limitations of monetary
policy in inducing long-term growth in the face of structural
deficiencies, the Monetary Policy Committee (MPC) reiterated
the need for supportive fiscal and structural reform and policies
in key areas of power and other infrastructure.

Economic outlook in the near term suggest that output is
expected to remain sluggish in the advanced economies
while it would be relatively robust in the emerging and
developing economies. Overall, global growth by the IMF is
projected at 3.5 per cent in 2013, representing a modest
improvement over the 3.2 per cent recorded in 2012.
Improvement in global output notwithstanding, unemployment
is likely to stay elevated in many parts of the world, especially
in the euro area. Output growth in the domestic economy is
expected to improve to 6.8 per cent in 2013 due to favourable
macroeconomic conditions arising from reform measures. Key
risks to output growth in the near term include the aftermath of
severe flooding in several parts of the country in 2012. In
addition, the lingering security challenges as well as delays in
reform of critical sectors could undermine investor-confidence
and output growth.


CBN Monetary Policy Review

According to the World Bank, global inflation is expected to
moderate slightly within the range of 3.5 – 4.0 per cent in 2013
which is close to 3.9 per cent reported for 2012. In the
advanced economies consumer price is expected to
moderate from 2.0 per cent in 2012 to 1.6 per cent in 2013,
while in the emerging economies prices are expected to
remain unchanged at 6.1 per cent in 2013 (WEO). Staff
forecast indicated that inflation would moderate in the
domestic economy to 8.5 per cent in the first half of 2013
based on the sustenance of tight stance of monetary policy.


CBN Monetary Policy Review

CHAPTER 2
DOMESTIC PRICE DEVELOPMENTS AND THE REAL
ECONOMY

In the second half of 2012, inflationary pressures moderated
slightly following the diminishing effects of the partial removal
of subsidy on premium motor spirit (PMS) in January 2012. The
moderation was complemented by the sustained tight
monetary policy stance of the Bank and the relative stability in
the exchange rate of the naira. While domestic output in 2012
remained strong, compared with 2011, there was a decline
partly traced to the impact of widespread flooding which
ravaged most farmlands along the major agricultural belt of
the country as well as higher electricity tariff and imported
food inflation.

2.1
Domestic Economic Activity
Domestic output growth remained resilient despite flooding in
most parts of the country, incessant security challenges and
the slow pace of recovery in the global economy. Growth in
real Gross Domestic Product (GDP) in both oil and non-oil
sectors were, however, lower in 2012 relative to 2011. Real GDP
stood at 6.99 per cent compared with 6.39 per cent in the first
half of 2012 and 7.76 per cent in the corresponding period of
2011. The contribution of the oil sector to real GDP declined to
12.59 per cent in the second half of 2012 from 13.86 per cent in
the first half and 13.57 per cent in the corresponding period of
2011. The decline was attributed to disruptions in production
due to facility shut downs and pipeline vandalism.

The non-oil sector remained the major driver of growth at 8.22
per cent rate in the second half of 2012 compared with the
0.11 per cent drop in the oil sector. In the non-oil sector,
contributions from agriculture; and wholesale and retail trade
to overall growth declined to 1.43 and 2.22 percentage points,
respectively, compared with 2.31 and 2.26 percentage points
recorded in the second half of 2011. The slowdown in the
contribution of agriculture to output growth was attributed to
the flood and security challenges, which affected farming
activities in some parts of the country during the review period.
Inflationary
pressures
moderated
following the
diminishing
effects of the
partial removal
of subsidy on
premium motor
spirit (PMS) and
higher electricity
tariff


CBN Monetary Policy Review

In addition, the decline in the contribution of the wholesale
and retail trade sector was due to the prevailing security
challenges in the country, which affected distribution channels
for most products thereby exacerbating the structural rigidities
and infrastructural deficiencies.

The index of industrial production rose to 137.59 (1990=100) in
the second half of 2012, compared with 136.30 in the first half
and 135.10 in the corresponding period of 2011. This
represented an increase of 0.95 per cent over the first half and
1.84 per cent in the corresponding period of 2011. Similarly, the
index of manufacturing production stood at 106.80 (1990=100)
in the second half of 2012 compared with 106.10 in the first half
and 98.88 in the corresponding period of 2011. This
represented an increase of 0.66 per cent over the level in the
first half and 8.0 per cent in the corresponding period of 2011.
Likewise, the index of mining production at 146.96 (1990=100),
was 0.18 per cent higher than the 146.70 recorded during the
first half of 2012. The noticeable improvements in some of
these indices were attributed largely to the steady power
supply, increased production in the cement industry and the
value-chain initiatives of the government.

In addition, the slow rate of domestic output growth in 2012
relative to 2011, were traceable to developments in the global
economy, which included lingering sovereign debt crisis,
financial sector fragilities in the euro zone and the unresolved
US fiscal cliff.
2.2 Trends in Inflation
Consumer prices moderated in the second half of 2012 due to
the waning effects of the increase in prices of petroleum
products in January and the sustained tight monetary policy.
Inflationary pressures were, however, heightened by the
increased tariffs on electricity, import duty on rice and wheat;
implemented in July 2012 and the effects of the flood in some
parts of the country, which affected agricultural output and
distribution channels.

Headline inflation (year-on-year) moderated in the second half
of 2012 to 12.0 per cent at end-December, from 12.8 per cent
....Headline
inflation (year-onyear) moderated
in the second
half of 2012 to
12.0 per cent by
end-December,
from 12.9 per
cent end-June

CBN Monetary Policy Review

at end-June 2012, which was however, higher than the 10.3
per cent attained at end-December 2011. The major drivers of
headline inflation for end-December 2012 included food and
non-alcoholic beverages, housing, water, electricity and
transport.

Food inflation (year-on-year) also moderated to 10.2 per cent
by end-December 2012, compared with 12.1 and 11.0 per
cent at end-June 2012 and December 2011, respectively. The
moderation was partially due to farm produce component of
food inflation which dropped by 1.9 percentage points as a
result of the harvest season.

Core inflation (year-on-year) decelerated to 13.7 per cent by
end-December 2012 from 15.0 per cent at end-June 2012,
which was, however, higher than the 10.8 per cent achieved
at end- December 2011.

Figure 2.1
Headline Inflation (December 2011 – December 2012)
Source: NBS

The core and food components of the consumer price index
increased from 138.0 and 134.5, at end-June 2012 to 141.80
and 141.20, respectively (Table 2.1). The index of core inflation
increased by 3.8 points, while that of food rose by 6.7 points. In
effect, the food components of inflation exerted greater
pressure on headline inflation.

Per Cent
Headline Inflation


CBN Monetary Policy Review

Table 2.1
Inflation Rate (December 2011 – December 2012)

Table 2.2
Quarterly Consumer Price Development
(November 2009=100)

12-Mar
12-Jun
12-Sep
12-Dec

Yon-Y
12MMA
Yon-Y
12MMA
Yon-Y
12MMA
Yon-Y
12MMA
Headlin
e

Core

Food

Source: National Bureau of Statistics (NBS)


Headline Inflation
Core Inflation
Food Inflation
Date
CPI
Y-onY
12MMA
CPI
Y-onY
12MMA
CPI
Y-onY
12MMA
Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

Dec-12

Source: National Bureau of Statistics (NBS)


CBN Monetary Policy Review

Figure 2.2
Headline, Core and Food Inflation (Y – Y)
(December 2011 - December 2012)
Source: NBS

In terms of food inflation, the contribution of processed food
increased from 4.3 to 4.4 per cent between July and
December, 2012. On the other hand, the contribution of farm
produce declined from 7.7 per cent at end-June 2012 to 5.8
per cent at end-December 2012. Further analysis showed that
meat; fruits; and yams, potatoes and other tubers declined
from 1.3, 0.4, and 1.8 per cent at end-June to 1.14, 0.29, and
1.17 per cent, respectively, in December 2012 (Table 2.3).


Per Cent
Headline
Core
Food


CBN Monetary Policy Review

Table 2.3
Selected CPI Components’ Contribution to
Food Inflation (Year-on-Year) (July – December 2012)
Source: NBS

Analysis of core inflation showed that of all the components,
housing, water, electricity, gas & other fuels contributed less to
inflation during the second half of 2012, as it declined from 4.9
per cent in June to 4.0 per cent in December, 2012. Also, the
contributions of transport; and furnishings, household (HH)
equipment & HH maintenance, decreased from 1.4 and 1.0 to
1.3 and 0.9 per cent in June and December 2012, respectively.
However, the contribution of education to core inflation
stabilised at 0.7 per cent during the period (Table 2.4).

Table 2.4
Selected CPI Components’ Contribution to Core Inflation
(Year-on-Year) (July – December 2012)
Date
12Jun
12-Jul
12-Aug
12-Sep
12-Oct
12-Nov
12-Dec
Core

Housing,
Water,
Electricity, Gas
& Other fuel

Transport

Furnishings,
Household
Equip. & HH
Maint.

Education

Source: NBS

Date
12-Jun
12-Jul
12-Aug
12-Sep
12-Oct
12-Nov
12-Dec
Food

Processed
Food

Farm
Produce

Meat

Fruits

Yams,
Potatoes &
Other Tuber


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Figure 2.3
Selected CPI Components’ Contribution to Food Inflation
(Year-on-Year) (June – December 2012)

Source: NBS

Figure 2.4
Selected CPI Components’ Contribution to Core Inflation
(Year-on-Year) (July – December 2012)

Source: NBS

2.3
Actual and Seasonally Adjusted Headline Inflation
During the period under review, the seasonally adjusted
inflation rate was higher than the actual inflation between July
and October 2012. The development was attributed to the
commencement of the harvesting season which increased
food availability and exerted downward pressure on domestic
food prices. In November and December, however, actual
inflation rose above the seasonally adjusted inflation due to

Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Per Cent
Food
Processed Food
Meat
Fruits
Yams, Potatoes & Other Tuber

Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Per Cent
Core
Housing, Water, Electricity, Gas & Other fuel
Transport
Education
Furnishings, Household Equip. & HH Maint.


CBN Monetary Policy Review

the effects of the nationwide flooding that ravaged most
states in the country (which affected the harvest of late
maturing crops) as well as increase in expenditure associated
with the year-end festivities.

Figure 2.5
Actual and Seasonally Adjusted Headline Inflation
(December 2011 – December 2012)

Source: NBS

2.4
Key Factors that Influenced the Domestic Price Level
During the second half of 2012, both demand-pull and costpush factors influenced price developments. There were also
other factors which helped to mitigate inflationary pressures
during the period under review.

2.4.1 Demand-Pull Factors
The late implementation of the capital budget for the second
quarter of 2012 and the implementation of the third and fourth
quarter capital budgets during the second half, led to
substantial injection of funds beyond what was earlier
earmarked for the period. The substantial injection of funds
created additional liquidity which mounted pressure on
domestic prices during the review period.

In addition, high oil prices experienced during the review
period boosted overall federation revenues and supported
higher levels of public expenditure across the three tiers of

Per Cent
Dec-11
Jan-12
Feb-12 Mar-12 Apr-12 May-12 Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12 Dec-12
Inflation

Inflation SA


CBN Monetary Policy Review

government. These factors contributed to increased demand,
which helped to fuel inflation.

Figure 2.6
Bonny Light Crude Oil Price
(December 2011 – December 2012)

Source: Bloomberg

2.4.2. Cost-Push Factors
In the second half of the year, the displacement of farmers in
some parts of the country due to flood and insecurity
accounted substantially for the drop in agricultural output as a
percentage of GDP in the review period. The decline in
agricultural
output
and
incessant
security
challenges
hampered effective distribution of agricultural products,
accentuating higher food prices.

Although the partial withdrawal of petroleum subsidy took
place in the first half of 2012, the spiral and lag effects were still
noticeable during the second half of 2012, especially through
its primary effect on energy and transport costs and secondary
effects on other prices.

The upward review of tariffs on electricity, imported rice and
wheat which took effect from July 1, 2012 further exerted
pressure on domestic prices, especially core inflation. The
increase in imported food prices, which rose from 132.4 per
cent in July 2012 to 134.5 in October and further to 136.7 at
end-December 2012, was due to rising global food inflation
traced to severe drought in the US, Europe and Central Asia;

Price (US $ per barrel)
Oil Price (Bonny Light)


CBN Monetary Policy Review

and flooding in Thailand and India, which negatively impacted
food production.

2.4.3 Moderating Factors
The Bank continued the tight monetary policy stance, which
commenced in the fourth quarter of 2010. The policy was
aimed at moderating inflationary pressures to achieve its price
stability mandate.

Against the background of high liquidity in the banking system
and the resulting demand pressure in the foreign exchange
market, the MPC at its July 2012 meeting raised the CRR from
8.0 to 12.0 per cent and reduced the Net Open Position (NOP)
of the DMBs from 3.0 to 1.0 per cent. In addition, the
Committee also retained the Monetary Policy Rate at 12.0 per
cent with symmetric corridors of +/- 200 basis points. Apart from
controlling inflation, these policy measures were meant to
sustain the stability of the naira exchange rate and help in
building-up external reserves.

Other measures taken to moderate inflation during the review
period were the reduction in multiple accounts by the Federal
Government through the implementation of the Treasury Single
Account, increased recourse to bond financing of government
deficits and the substantial sale of CBN bills.

In summary, despite the impact of floods on agricultural output
and structural and infrastructural deficiencies in the economy,
the sustained tight monetary policy posture of the CBN during
the second half of 2012 contributed in moderating the threat
of inflationary pressures


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Box 1
The Nigeria 2012 Flood Disaster and Monetary Policy

The 2012 flood disaster in Nigeria has been described as the worst in a
century given its coverage and magnitude of devastation. The flood,
which ravaged twelve states comprising Rivers, Niger, Benue, Sokoto,
Katsina, Lagos, Ondo, Delta, Rivers, AkwaIbom, Bayelsa and Cross
River states resulted in the loss of 363 lives, injured 5,851 others, while
3,891,314 people were displaced and 59 communities completely
sacked.

The National Emergency Management Authority (NEMA) reports that
the flooding was caused by persistent heavy rains between July and
October 2012, and the rising water level resulting in runoffs of major
local dams such as the Kainji, Shiroro and Jebba on the Niger River,
Lagdo Dam in the neighboring Cameroun on the Benue River, Kiri
Dam on the Gongola River and several other irrigation dams and
tributaries of the Rivers Niger and Benue. Consequently, apart from
submerging homes and farmlands, there was an invasion of reptiles
such as crocodiles, snakes and other dangerous aquatic animals that
were thrown into the hinterland, which hastened the abandonment
of homes and villages by coastal inhabitants.

The World Bank estimates the total social and economic costs of the
flooding to be around N1.48 trillion or equivalent of $9.5 billion. The
major sectors negatively impacted include Social (education, health
and housing), production (Agriculture, manufacturing, commerce
and Oil industry), infrastructure (water, sanitation, electricity and
transport) and the cross-sectoral (environment). From the estimates,
the shares of physical and durable assets were 57.0 per cent of the
total flood effects, while production accounted for the remaining 43.0
per cent.

To mitigate the socio-economic impact of the flooding, the Federal
Government released the sum of N17.6 billion as direct financial
assistance to the affected states and government agencies
responsible for disaster management. In addition, a disaster relief fund
committee
was
inaugurated
to
raise
financial
resources
to
complement governments’ financial and logistic intervention.

The Monetary Policy Committee (MPC) meetings of September and
November 2012 considered two issues arising from the flood disaster
that has implications for monetary policy. First, the inflationary impact
of increased government expenditure as a result of the flood disaster
intervention and relief fund. The second is the likely uptick in food
inflation in the near-to-medium-term arising from the devastation of
agricultural production and infrastructure. The Committee, in response
to the anticipated downside risks to inflation objectives by the
foregoing retained the tight stance of monetary policy to insulate the
domestic economy from the adverse consequences of liquidity surfeit
arising from increased government expenditure and likely rise in food
prices as a result of the shortfall in domestic food production.


CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER 3
MONETARY POLICY

The monetary policy environment in the second half of 2012
was characterized by inflationary pressures from the lag effect
of the partial removal of subsidy on premium motor spirit (PMS),
upward adjustment of tariffs on electricity and imported
rice/wheat and flooding in the food producing belt of the
country. In response, the Monetary Policy Committee (MPC)
continued with the tight policy stance by raising the Cash
Reserve Ratio (CRR) from 8.0 per cent to 12.0 per cent and
lowering the Net Open Position (NOP) from 3.0 per cent to 1.0
per cent in July, 2012. The MPR was raised to and retained at
12.0 per cent at the three meetings of the MPC during the
review period.

3.1
Highlights of Monetary Policy Measures
The monetary policy stance of the Bank remained restrictive
during the second half of 2012. The CRR was increased from
8.0 per cent to 12.0 per cent at the July 2012 MPC meeting
and remained at that level throughout the review period. The
foreign exchange NOP, which was reduced to 1.0 per cent
from 3.0 per cent at the July 2012 MPC meeting, was also
retained in subsequent meetings. In addition, the mid-point of
the exchange rate remained at N155.00/US$1.00 with the
band of +/- 3.0 per cent in order to sustain the stability of the
exchange rate of the domestic currency, attract foreign
investment and build-up external reserves.

Key considerations that informed the continuation of the tight
monetary policy stance included the need to stabilise the
exchange rate; the increase in import tariff on rice and wheat
effective from July 2012; increase in electricity tariff effective
from June 2012 and the impact of the flood on food
production.

3.2
Decisions of the Monetary Policy Committee
Uncertain developments in the international and domestic
economic environment shaped Monetary Policy Committee
(MPC) decisions in the second half of 2012. Some of the
Monetary policy
in the second
half of 2012 was
mainly driven by
the need to
contain
inflationary
The MPR was
unchanged at
12.0 percent in
the three
meetingsheld
during the
period.


CBN Monetary Policy Review

challenges included the continued fragility in the global
economy, weak domestic growth performance and outlook,
threats
of
high
inflation,
unemployment
and
possible
exchange rate depreciation.

In its July 2012 meeting, the MPC considered three options. The
first was an expansionary stance by lowering MPR in view of
the weakening domestic growth and the need to boost credit
to the economy and stimulate growth. However, the
Committee noted the slow pace of structural reforms and the
limitations of monetary policy to ensure sustained growth in an
economy
with
weak
infrastructure
base
and
poor
implementation of capital budgets. The second was to pursue
a contractionary policy by increasing the MPR specifically to
moderate inflation and stabilize domestic price movements.
The Committee acknowledged the threat of inflation but
noted the negative impact of high interest rates on small and
medium scale businesses. Second, high interest rates impact
negatively on the performance of risk assets in DMBs balance
sheets and the growth consequences for declining domestic
credit to the economy. The third option was to adopt a neutral
policy stance by leaving MPR unchanged in spite of
inflationary pressures from both domestic and international
developments. Given the mixed signals from price movements,
the likely speculative run on the naira as a result of growing
banking system liquidity, and the uncertainty in global
economic developments, the Committee opted to retain the
MPR at 12.0 per cent with symmetric corridor of +/- 200 basis
points. However, the CRR was increased from 8.0 to 12.0 per
cent to contain liquidity surfeit in the banking system, while the
foreign exchange Net Open Position was reduced from 3
percent to 1.0 per cent to avert speculative attacks on the
Naira.

At the September 2012 meeting, the Committee noted that
the continued fragility in the global economic conditions
manifested in weak macroeconomic performance in some
industrialized and emerging market economies. Specifically,
the Committee was concerned about the weak global
demand, elevated inflationary pressures, slow pace of growth
in global trade, contracting fiscal space, especially in Europe


CBN Monetary Policy Review

and the US and declining investments. In contrast, the
Committee
noted
with
satisfaction
some
positive
developments in domestic growth performance, which was
mainly driven by improvements in agricultural production,
declining insecurity and relative improvement in power supply
and distribution. In addition, the period witnessed high oil
prices and increased foreign portfolio inflows which sustained
accretion to foreign reserves. The moderation in domestic
inflation and sustained efforts by the government in structural
reforms and fiscal consolidation pointed to recovery in the
domestic
economy
and
presented
prospects
for
macroeconomic stability. Notwithstanding, the Committee
cautioned against fiscal expansion predicated on favourable
crude oil prices as this would threaten the inflation objective of
the Bank. Against this backdrop, the Committee unanimously
voted to maintain the tight policy stance by retaining the MPR
at 12.0 per cent with +/- 200 basis points corridor, the CRR at
12.0 per cent and foreign exchange NOP at 1.0 per cent.

At the November 2012 meeting, the Committee observed that
the global economy showed little signs of recovery as output
continued to decline, caused mainly by weak growth
performance in the euro area, Asia and other emerging
market economies. Also, there was speculation that global
recovery would be further challenged if the fiscal cliff in the US
was not resolved. Weak global recovery manifested in rising
unemployment rates, fragile financial conditions and housing
markets as well as deterioration in public and private balance
sheets, which negatively impacted on oil export and foreign
capital inflow to developing and emerging markets, including
Nigeria. On the domestic front, the real GDP growth rate was
revised downward to 6.61 from 6.85 per cent by the National
Bureau of Statistics (NBS). Furthermore, inflationary pressures reemerged in October 2012, in spite of the moderation in core
inflation to 12.40 from 13.10 per cent. The Committee noted
with concern some structural elements in the inflation threat,
which was beyond the scope of monetary policy. However,
there was improvement in reserve accretion of $10.27 billion or
29.0 percent to US$45.68 billion as at November 15, 2012 from
US$ 35.41 billion at end-June 2012.


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The Committee, in considering the options available for
monetary policy, noted that the uncertainty in the global
economy posed downside risks to the sustenance of growth
prospects in the domestic economy. In addition, the domestic
economy, in its opinion, had not achieved sufficient stability to
warrant a reversal of the tight stance of monetary policy. The
committee, therefore, unanimously voted to retain the MPR at
12.0 per cent with a corridor of +/- 200 basis points; retain the
CRR at 12.0 per cent and the Liquidity Ratio at 30.0 per cent.

Table 3.1
MPC Decisions, July – November, 2012
Items
July
September
November
MPR
Retain the MPR at
12%
Retain the MPR at
12%
Retain the MPR at
12%
MPR Corridor
Maintain +/- 200 basis
points
Maintain +/- 200
basis points
Maintain +/- 200
basis points
SDF Rate
Maintain at 10%
Maintain at 10%
Maintain at 10%
SLF Rate
Maintain at 14%
Maintain at 14%
Maintain at 14%
CRR
Raise to 12% from 8%
Retain at 12%
Retain at 12%
LR
Retain at 30%
Retain at 30%
Retain at 30%
NOP
Reduce to 1% from
3%
Retain at 1%
Retain at 1%
FX Rate Mid –
Point
Retain at N155/US$1
Retain at
N155/US$1
Retain at
N155/US$1
FX Band
Maintain +/-3 per cent
band
Maintain +/-3 per
cent band
Maintain +/-3 per
cent band

3.3 Monetary Policy Instruments
In consideration of the overriding goal of price stability and the
need to create an environment conducive to local and
international investments, the MPC deployed a number of
instruments, notably MPR complemented by CRR, Open
Market Operations (OMO) and Discount Window Operations.
The choice of these instruments was guided by the need for
stability in the domestic macroeconomic environment.


CBN Monetary Policy Review

3.3.1 Monetary Policy Rate (MPR)
The MPR, the Bank’s benchmark policy rate, remained the
major signaling instrument accompanied by interest rate
corridor
(standing
lending/deposit
facility
rates).
The
Committee kept the MPR unchanged at 12.0 per cent during
the three regular meetings held in the second half of 2012.

3.3.2 Reserve Requirements
The Bank retained the use of reserve requirements (Cash
Reserve and Liquidity Ratios) in the review period to
complement
OMO
and
other
instruments
of
liquidity
management. The Cash Reserve Ratio was increased from 8.0
to 12.0 per cent, while the Liquidity Ratio was unchanged at
30.0 per cent in the second half of 2012. The increase in CRR
was to address excess liquidity and demand pressure on the
Naira.

3.3.3 Open Market Operations (OMO)
The Bank continued to use OMO as the major medium for
liquidity and monetary management. The CBN Bills were the
main securities for OMO during the period. Total OMO
securities offered was N4,061.00 billion, while subscription was
N4,678.23 billion. Actual sales amounted to N2,795.58 billion in
the second half of 2012, compared with N1,717.35 billion in the
first half of 2012 and N1,582.02 billion in the corresponding
period of 2011. This represented an increase of 62.8 and 17.1
per cent, respectively. The increase in OMO sales was
attributed to the impact of monetization of AMCON bonds,
attractive long dated bills and augmentation from excess
crude account. Public subscription and sales in the review
period were remarkably higher than the preceding period due
to huge liquidity that prevailed, the greater frequency of
auctions and attractive yields.


Actual sales,
however,
amounted to
N2,795.58 billion
in the second
half of
2012,compared
with N1,717.35
billion in the first
half of2012....


CBN Monetary Policy Review

Table 3.2
CBN OMO Bills Auction (N’million) January 2009 – December 2012

Date

%
Change
over the
Previous
Period
Jan


Feb


Mar


Apr


May


Jun


1st Half

Jul


Aug


Sep


Oct


Nov


Dec


2nd Half

Cumulative
Figure


3.4 Standing Facilities
In the second half of 2012, DMBs and Discount Houses (DHs)
accessed the standing facilities (lending/deposit) to meet their
daily liquidity requirements. However, there was a reduction in
the cumulative volume of transactions at the CBN standing
lending facility (SLF). SLF stood at N7,733.53 billion compared
with N10,721.44 billion in the first half of 2012 and N25,047.27
billion in the corresponding period of 2011. The cumulative
volume of SLF at end-December 2012 represented a decrease
of 27.9 and 69.1 per cent, compared with the level in the first
half of 2012 and the corresponding period of 2011, respectively
(Table 3.3). The significant decrease in the volume of SLF
transactions in the second half of 2012 was attributed to
improvement in liquidity conditions in the banking system
driven mainly by AMCON injections, huge repayments of
matured FGN Bonds and CBN securities.


The Bank’s In the
second half of
2012, DMBs and
Discount Houses
(DH) actively
accessedthe
Standing facilities
(lending/deposit)
to meet their
daily
liquidityneeds


CBN Monetary Policy Review

Table 3.3
CBN Standing Lending Facility (N'billion)
(January 2009- December 2012)

Date

% change over the
preceding/corresponding
period
Jan

Feb

Mar

Apr

May

Jun

1st
Half

Jul

Aug

Sep

Oct

Nov

Dec

2nd
Half

Total


There was a significant increase in the cumulative volume of
transactions in the CBN Standing Deposit Facility (SDF) window
in the review period. Cumulative volume of SDF stood at
N9,885.25 billion in the second half of 2012, compared with
N3,727.96 billion in the first half of 2012 and N1,435.82 billion in
the corresponding period of 2011. The level of SDF as at endDecember 2012 represented 165.2 and 588.5 per cent
increases over the levels in the first half of 2011 and the
corresponding period in 2011, respectively (Table 3.4). The
observed increase in the use of SDF window reflected
increased
system-wide
liquidity
in
the
review
period,
compared with the corresponding period of 2011. Also, the
increased cumulative volume of transactions on the SDF
window resulted from the remuneration under the facility after
October

when
reserve
averaging
scheme
was
suspended in favour of daily maintenance of CRR.


CBN Monetary Policy Review

Table 3.4
CBN Standing Deposit Facility (N'billion)
(January 2009- December 2012)

Date

% change over the
preceding/corresponding
period
Jan

Feb

Mar

Apr

May

Jun

1st
Half

Jul

Aug

Sep

Oct

Nov

Dec

2nd
Half

Total


3.5
Foreign Exchange Intervention
The Bank continued its intervention in the foreign exchange
market aimed at sustaining the stability of the Naira. Total
supply of foreign exchange by the Bank in the review period
stood at US$10,756.78 million, compared with US$13,861.67
million and US$23,458.70 million in the first half of 2012 and the
corresponding period of 2011, respectively (Table 3.5). There
was a significant decrease in total supply by 22.4 and 54.2per
centfrom the levels in the first half and the corresponding
period of 2011, respectively. The sharp decline in demand
reflected the efficacy of measures to stop simultaneous access
to the wDAS and SLF windows by the DMBs and close
monitoring of the foreign exchange market. These measures
were complemented by increased autonomous foreign
exchange inflows due to high year round crude oil price;
relaxation of regulations on capital flows as well as increased
The Bank
continued its
intervention in
the foreign
exchange
marketaimed at
sustaining the
stability of the
naira.


CBN Monetary Policy Review

private capital inflow attracted by the relatively high rate of
returns on the domestic financial assets.

Table 3.5
Foreign Exchange Supply by the CBN US$ million
(January 2010 – December 2012)
YEAR

Sales to
wDAS
Sales
to BDC
Total
Supply
(wDAS
+ BDC)
Total
wDAS
sales
Sales
to BDC
Total
Supply
(wDAS
+ BDC)
Sales to
wDAS
Sales
to BDC
Total
Supply
(wDAS
+ BDC)
Jan

Feb

Mar

Apr

May

Jun

1st
Half

Jul

Aug

Sep

Oct

Nov

Dec

2nd
Half

Total


3.6
Performance of Monetary Aggregates
Broad money stock (M2) grew by 12.9 per cent to N15,483.85
billion at end-December 2012 from N13,483.06 billion at endJune 2012. The end-December 2012 level was 7.1 per cent
below the benchmark of N16,577.53 billion. The year-on-year
growth at 16.4 per cent was below the benchmark growth of
24.6 per cent.

Narrow money (M1) grew by 11.1 per cent to N7,420.95 billion
at end-December 2012 from N6,599.39 billion at end-June
2012. The end-December level was 22.9 per cent below the
benchmark of N9,117.64 billion. The year-on-year growth in M1
at 9.6 per cent was lower than the benchmark of 34.7 per
cent. The performance of the monetary aggregates in the
review period reflected the tight monetary policy stance of the
Bank and effective management of government liquidity
position following the implementation of the Treasury Single
The endDecember level
was N1,448.87
billion (8.74 per
cent) below the
2012 endDecember
benchmark...


CBN Monetary Policy Review

Account (TSA), increased recourse to bond financing of deficit
and substantial OMO sales. These developments effectively
made the FGN a net creditor of the banking system during the
review period.

Table 3.6
Performance of Monetary Aggregates
(December 2011 – December 2012)

Change
in H1

Change
in H2

Actual
Dec

Actual
June

Target

Actual
Dec

Deviation
Actual
Actual
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

Figure 3.1
The Performance of M2, M1 and RM (2011 and 2012)

Reserve Money (RM) grew by 32.2 per cent to N3,704.48 billion
at end-December 2012 from N2,511.96 billion at end-June
2012. The end-December level was 18.7 per cent above the
benchmark of N3,013.32 billion. The year-on-year growth in RM
at 26.9 per cent was higher than the benchmark of 8.2 per
cent. The significant increase was due largely to an increase in
the CRR from 8.0 to 12.0 per cent in July 2012.

Aggregate domestic credit dropped by 6.9 per cent to
N12.698.21 billion at end-December 2012 from N13,567.43
billion at end-June 2012. The end-December level was 48.6 per
cent below the benchmark of N18,873.49 billion. The year-onyear growth in Aggregate Domestic Credit at 7.2 per cent was
far below the benchmark of 52.2 per cent. The sharp decrease
was partly due to greater reliance of the FGN on public
financing through issuance of bonds and better management
of its cash flow under the TSA.

Credit to Government declined by 53.78 per cent to N2,453.56
billion at end-December 2012 from N1,133.69 billion at endJune 2012. The end-December level was 91.7 per cent below
the benchmark of N204.66 billion. Credit to Government yearon-year declined by 393.81 per cent, which was lower than the
benchmark of 61.5 per cent. In effect, the public sector was a
net creditor to the banking system throughout 2012.


M2 (%)
M1 (%)
RM (%)
M2 (%)
M1 (%)
RM (%)

Target
Actual
The year-on-year
growth in
Aggregate
Domestic Credit
was 1.98 per
cent, which was
far below the
benchmark of


CBN Monetary Policy Review

Figure 3.2
The Performance of NDC, Cg and Cp (2011 and 2012)


Credit to the private sector increased by 2.97 per cent to
N15,151.76 billion at end-December 2012 from N14,701.06
billion at end-June 2012. The end-December level was 25.9 per
cent below the benchmark of N19,078.15 billion. The year-onyear growth in credit to private sector, at 6.8 per cent, was
lower than the benchmark of 47.5 per cent. The moderation in
growth was due to flight to safety by DMBs into low-risk Treasury
Bills.

Net foreign assets (NFA) increased by 16.8 per cent to
N9,043.68 billion at end-December 2012 from N7,522.26 billion
at end-June 2012. The end-December level was 15.4 per cent
above the benchmark of N7,654.56 billion. The year-on-year
growth in NFA, at 26.7 per cent, was higher than the
benchmark of 6.6 per cent. The growth was due to increased
private capital inflow attracted by the relatively high rate of
returns on financial market securities as well as the high price
of crude oil throughout the year.


NDC (%)
Cg (%)
Cp (%)
NDC (%)
Cg (%)
Cp (%)

Target
Actual
Credit to Private
Sector increased
by N591.68bn
(4.03 per cent) in
the second half


CBN Monetary Policy Review

CHAPTER 4
DOMESTIC FINANCIAL MARKETS

4.1
Money Market
The money market remained active in the second half of 2012
with Government securities and CBN OMO bills dominating the
primary market segment. Market activities were influenced
largely
by
liquidity
conditions.
The
implementation
of
administrative measures like prohibition of concurrent dealings
in wDAS and the Bank’s lending windows had significant
impact on market activities in the review period. As the
liquidity situation in the market improved owing to both
administrative actions and autonomous inflows, short-term
interest rates moderated. Fiscal operations continued to weigh
in on liquidity conditions in the market.

4.1.1 Developments in Short-Term Interest Rates
Stabilizing short-term interest rates around the policy rate
remained a challenge for monetary management in the
review period. This was because the sharing of revenue
proceeds in the Federation Account by the three tiers of
government created system-wide liquidity swings and volatility
in short-term interest rates (figure 4.1). The average interbank
call rate ranged between 11.73 and 17.81 per cent, while the
open buy back (OBB) rate ranged from 11.58 and 16.51 per
cent in the second half of 2012.


Short-term
interest
rates
moderated
but
remained largely
within the MPR
corridor
Money market
activities in the
second half of
2012 were largely
influenced
administrative
actions and
liquidity
conditions


CBN Monetary Policy Review

Table 4.1
Weighted Average Money Market Interest Rates (%)
(June 2012 – December 2012)
Month
Monetary
Policy Rate
Overnight Interest Rates
Tenored
Call Rate
Open-BuyBack
NIBOR 30Day
Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

Dec-12


Figure 4.1
Weighted Average Money Market Interest Rate
(June 2012 – December 2012)


(i)
Interbank Call Interest Rate
The weighted average interbank call rate rose from 14.92 per
cent in June 2012 to peak at 17.81 per cent in August before
declining to 11.73 per cent in December 2012. Overall, the
interbank call rate decreased by 319 basis points between
June and December 2012. On a year-on-year basis, the
weighted average interbank call rate declined by 377 basis
points to 11.73 per cent in 2012 from 15.50 per cent in
December 2011 (Figure 4.1).


Jun-12
Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12
Per Cent
Monetary Policy Rate
Call Rate
Open-Buy-Back
NIBOR 7-Day
NIBOR 30-Day
Interbank
call
rate
eased
in
response
to
increased
market liquidity


CBN Monetary Policy Review

Figure 4.2
Daily Interbank Call Rates (June – December 2012)


(ii) Open Buy-Back Rate
The weighted average OBB rate which was 14.72 per cent in
June 2012 rose to 16.51 per cent in August but declined to
11.58 per cent in December.. Thus, the OBB rate fell by 314
basis points between June and December 2012. On a year-onyear basis, the weighted average OBB rate fell by 248 basis
points to 11.58 per cent in December 2012 from 14.06 per cent
in December 2011 (Figure 4.1).

Figure 4.3
Daily Open Buy Back (OBB) Rates
(June – December 2012)


Per Cent
Interbank Call

Per Cent
OBB
OBB rate
declines as
system liquidity
conditions eased


CBN Monetary Policy Review

(iii) Nigeria Interbank Offered Rate (NIBOR)
The NIBOR remained the traditional reference rate for tenured
transactions. The 30-day NIBOR moved in opposite direction
initially to the interbank call and OBB interest rates in the
second half of 2012. The weighted average 30-day NIBOR
which was 16.04 per cent in June 2012 moderated to 12.96
per cent in August but rose to 14.33 per cent in October. It
nonetheless fell to 12.96 per cent in December 2012 (Figure
4.1).

The general decline in short-term rates in the period under
review was primarily due to liquidity surfeit traced to payment
of maturing OMO bills, fiscal operations as well as AMCON
injections. The effect of the injections lasted through the fourth
quarter, thereby, moderating rates through year-end. This
development was notwithstanding the restrictive stance of
monetary policy.

4.2
The Foreign Exchange Market
The thrust of exchange rate policy remained the maintenance
of a stable exchange rate of the naira around N155/US$ with a
band of +/- 3 per cent. The Bank continued to respond to
demand pressures to keep the exchange rate within the band.
This largely accounted for the stability witnessed in the market
in the review period.

Figure 4.4
Daily Exchange Rate (July 2011 – December 2012)

Naira/US$
The
30-day
NIBOR
rate
moved
against
the
interbank
rates initially but
corrected
toward the end
of
the
review
period.
Exchange rate
policy
predicated on
need to maintain
stability.


CBN Monetary Policy Review

4.2.1
Spot Rate
The wDAS spot rate appreciated by 0.19 per cent to average
N157.35/US$ in the second half of 2012 compared with the
average of N157.65/US$ in the first half of 2012, and
N154.51/US$ in the corresponding period of 2011, representing
a depreciation of 1.80 per cent.

In the interbank foreign exchange market (IFEM), the spot rate
which averaged N158.37/US$, appreciated by 0.59 percent
compared with N159.31/US$ in the first half of 2012 while it
depreciated by 0.69 per cent from N157.29/US$ in the
corresponding period of 2011. Similarly, spot rates at the BDC
segment averaged N160.49/US$ in the second half of 2012
compared with N161.23/US$ in the first half of 2012 and
N161.66/US$ in the corresponding period of 2011, representing
an appreciation of 0.46 and 0.73 per cent, respectively.

The appreciation in the spot rates across most segments of the
foreign exchange market was attributed to reduced demand
pressure following measures to curtail speculative demand as
well as positive developments in the international crude oil
market (Table 4.2).


Appreciation in
rates across all
segments of the
market due to
reduced
demand pressure


CBN Monetary Policy Review

Table 4.2
Average Monthly Spot Exchange Rates (N/US$)
July 2011 – December 2012


CBN
IFEM
BDC
Jul-11
151.86
152.41
163.71
Aug-11
152.72
153.79
163.10
Sep-11
155.26
156.70
158.23
Oct-11
153.26
159.83
161.25
Nov-11
155.77
158.83
160.35
Dec-11
158.21
162.17
163.30
2011: H2 Average
154.51
157.29
161.66
2011 Average
153.54
155.89
159.31
Jan-12
158.39
161.31
164.62
Feb-12
157.87
158.59
160.85
Mar-12
157.59
157.72
159.41
Apr-12
157.33
157.44
159.37
May-12
157.28
158.46
159.67
Jun-12
157.44
162.33
163.43
2012: H1 Average
157.65
159.31
161.23
Jul-12
157.43
161.33
163.32
Aug-12
157.38
158.97
162.24
Sep-12
157.34
157.78
159.80
Oct-12
157.32
157.24
159.00
Nov-12
157.31
157.58
159.32
Dec-12
157.32
157.33
159.26
2012: H2 Average
157.35
158.37
160.49
2012 Average
157.50
158.84
160.86

4.2.3 End-Period Exchange Rate
The naira appreciated in all segments of the foreigh exchange
market. At the wDAS, the naira appreciated by 0.11 per cent
to N157.33/US$ at end-December 2012 from N157.50/US$ at
end-June. It appreciated by 0.60 per cent to N157.33/US$ at
end-December, 2012 from N158.27/US$ at end-December
2011 (Table 4.4).

Similarly, the naira appreciated by 3.14 per cent to
N159.00/US$ at the BDC segment at end-December 2012 from
N164.00/US$ at end-June 2012. On a year-on-year basis, it
appreciated by 3.77 per cent. At the interbank segment, the


CBN Monetary Policy Review

naira rose to N157.25/US$ at end-December 2012 from
N162.85/US$ at end-June 2012 and N159.70/US$ at endDecember 2011, representing appreciations of 3.56 and 1.56
per cent, respectively (Table 4.4 and Figure 4.5).

Figure 4.5
End-Month Exchange Rate (July 2011 – December 2012)


Table 4.3
End-Month Exchange Rates Movements (July 2011 – December 2012)
(N/US$)


CBN
IFEM
BDC
Jul-11
151.96
153.00
164.00
Aug-11
153.92
155.00
157.00
Sep-11
156.15
159.60
160.00
Oct-11
151.75
159.35
160.00
Nov-11
157.87
161.20
161.00
Dec-11
158.27
159.70
165.00
Jan-12
158.62
161.16
163.00
Feb-12
157.46
157.75
159.00
Mar-12
157.57
157.72
159.00
Apr-12
157.26
157.40
159.00
May-12
157.31
159.85
162.00
Jun-12
157.50
162.85
164.00
Jul-12
157.40
160.75
164.00
Aug-12
157.36
158.17
161.00
Sep-12
157.34
157.24
159.00
Oct-12
157.27
157.06
159.00
Nov-12
152.32
157.40
159.00
Dec-12

Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
US$/N
CBN
IFEM
BDC


CBN Monetary Policy Review

4.2.4 Nominal and Real Effective Exchange Rate
The
Nominal
Effective
Exchange
Rate
(NEER)
index
depreciated marginally by 0.04 per cent to 98.04 at endDecember 2012 from 98.00 at end-June 2012, while it
appreciated by 1.7 per cent relative to 99.73 at endDecember 2011. The Real Effective Exchange Rate (REER)
index appreciated by 3.8 and 9.4 per cent to 76.65 at endDecember 2012 from 79.67 at end-June 2012, and 84.56 at
end-December 2011, respectively (Table 4.5 and Figure 4.6).

On the average, both the NEER and REER decreased at endDecember 2012, when compared with the level at end-June
2012, reflecting a real exchange rate appreciation relative to
the currencies of Nigeria’s major trading partners.
Table 4.4
Nominal and Real Effective Exchange Rates Indices
(July 2011 – December 2012)


NEER
REER
Jul-11
101.49
90.22
Aug-11
101.62
88.82
Sep-11
100.41
86.46
Oct-11
99.24
85.08
Nov-11
100.73
86.26
Dec-11
99.73
84.56
2011: H2 Average
100.54
86.90
Jan-12
101.69
84.38
Feb-12
101.41
84.40
Mar-12
100.29
82.84
Apr-12
99.66
82.66
May-12
97.78
80.53
Jun-12
98.00
79.67
2011: H1 Average
99.81
82.41
Jul-12
97.96
79.35
Aug-12
97.90
78.89
Sep-12
98.60
78.75
Oct-12
98.16
77.80
Nov-12
97.79
77.01
Dec-12
98.04
76.65
2012: H2 Average
98.08
78.08


NEER index
increased to
N98.04 at endDecember 2012


CBN Monetary Policy Review

Figure 4.6
Nominal and Real Effective Exchange Rate Indices
(July 2011 – December 2012)


4.2.5 Demand and Supply of Foreign Exchange
Total demand for foreign exchange at the wDAS in the review
period decreased by 20.59 per cent to US$8,705.60 million from
US$10,963.16million recorded in the first half of 2012. The
demand for foreign exchange fell by 56.52 per cent, when
compared with the US$20,020.37 million demanded in the
second half of 2011. The total supply of foreign exchange at the
wDAS decreased by 14.70 and 39.46 per cent to US$9,170.00
million in the second half of 2012, compared with US$10,750.00
million recorded in the first half of 2012 and US$15,146.87 million
in the corresponding period of 2011, respectively (Table 4.6 and
Figure 4.7).

The various policy actions undertaken by the Bank contributed
in moderating foreign exchange demand and stabilizing the
foreign exchange market in the review period. The decrease in
the amount demanded could be traced to the decrease in
the demand for foreign exchange by authorised dealers due
to the reduction in the Net Open Position limit and increased
Cash Reserve Requirement. The restriction of authorised
dealers from accessing the CBN Lending Windows (Repo and
SLF) and the WDAS windows concurrently also had moderating
effects on demand.


Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Index Points
NEER
REER


CBN Monetary Policy Review

The period also experienced an increase in the price of crude
oil as well as reduced demand and intervention by the Bank
leading to significant accretion to external reserves.

Table 4.5
Foreign Exchange Demand and Supply (US Dollar Million)
(July 2011 – December 2012)

wDAS Demand
wDAS Supply
Jul 2011
3,065.41
2,643.34
Aug 2011
4,504.49
2,899.05
Sep 2011
4,081.18
3,850.00
Oct 2011
3,899.58
2,607.00
Nov 2011
3,054.43
1,749.62
Dec 2011
1,415.28
1,397.86
2011: H2 Total
20,020.37
15,146.87
Jan 2012
2,132.99
1,950.00
Feb 2012
1,891.96
2,000.00
Mar 2012
1,426.45
1,350.00
Apr 2012
1,052.88
1,080.00
May 2012
1,681.26
1,620.00
Jun 2012
2,777.62
2,750.00
2012: H1 Total
10,963.16
10,750.00
Jul 2012
2,166.32
2,280.00
Aug 2012
1,646.41
1,780.00
Sep 2012
1,549.18
1,590.00
Oct 2012
1,112.89
1,250.00
Nov 2012
1,236.98
1,250.00
Dec 2012
993.81
1,020.00
2012: H2 Total
8,705.60
9,170.00


CBN Monetary Policy Review

Figure 4.7
Demand and Supply of Foreign Exchange at wDAS
(July 2011 – December 2012)


4.2.6 Foreign Exchange Flows
4.2.6.1 Foreign Exchange Flows through CBN
Gross
foreign
exchange
inflow
through
the
CBN
was
US$24,611.59million in the second half of 2012, compared with
US$22,170.75 million in the first half, representing an increase of
11.0 per cent, while it declined by 10.9 per cent from
US$27,631.39 million in the corresponding period of 2011 (Figure
4.8 and Table 4.7). Foreign exchange outflow declined by 18.2
and 43.9 per cent to US$15,835.23 million in the second half of
2012 from US$19,355.44 million in the first half of 2012 and
US$28,244.16 million in the corresponding period of 2011,
respectively.

In the second half of 2012, foreign exchange flows through the
CBN resulted in a net inflow of US$8,776.36 million compared
with a net inflow of US$2,815.31 million in the first half of 2012
(Table 4.7).


Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
US$'Million
A net inflow of
US$8,776.36
million recorded
in 2nd Half of
2012, reflecting
increase in
inflows


CBN Monetary Policy Review

Table 4.6
CBN Monthly Foreign Exchange Flows (US$ million)
(July 2011 – December 2012)


INFLOW
OUTFLOW
NET FLOW
Jul-11
4,647.69
3,826.89
820.80
Aug-11
4,356.59
4,234.08
122.51
Sep-11
5,323.46
6,087.81
-764.35
Oct-11
4,915.31
5,345.96
-430.65
Nov-11
4,256.05
5,082.29
-826.24
Dec-11
4,132.29
3,667.13
465.16
2011: H2
27,631.39
28,244.16
-612.77
2011 Total
47,205.72
48,774.68
-1,568.96
Jan-12
4,307.02
2,945.79
1,361.23
Feb-12
3,546.16
3,902.26
-356.10
Mar-12
4,266.63
2,912.41
1,354.22
Apr-12
3,242.89
1,754.87
1,488.02
May-12
3,627.10
3,256.98
370.12
Jun-12
3,180.95
4,583.13
-1,402.18
2012: H1
22,170.75
19,355.44
2,815.31
Jul-12
4,132.09
3,006.72
1,125.37
Aug-12
5,953.41
2,796.59
3,156.82
Sep-12
3,358.57
2,277.44
1,081.13
Oct-12
3,576.35
1,960.37
1,615.98
Nov-12
4,272.42
3,794.48
477.94
Dec-12
3,318.75
1,999.63
1,319.12
2012: H2
24,611.59
15,835.23
8,776.36
2012 Total
46,782.34
35,190.67
11,591.67


CBN Monetary Policy Review

Figure 4.8
Foreign Exchange Flows through the CBN
(July 2011 – December 2012)

4.2.6.2 Foreign Exchange Flows through the Economy
Gross foreign exchange inflow through the entire economy was
US$63,466.93million in the second half of 2012, compared with
US$55,548.08 million in the first half representing an increase of
14.3 per cent, while it also rose by 15.7 per cent from
US$54,849.14 million in the corresponding period of 2011 (Table
4.8). Foreign exchange outflow declined by 16.7 and 42.0 per
cent to US$16,822.06 million in the second half of 2012 from
US$20,204.63 million in the first half of 2012 and US$29,019.54
million in the corresponding period of 2011, respectively.

In the second half of 2012, foreign exchange flows through the
economy resulted in a net inflow of US$46,644.90 million
compared with a net inflow of US$35,343.45 million in the first
half of 2012 (Table 4.7).


Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
US$'Million
NET FLOW
INFLOW
OUTFLOW
A net inflow of
US$8,776.36
million recorded
in 2nd Half of
2012, reflecting
increase in
inflows


CBN Monetary Policy Review

Table 4.7
Monthly Foreign Exchange Flows through the Economy
(US$ million) (July 2011 – December 2012)


Figure 4.9
Foreign Exchange Flows through the Economy
(July 2011 – December 2012)

Jul. 2011
Aug. 2011
Sep. 2011
Oct. 2011
Nov. 2011
Dec. 2011
Jan. 2012
Feb. 2012
Mar. 2012
Apr. 2012
May. 2012
Jun. 2012
Jul. 2012
Aug. 2012
Sep. 2012
Oct. 2012
Nov. 2012
Dec. 2012
US$'Million
Net Flow
Total Inflow
Total Outflow


Inflow
Inflow
Outflow
Outflow
Net Flow
Net Flow
(CBN)
(Autonomous)
(CBN)
(Autonomous)
(CBN)
(Autonomous)
Jul. 2011

Aug. 2011

Sep. 2011 10,371.26

Oct. 2011

Nov. 2011

Dec. 2011

Total H2 2011 54,849.14 27,631.39

Total 2011 105,106.22

Jan. 2012

Feb. 2012

Mar. 2012

Apr. 2012

May. 2012

Jun. 2012

Total H1 2012 55,548.08 22,170.74

Jul. 2012

Aug. 2012 12,416.40

Sep. 2012

Oct. 2012 11,395.17

Nov. 2012 10,370.22

Dec. 2012 10,474.61

Total H2 2012 63,466.93 24,611.59

Total 2012 119,015.01

Descriptor
Total
Inflow
Total
Outflow
Net Flow


CBN Monetary Policy Review

4.3 Capital Market
The capital market witnessed improved performance in the
second half of 2012, compared with the first half and the
corresponding period of 2011. This development was due
largely to enhanced earnings, improved investor sentiments
and foreign portfolio investments. In addition, the Inclusion of
FGN bonds on the JP Morgan’s Government Bond Index of
Emerging Markets (GBI-EM) in October 2012 and the
announcement by Barclays Capital to similarly include FGN
bonds in Barclays Emerging Markets Local Currency Bond
Index (EM-LCBI) re-awakened the interest of foreign institutional
investors in the Market.

Financial markets’ fragilities, especially in the Euro-zone
continued to facilitate the redirection of capital flows in favour
of emerging and developing economies, including Nigeria.
Positive activity in the market was also as a result of various
measures taken by key stakeholders such as the Federal
Ministry of Finance (FMF), the Securities and Exchange
Commission (SEC), the Central Bank of Nigeria (CBN), the
Nigerian Stock Exchange (NSE), the Debt Management Office
(DMO) and the Asset Management Corporation of Nigeria
(AMCON) to develop the capital market. Measures taken by
the NSE in the areas of its “five pillars” transformation strategy
contributed in boosting investor confidence.


Capital market
weighed downby
profit
takingactivities of
investors, among
others.


CBN Monetary Policy Review

4.3.1
Equities Market
The All-Share Index (ASI) increased by 30.0 per cent to
28,078.81 at end-December 2012, from its level of 21,599.56 at
end-June 2012, and by 35.5 per cent, when compared with
the level at end-December 2011. Market Capitalization (MC)
for equities also increased by 30.0 per cent to N8.97 trillion at
end-December 2012 from N6.90 trillion at end-June 2012, and
by 37.4 per cent when compared with the N6.58 trillion
recorded at end-December 2011 (Table 4.8 and Figure 4.9).
Box 2
Inclusion of Federal Government of Nigeria (FGN) bonds on the JP
Morgan’s Government Bond Index of Emerging Markets (GBI-EM)

JP Morgan Chase & Co, a United State financial services firm and
one of the world’s biggest underwriters of emerging-market debt,
included the Federal Government of Nigeria (FGN) bonds on its
benchmark Government Bond Index of Emerging Markets (GBI-EM)
in October, 2012. Nigeria became the second African country
after South Africa to be included in this widely followed index. The
firm included Nigerian debt maturing in 2014, 2019 and 2022 in a
gradual inclusion which started October and finished by
December 2012. Nigeria bond in the GBI-EM possess a weight of
0.59% in the index and has about $170 billion of assets under
management benchmarked against it.

The development was due to improvement in the Nigerian
economic outlook as policy makers remove restrictions on foreign
investment, control inflation and stabilized the country’s currency.
In addition, robust growth in the economy of the country in the
face of daunting challenges in global recovery pointed to the
resilience of the economy and boosted confidence in its risk profile
perception. The attractive yield in the sovereign bond market of
the country has recently earned the market its place as investor
delight.

Nigeria's inclusion in the index will prompt investors and asset
managers who track the index to buy the country's bonds to
match changes. This will, therefore, raise the visibility of the Nigerian
bond market on the international scene, placing what has been so
far deemed a 'frontier' market a step closer to more mainstream
investment destinations. The development has improved the
country’s risk profile perception and re-awakened the interest of
foreign investors in the FGN bond Market. As a result, capital
inflows into the country’s debt market have increased with the
expectations of availability of more funds that could be lent to
companies and households.


CBN Monetary Policy Review

The reforms of the capital market by the SEC and NSE; and the
inclusion of selected Nigerian government bonds in the JP
Morgan Government Bond Index-Emerging Markets (GBI-EM),
not only boosted the confidence of international institutional
investors in the Nigerian bond market, but re-awakened local
institutional investors appetite for equities.

The ASI’s 35.45 per cent year-to-date increase (the strongest
performance since the global financial and economic crisis),
was driven mainly by strong performance in consumer goods
and banking sectors. The Bloomberg NSE Consumer Goods
Index grew by 42.29 per cent and the Bloomberg NSE Banking
Index increased by 23.84 per cent over their levels in 2011. The
performance of two other sectoral indices - the Bloomberg
NSE Insurance and the Bloomberg Oil and Gas indices,
however, declined by 17.45 per cent and 30.53 per cent,
respectively, over their levels at end-December 2011.

Table 4.8
NSE All-Share Index (ASI) and Market Capitalization (MC)
(December 2011 – December 2012)
Date
ASI
MC (Equities)
(N’ Trillion)
Dec-11
20,730.63
6.53
Jan-12
20,875.83
6.58
Feb-12
20,123.51
6.34
Mar-12
20,652.47
6.55
Apr-12
22,045.66
7.03
May-12
22,066.40
7.04
Jun-12
21,599.56
6.90
Jul-12
23,061.38
7.34
Aug-12
23,750.81
7.56
Sep-12
26,011.63
8.28
Oct-12
26,430.92
8.42
Nov-12
26,494.44
8.47
Dec-12
28,078.81
8.97
Source: NSE


CBN Monetary Policy Review

Figure 4.10
NSE ASI and MC (December 2011 – December 2012)
Source: NSE

Figure 4.11
NSE ASI and MC (July – December 2012)

Source: NSE

4.3.2 Market Turnover
Aggregate stock market turnover in the second half of 2012
decreased by 18.43 per cent to 43.03 billion shares, valued at
N340.76 billion, in 528,468 deals, compared with 52.75 billion
shares valued at N789.34 billion, in 427,848 deals in the first half
of 2012. Relative to the second half of 2011, market turnover
increased by 7.41 per cent from 40.06 billion shares valued at
N262.75 billion, in 497,025 deals.


MC
ASI
All-Share Index
Market Capitalisation (N' Trillion)

ASI
All-Share Index
Market Capitalisation (N' Trillion)
MC


CBN Monetary Policy Review

4.3.3 Sectoral Contribution to Equities Market Capitalization
The building materials sub-sector was the most capitalized
sector. However, its share in overall market capitalization
dropped to 27.0 per cent at end-December 2012 from 30.0 per
cent at end-June 2012. Compared with the 29.0 per cent at
end-December 2011, the sub-sector’s share of market
capitalization dropped by 2.0 per cent. Other leading subsectors were banking; breweries; and food, beverages and
tobacco with respective market shares of 25.0, 17.0 and 11.0
per cent, at end-December 2012.

Figure 4.12
NSE Market Capitalisation by Sector as at End-June 2012
Source: NSE


Breweries
16%
Banking
30%
Food &
Beverages
10%
Conglomerates
1%
Insurance
2%
Oil and Gas
2%
Building
Materials
30%
Other Sectors
9%
Dangote cement
remains most
capitalizedindivi
dual equity.


CBN Monetary Policy Review

Figure 4.13
NSE Market Capitalisation by Sector as at End-December 2012
Source: NSE

4.3.4 Bonds Market
The bonds market in Nigeria consists of FGN bonds, State
Government bonds and corporate bonds.

4.3.4.1 Federal Government (FGN) Bonds
The value of FGN Bonds outstanding stood at N4.08 trillion at
the end of the second half of 2012, representing an increase of
8.51 per cent, compared with N3.76 trillion at the end of the
first half. Total transactions in FGN Bonds in the over-thecounter (OTC) market in the second half of 2012 was 4.22
billion units valued at N4.32 trillion in 24,082 deals, compared
with 3.04 billion units valued at N2.62 trillion in 20,357 deals in
the first half of 2012 and a turnover of 4.19 billion units worth
N3.76 trillion in 29,625 deals recorded in the second half of
2011(Figure 4.15).


Breweries
17%
Banking
25%
Food &
Beverages
11%
Conglomerates
1%
Insurance
2%
Oil and Gas
2%
Building
Materials
27%
Other Sectors
15%


CBN Monetary Policy Review

Figure 4.14
Volume and Value of FGN Bonds (2011 – 2012)
Source: NSE

4.3.4.2 FGN Eurobond
The Federal Government of Nigeria’s Eurobond was traded in
the London Stock Exchange (LSE) during the review period.
Yields on the bonds decreased to 4.02 per cent at endDecember 2012 from 5.55 and 6.01 per cent at end-June 2012
and end-December 2011, respectively. The decrease in the
Eurobond yield was largely as a result of improved confidence
in the economy following the inclusion of FGN bonds on the JP
Morgan’s Government Bond Index of Emerging Markets (GBIEM) in October 2012. Following this, Barclays Capital has also
included Nigeria on its own index. Furthermore, Nigeria
benefitted from the increased demand for emerging and
developing economies’ sovereign debt instruments following
the debt crisis in the euro area as well as low yield in the
advanced economies (figure 4.15).


2011:H1
2011:H2
2012:H1
2012: H2
Volume (Billions)
Billions

Trillions


CBN Monetary Policy Review

Figure 4.15
10-Year U.S. Dollar-denominated Bond Yields for Nigeria
(January 24, 2011 – December 31, 2012)

Source: Bloomberg

4.3.4.3 Yields on Federal Government Bonds
The FGN bonds yield curve at end-December 2012 shifted
downwards by 396 basis points compared with the position at
end-June 2012 and by 280 basis points compared with the
level at end-December 2011 (Figure 4.16). The downward
trend in FGN Bonds yields was attributed to the listing of the
FGN bonds on the JP Morgan Index which led to increased
patronage of the sovereign debt market by foreign investors.
In addition, Standard and Poor’s (S&P) upgrade of the
country’s credit rating further improved institutional investors
confidence in the Nigerian debt market. Other factors
included improved liquidity position due to matured treasury
bills as well as the release of FAAC fund. Positive inflationary
expectations further increased investor sentiment toward reinvestment in short term securities, despite the MPR, liquidity
ratio & CRR positions. Also, rate of returns on treasury bills
remained higher than savings & deposit rates, which also
motivates domestic investors appetite for these papers. In
addition, domestic debts mirrored the downward trend in
Nigeria’s Eurobond yields.


24-Jan-11
24-Mar-11
24-May-11
24-Jul-11
24-Sep-11
24-Nov-11
24-Jan-12
24-Mar-12
24-May-12
24-Jul-12
24-Sep-12
24-Nov-12
Yields (%)


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Figure 4.16
FGN Bonds Yield Curves
(End-December 2011 vs. End-June 2012 vs. End-December 2012)


4.3.4.4 State/Local Government Bonds
The total value of state/local government bonds issued in the
second half of 2012 was N341.0 billion, same as in the first half
of 2012. The development was traced to the listing of the Ekiti
State N20.0 billion, fixed rate development bond and the
Benue State N13.0 billion fixed rate development bond in the
review period.

4.3.4.5 Corporate Bonds
In the second half of 2012, the value of outstanding corporate
bonds increased marginally to N1.40 trillion from the N1.39
trillion recorded in the first half of 2012.


Annual Yields (%)
Term to Maturity (Years)
End-December, 2012
End-December, 2011
End-June, 2012


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CBN Monetary Policy Review

CHAPTER 5
ECONOMIC OUTLOOK

5.1 Overview
Global output was projected to increase by 3.5 per cent in
2013 due largely to expected rebound in China’s growth. The
projected global growth is higher than the 3.2 per cent
estimated for 2012, but weaker than 3.9 per cent recorded in
2011. Output is expected to remain sluggish in advanced
economies but relatively robust in many emerging market and
developing economies. In addition, unemployment is likely to
remain elevated in many parts of the world as downside risks
increase considerably. Overall, there is a great risk of global
growth in 2013 falling below 2.0 per cent, unless critical policy
actions are embarked on and sustained in the euro area and
the United States. In the Euro area, the expected policy action
is the implementation of the fiscal compact while in the United
States complete resolution of the Fiscal Cliffis called for. China
is expected to continue her market-oriented structural reforms
and rebalancing of the economy towards growth in domestic
private
consumption.
In
other
emerging
market
and
developing countries, the policy actions required differ but the
general challenge is to rebuild macroeconomic policy space
in all countries. A broad set of indicators of global industrial
production and trade suggests that global growth has not
strengthened further. Specifically, activity in the euro area
periphery is expected to be softer than envisaged, with signs of
stronger spillovers of that weakness to the region’s trading
partners.

In Nigeria, output growth appears promising despite the
slowing global growth. The 7.1 per cent 2012 real GDP growth
reported by the IMF is 1.1 and 2.3 percentage points higher
than that of sub-Saharan oil exporters and the whole of subSaharan Africa, respectively. The non-oil sector remained the
major driver of growth recording 8.2 per cent increase in
contrast to the oil sector, which contracted by 0.2 per cent.
The continued decline in the contribution of the oil sector to
growth due to lower production could hamper growth
prospects in 2013. Although the economy relies heavily on oil


CBN Monetary Policy Review

and gas, there has been little or no new investment in the
sector for quite a while. In addition, the severe flooding in
several parts of the country in 2012, which damaged housing,
agricultural and oil assets, as well as the continuing security
challenges, pose downside risks to growth in 2013.

Quantitative easing in leading advanced economies have
kept interest rates low, prompting strong capital flows to
emerging markets where rates were generally high. In the Euro
area periphery, bond spreads declined but asset prices,
particularly equities, rose generally. This improvement in global
financial conditions continued in the fourth quarter of 2012.
But uncertainty and risk emanating from the slower-thandesired pace of economic recovery, the continuing fiscal
stand-off in the United States of America and sharp
contraction in euro area economic activities make 2013 a
challenging year for capital markets around the world. At the
operational level, capital markets will experience diminished
activity because of the checks on Brokers (proprietary) trading
for their own account (under the Dodd-Frank Act’s Volcker
Rule). The migration of unregulated derivatives trades to the
more transparent over-the-counter exchanges will also cause
diminished capital market activity. In the advanced, emerging
market and developing economies, there is regulatory
overhang requiring the capital market to restructure and
realign towards compliance with a myriad of regulations.

The rise in world stock markets in 2012 led by Brazil, Russia, India
and China would continue in 2013. In the United States,the
resolution
of
fiscal
policy
issues,
another
year
of
accommodative Federal Reserve Bank actions and improving
corporate profits would skew the macro and market risks to the
upside.

In the domestic market, stock prices have responded to the
change in market mood from apprehension in early 2012 to
optimism for better performance in 2013. There was good
reason for the sense of optimism by the end of 2012. Market
capitalisation rose by 37.4 per cent to N8.974 trillion while the
All Share Index (ASI) also rose by 35.4 per cent to 28,079 in the
year, compared with the decline of 17.7 per cent in market


CBN Monetary Policy Review

capitalisation and 16.77 per cent decline in All Share Index in
2011. The outlook for 2013 is for further growth in the market in
the hope that corporate profits would continue to grow,
especially that of banks that constitute 31 per cent total
market capitalization. It is also hoped that inflation would
continue to decline, the exchange rate will remain stable to
encourage capital inflow, and domestic economic growth will
continue to be robust. In addition, fiscal consolidation, positive
stock valuations and global economic recovery will support
capital market growth in 2013. The risk to the outlook comes
from concerns about continued recovery in the global
economy. Adverse economic conditions in the United States of
America, Japan and the euro area could trigger capital
reversal in the market since foreign portfolio investors account
for 70 per cent of activities in the market.

In the foreign exchange markets, improvement in economic
outlook in the United States, persistent structural weakness in
the euro area, aggressive intervention by central banks, credit
risk differentiation among emerging market economies, and
excess global liquidity will be the key drivers of capital flows.
The US dollar has regained traction against all major currencies
supported by an improved growth and fiscal consolidation
outlook combined with rising European risk. While the G4
currency re-pricing is underway; the US dollar is poised to
strengthen against the euro, British pound sterling and
Japanese yen. The protracted euro area crisis has lowered the
profile of the euro and the uncertainty has not abated. In Asia,
the Japanese yen’sweakness may intensify in the second
quarter of 2013 but close the year at 95 per USD. Africa’s
strongest currency, the South African rand has been adversely
affected by persistent labour unrest and weak external
demand.

In the domestic market, the naira is expected to remain stable.
The Central Bank’s policy is to maintain the foreign exchange
rate band at 155 (+/- 3). The Bank may, however, depending
on the macroeconomic environment, adjust the mid-point of
the exchange rate band to 160 naira, consistent with the
budget 2013 provision but maintain the +/- 3 per cent corridor.
Foreign
exchange
reserve
at
the
end
of

was


CBN Monetary Policy Review

US$44.18billion, while the ECA closed at US$9.66billion. Oil price
performance suggests that the reserve level will continue to
grow in the near- to medium-term. The risk to this outlook
include decline in oil prices and export volume as a result of
increased oil production in the United States, sharp contraction
in global economic growth, and rise in domestic political
disturbances which would affect oil production and export.

The money market continues to be characterised by low shortterm interest rates and quantitative easing in major financial
centres, low inflation, slow economic recovery, and a trend
towards corporate, high yield, and emerging market bonds in
search of yield spreads. Whereas nearly all the factors that
helped bond market performance in the past two years
remain firmly in place, bond yields are at very low levels
relative to their levels in the immediate past periods. This
indicates that yields will fall little in the near- to medium-term
(and by extension, for prices to rise) than was the case one or
two years ago. At the same time, it leaves a greater latitude
for yields to rise (and prices to fall) if one or more elements of
the fundamental backdrop were to change.

The outlook for investors in bonds is one of two possibilities: the
overall bond market may deliver returns within one to two
percentage points of its yield in 2013, if the environment
improves or at the least, stay unchanged. Otherwise, fixedincome securities could have significant downsides.

Bond yields declined at 2012 year end, relative to January
2012. Activities were relatively low in the last week of 2012 as
bond yields rose slightly, driven largely by a decline in demand
for fixed income securities. Liquidity tightness at the money
market and profit taking activities by investors may have led to
the observed uptick in bond yield, as prices declined.


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Table 5.1
FGN Bond Yield in 2012
Yields
28-Dec-12
6-Jan-12
Change (Points)
3 Year
11.99
15.75
(3.76)
5 Year
12.15
15.80
(3.65)
7 Year
11.96
15.64
(3.68)
10 Year
12.00
15.32
(3.32)
20 Year
12.26
14.02
(1.76)

Global inflation in 2013 is projected to hover around 3.0 - 4.0
per cent and about 6.3 per cent in developing countries. In
high income countries, however, it is projected to gradually
decrease to around 1.6 per cent in 2013 down from 2.0 per
cent in 2012 in the advanced economies. Headline inflation is
expected to further moderate in developed economies in
2013 as large output gaps and low wages in many countries
keep
inflationary
expectations
low.
In
the
developing
economies, however, higher oil prices and some countryspecific supply-side constraints may exert upward pressure on
inflation.

Domestic inflation is expected to moderate in 2013 to single
digit on the average, on the back of stable exchange rates,
increased productivity and subdued money supply growth. It is
expected that core inflation will moderate relatively below
food inflation and the drivers of core inflation are unlikely to rise
significantly.

5.1.1
Global Output1
Provisional data from the World Economic Outlook (WEO)
indicate that global output growth in the second half of 2012
was 3.2 percent, lower than the 4.00 per cent recorded in the
first half of 2012 and was projected to increase to 3.5 percent
in the first half of 2013. This is 0.1 percent decline compared
with the forecast of October 2012. The outlook for the global
economy is premised on policy actions that would support
modest growth recovery in the euro area and the United
States as well as Japan’s stimulus plan. Similarly, effective


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policies in the emerging markets and developing economies
are also expected to support a modest growth. Growth in the
advanced economies was 1.3 per cent in the second half of
2012, down from 1.6 per cent in the first half of 2012 and was
expected to accelerate to 1.4 per cent in the first half of 2013.
In the emerging and developing economies, growth was 5.1
per cent in the second half of 2012 as against 6.3 per cent in
the first half of 2012.

In Developing Asia also, growth declined to 6.6 per cent in the
second half of 2012 from 8.0 per cent in the second half of
2011 and was projected at 7.1 per cent in the first half of 2013.
Likewise, in Latin America and the Caribbean countries, output
growth decelerated to 3.0 per cent in the second half of 2012
from 4.5 per cent in the first half of 2012 and was projected to
improve to 3.6 per cent in the first half of 2013.

The IMF also indicated that annual output growth for 2013 in
the advanced countries would be 1.4 per cent; emerging and
developing economies, 5.5 per cent and developing Asia, 7.1
per cent. Similarly, the report showed that output growth in
Latin America and the Caribbean would be 3.6 per cent; 3.4
per cent in the MENA region, and 5.8 per cent in sub-Saharan
Africa, (Table 5.1).

In 2013, growth in the emerging market and developing
economies is expected to reach 5.5 per cent. Supportive
policies have underpinned much of the recent acceleration in
activity in many economies. But weakness in advanced
economies will restrict global trade volumes because of the
effect on external demand, as well as on the terms of trade of
commodity
exporters,
given
the
assumption
of
lower
commodity prices in 2013. Moreover, the space for further
policy easing has diminished, while supply bottlenecks and
policy uncertainty have hampered growth in some economies
such as Brazil and India. Although economic conditions in subSaharan Africa have remained generally robust relative to the
sluggish global economy, its impact is limited by the
contribution of the sub-region to global trade. The near-term
outlook for sub-Saharan Africa remains broadly positive though
downside risks have intensified, stemming mostly from the


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uncertain global economic environment. The impact would be
most severe in countries with undiversified export base and
lowand policy buffers.

The outlook for the Middle East and North Africa region is
mixed. Oil-importing countries are witnessing tepid growth, and
the moderate recovery expected in 2013 is subject to
heightened downside risks. For the Arab countries in transition,
political challenges may likely undermine growth, especially
with policy buffers largely eroded. The region's oil exporting
bloc is expected to record some level of growth in part due to
Libya's post-war recovery, increase production in Iraq and
possible restoration of peace in the Strait of Hormuz.

Table 5.2
World Economic Outlook (WEO)
Source: IMF World Economic Outlook Update, January 2013

5.1.2
Global Inflation
Global consumer prices fell in 2012 relative to 2011 in the
advanced economies, emerging market and developing

A. World Output


World Output

Advanced Economies

USA

Euro Area

Japan

UK

Canada

Other Advanced Economies

Emerging & Developing Economies

Central and Eastern Europe

Commonwealth of Independent States

Developing Asia

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

G
a


CBN Monetary Policy Review

economies. This was driven mainly by falling commodity prices
and weak demand. In the advanced economies, consumer
prices fell to 2.0 per cent in 2012 from 2.7 per cent in 2011. In
the United States, consumer prices dropped from 3.1 per cent
in 2011 to 1.7 per cent in 2012 as a result of lower commodity
prices and weaker demand. In the euro area, consumer prices
declined from 2.7 to 2.2 per cent in 2012. Inflation in advanced
Asia comprising Japan, Australia, New Zealand and the newly
industrialized economies decreased from 1.6 per cent in 2011
to 1.2 per cent in 2012. Japanese inflation rose marginally from
-0.3 per cent in 2011 to 0.0 per cent in 2012. In developing Asia
comprising China, India, and the ASEAN-5, inflation fell from 6.5
to 5.0 per cent. In Latin America and the Caribbean, inflation
declined marginally from 6.6 percent in 2011 to 6.0 per cent in
2012. Consumer prices in the MENA region rose relative to 2011
levels. Among oil exporters in the region, inflation rose to 11.1
per cent from 10.1 per cent, while among oil importers, it
decreased from 8.5 per cent in 2011 to 8.3 per cent in 2012. In
Sub-Saharan Africa (SSA), inflation is expected to fall to 9.1 per
cent in 2012 from 9.7 per cent in 2011.

Inflation in 2013 is estimated at around 3.0 - 4.0 per cent
globally and around 6.3 per cent in developing countries. In
high income countries however, it is projected to gradually
decrease to around 1.6 per cent by the end of the first quarter
of 2013 and remain around that level throughout 2013.
Although the outlook is subject to both upside and downside
risks with considerable consequences for low income countries,
which are sensitive to price fluctuations duetohigh reliance on
primary commodities, narrow range of policy instruments and
weak fiscal and monetary buffers.

5.1.3
Global Oil Prices
Weak global growth and increased domestic oil production in
the US, traditionally the Organisation of Petroleum Exporting
Countries’ (OPEC) largest customer, have led to forecast of a
fall in oil prices in 2013 and a reduction in the ability of OPEC
to influence prices. However, both the U.S. Energy Information
Administration (EIA) and OPEC have raised their forecasts for
global oil demand in 2013. The EIA has raised its 2013 growth
forecasts by 110,000 barrels per day (bpd) to 1.05 million bpd in


CBN Monetary Policy Review

2013. Global oil demand is now expected to total 90.2 million
bpd in 2013. OPEC’s projected is forecast oil demand to
increase by 840,000 bpd, 80,000 bpd higher than its previous
estimate. Prices for Brent Crude (equivalent to Nigeria’s Bonny
Light) have gained approximately 10.0 per cent year-to-date
hitting a 10-month high of over $118 a barrel. OPEC forecast an
average of US$110.00 per barrel in 2013 as it intends to keep
production stable after the November 2012 cut. Others expect
prices to average US$102/bbl, just 3.0 per cent lower than in
2012. While oil prices may slip slightly in the first quarter, supply
and demand conditions will be largely balanced as a result of
expected non-OPEC supplies of 1.1 million barrels per day from
shale oil fields.

5.1.4 Global Trade
Growth in global trade volume decelerated sharply during
2012 to 3.8 per cent from 6.1 per cent in 2011. Developments in
global trade flows were mainly owing to declining import
demand in the euro area (the world’s largest trading bloc) and
weakness in other high-income economies, as well as from a
slowdown in some of the larger developing economies
including, China, India and Brazil. The outlook for 2013 is a
growth of 4.3 per cent, a reduction of 1.2 per cent from the
earlier forecast by the United Nations. Developing countries
and economies in transition would continue to have weak
demand for their exports in 2013 as a result. Also, the slight
increase in international protectionism, and the protracted
impasse in the world multilateral trade negotiations, would
adversely affect international trade flows.

The World Trade Organisation (WTO), in September 2012, cut its
forecast of growth in global trade volume in 2013 to 2.5 per
cent from 3.7 per cent. The organisation warned that the
situation was likely to get worse rather than better citing the
euro zone crisis as the main drag on growth.

5.1.5
Domestic Output Growth
The NBS estimated real GDP growth rate for 2012 at 6.58 per
cent compared with 7.1 per cent projected for the year and
down from 7.5 per cent in 2011. The decline in GDP growth was
due to external shocks from the contraction in the volume of


CBN Monetary Policy Review

trade with Nigeria’s major trading partners including the euro
area that experienced recession and weak recovery in the US
and China. The NBS has projected a growth rate of 7.7 per
cent in 2013 in its revised economic outlook for 2012-2015. It
highlighted a number of factors that necessitates cautious
optimism regarding the country’s growth projections in the
short- to medium-term. These include: the continued passthrough effects of the increase in pump prices with the partial
removal of fuel (PMS) subsidy, periodic fuel scarcity across the
country, increase in electricity tariff, and increase in import
tariffs of some major food items, security challenges, and
weather–related shocks particularly the recent flooding
experienced in most parts of the country.

5.2 Outlook for Inflation and Monetary Policy in 2013
5.2.1 Inflation Outlook
Inflation at the end of the second half of 2012 was 12.0 per
cent down from 12.9 and 12.6 per cent at the end of the first
half of 2012 and end of the second half of 2011, respectively.
The moderation would continue in 2013.

Staff estimates indicate that Headline inflation would hover
around 9.7 and 11.0 per cent in March and June 2013,
respectively. The estimate is 10.0 per cent confident that in
June 2013, headline inflation (year-on-year) will lie between
10.8 – 11.1 per cent; while core and food will lie between 11.5 -
11.9 and 10.1 – 10.5 per cent, respectively.

The upside risks to this projections include uncertainty about
the domestic pump price of premium motor spirit (PMS), global
crude oil prices and demand, intensification of insecurity, and
the management of the 2013 budget of all tiers of government
in the country.


CBN Monetary Policy Review

Figure 5.1
Fan chart for Headline Inflation


Figure 5.2
Fan chart for Core Inflation


Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Per Cent

Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Per Cent


CBN Monetary Policy Review

Figure 5.3
Fan chart for Food Inflation


Table 5.3
Confidence Interval Estimates for the Forecast of 2013 Inflation at 10%
and 90% Confidence Band
Components
Period
Central Path
Confidence Interval
Headline


10%
90%

2013Q1
9.7
9.5 – 9.8
8.0 – 11.3

2013Q2

10.8 – 11.1
8.8 – 13.1
Food


2013Q1
8.5
8.4 – 8.7
6.3 – 10.8

2013Q2
10.3
10.1 – 10.5
7.7 – 13.8
Non-Food


2013Q1
10.8
10.6 – 10.9
9.1 – 12.4

2013Q2
11.7
11.5 – 11.9
9.6 – 13.8
Source: Research Department, CBN


Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Per Cent


CBN Monetary Policy Review

APPENDICES

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

The Monetary Policy Committee met on July 23 and 24, 2012 with 11 out of the 12
members in attendance. The Committee reviewed the economic conditions and
challenges in the first half of the year against the backdrop of developments in
the international economic and financial environments with a view to considering
the monetary policy options for the remaining part of 2012.

The Global Economy
The Committee noted the continued fragility of global economic recovery and
the increased downside risks to growth in 2012. In particular, the sovereign debt
and financial sector problems, together with recession in the UK and some Euro
zone countries and reduced growth rate in the US continue to affect China, India
and Brazil’s export-driven growth. This has necessitated a downward revision of the
projected global output growth for 2012 by the IMF in the July 2012 WEO Update.
While the effort to fix banks and sovereign balance sheets by the European
Central Bank using long term refinancing operations eased funding constraints
and broadly rallied the assets markets, these gains were short-lived due to the
intensification of policy uncertainty after the Greek and French elections, strong
dampening effects of the financial fragility in the Euro Area peripheral states and
public resistance of austerity measures. In the advanced economies, the
weakness in the labor and housing market, the elevated debt level of the
households and the need to fix the encumbered balance sheets of banks are
likely to continue to constrain growth prospects. Consequently, the growth
forecast in the advanced countries was downgraded by 0.2 percentage points to
1.4 per cent in 2012 relative to the April WEO estimates.

In the United States, reduced retail sales and investment, growth rate concerns
about public debt and the uncertainty over domestic fiscal plans due to failure to
reach an agreement on near-term tax and spending policies constitute severe
threats to economic recovery. Thus, output growth in the US for 2012 was revised
slightly downward to 2.0 per cent from 2.1 per cent by the IMF in the July 2012
WEO.

In the Euro area, Real GDP growth is expected to contract from an annual rate of
about 1.4 per cent in 2011 to -0.3 per cent in 2012 with France, Italy and Spain
leading the contraction in growth. The revised growth rate of 1.0 per cent for


CBN Monetary Policy Review

Germany in July is an improvement of 0.4 per cent over the April 2012 IMF growth
projections. The risk to growth in the euro area is amplified by geopolitical
uncertainties and the risk of stagnation and long-term damage to potential
growth as unemployed workers lose skills and new entrants find it difficult to join
the active labor force.

In the UK, despite the Bank of England’s monetary measures to stimulate growth,
the effect of the Treasury’s fiscal consolidation for reducing the budgetary risk
remains strong, leading to weak business and consumer confidence. Thus, real
GDP growth was projected at 0.2 per cent against the initial projection of a
contraction of 0.4 per cent. Spain’s latest round of austerity measures failed to
reassure investors and markets, as the country’s borrowing costs continued to rise.

In emerging economies, the lag effect of past policy tightening has continued to
weaken internal and external demand thereby limiting growth. In China, real GDP
growth slowed to 7.6 per cent year on year in the second quarter of 2012,
compared with 8.9 per cent in the fourth quarter of 2011, due mainly to weak
external conditions, particularly sluggish demand from the euro area. Real GDP
growth forecast for 2012 has been reduced to 8.0 per cent from earlier forecast of
8.2 per cent. India’s real GDP growth moderated to 5.3 per cent, year on year, in
the first quarter of 2012 compared with 6.2 per cent in the fourth quarter of 2011,
with the projection for 2012 put at 6.1 per cent compared with 7.1 per cent in
2011.

Output performance in Sub-Saharan Africa is projected at 5.4 per cent in 2012.
While exports to Europe have dropped, strong terms of trade and increased trade
diversification towards emerging markets have helped support growth in the
region. A major issue in the region, however, is that inflationary pressures and
reduced fiscal space present limited flexible policy options for manoeuver,
especially if downside risks materialize.

Overall, the slowdown in global economic activities would have serious
implications for the Nigerian economy in the following respects: A softening in the
demand for oil and consequent decline in oil revenues; reduction in foreign
exchange earnings which would impair the build-up of external reserves and
consequently exert pressures on the exchange rate; increased budget deficit as
government would not be able to realize its revenue projections; and increased
public sector borrowing to finance expenditure outlays.


CBN Monetary Policy Review

Key Domestic Macroeconomic and Financial Developments
Output and Prices
The revised GDP growth rate projected by the National Bureau of Statistics (NBS)
for the Q2 2012 at 6.37 per cent was higher than Q1 2012 level of 6.17 per cent,
indicating increased momentum in the economy. Overall, GDP growth for 2012
was projected at 6.38 per cent, down from the realized growth rate of 7.74 per
cent in 2011. The projected decline in GDP growth for 2012 is attributable to a
number of factors including: the estimated loss of about N207.41 billion in national
output during the nation-wide strike in January; the dampening effects of low
crude oil demand from major trading partners notably the US, Euro area, and
China; falling oil prices, and weak aggregate domestic demand following rising
prices across major segments of the economy; as well as the prevailing security
concerns.

The non-oil sector remained the major driver of growth recording 7.52 per cent
increase in contrast to the oil sector which contracted by 0.24 per cent during the
period. The Committee noted the sustained slowdown in the growth in agricultural
output of 4.08% in the second quarter compared with 4.15% in the first quarter,
traceable to the continued security challenges which affected a large part of the
farming population in the northern parts of the country during the period. The
Committee also expressed serious concerns over the continued decline in the
contribution of oil to GDP, which became apparent from the second half of 2011,
and intensified through Q1 and Q2, 2012. Its contribution to growth, declined by
0.40 per cent apiece in the third and fourth quarters of 2011, and declined to 0.40
and 0.04 per cent in Q1, 2012 and Q2 2012, respectively. There are serious
concerns over continuing fiscal leakages, bunkering and oil theft in the NigerDelta area.

This notwithstanding, the Committee was pleased to note that the growth
projections were against the backdrop of severe weaknesses in the global
economy. Thus, domestic output growth was anchored by the positive impact of
the banking sector reforms as well as the initiatives by government to stimulate the
real economy such as improvement in national electricity generation which rose
to 2,900 MW/h as a result of increased gas supply to the thermal stations,
increased water level at the hydro stations, and the resuscitation of some dormant
generating stations.

The Committee noted significant downside risks to growth in the near-term, in
particular the fall in the average spot price of Nigeria’s reference crude, the
Bonny Light, from US$121.10 in the first quarter of 2012 to US$109.32 in the second


CBN Monetary Policy Review

quarter, and the current security challenges which continue to pose a threat to
agriculture and manufacturing.

Prices
The Committee noted the threat of Inflationary pressure which has re-emerged
since the beginning of 2012. The year-on-year headline inflation rose to 12.9 per
cent in June, 2012 against the 12.7 per cent in May 2012. Core inflation rose to
15.2 per cent in June, 2012 from the 14.9 per cent level in May, though food
inflation, declined from 12.7 per cent in May to 12.0 per cent in June 2012. The
major drivers of headline inflation during the period were food and non-alcoholic
beverages and housing, water, electricity, gas and other fuels. The acceleration in
core inflation in the second quarter was traced to increases in the contributions of
processed food and housing, water, electricity/gas and other fuels.

The Committee noted that in addition to the lag effects of the partial removal of
petroleum subsidy in January, other factors fuelling the upside risk to inflation in the
near-term include borrowing by government to cover large fiscal deficits in the
2012 budget, and the upward review of electricity tariffs and import Duty on
wheat and rice in July 2012.

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

The Committee noted that rates in all segments of the money market trended
upward between May 21 and July 11, 2012. Inter-bank call and OBB rates which
opened at 14.61 and 14.43 per cent, closed at 15.55 and 15.50 per cent,
respectively. The increase in the rates was a reflection of the tight liquidity in the
banking system traceable to the aggressive open market operations, given that
the MPR remained unchanged during the period.


CBN Monetary Policy Review

Retail lending rates remained high in June 2012 as the average maximum lending
rate remained unchanged at 23.44 per cent in June 2012. On the other hand, the
consolidated deposit rate fell marginally from 3.83 per cent in May to 3.82 per cent
in June. In view of these developments, the Committee reiterated its earlier call to
put in place an appropriate mechanism for reducing the interest rate spread,
while stabilizing interbank rates to sustain liquidity and facilitate intermediation in
the banking system.

External Sector Developments
Gross external reserves as at July 19, 2012 stood at US$37.16 billion, representing an
increase of US$ 0.33 billion over the level of US$36.83 billion at end-May 2012. The
exchange rate at the wDAS-SPT opened at N157.26/US$ on May 21 and closed at
N157.43/US$ on 12th July 2012, representing N0.17k or 0.11 per cent depreciation
during the period. At the interbank segment, the selling rate opened at
N158.80/US$ and closed at N161.20/US$, with a period average of N161.60/US$,
representing a depreciation of N2.40k or 1.51 per cent. At the BDC segment of the
market, the selling rate opened at N160.00/US$ and closed at N163.00/US$,
representing a depreciation of N3.00k or 1.87 per cent for the period. During the
period, the naira weakened to as low as N163.00/US$ due to developments in the
external economy and the CBN had to intervene significantly in the interbank
market to restore stability. The Committee expressed concern about the declining
accretion to external reserves. The Committee noted that the premia between the
rates at the wDAS and the interbank and between the wDAS and the BDCs
narrowed towards the end of the review period, and therefore urged the Bank to
sustain the existing measures to discourage speculative demand in the market.

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


CBN Monetary Policy Review

with very difficult choices, as whatever policy action taken must be weighed
against the possible trade-off(s) and implications for the wider economy.

The Committee further noted that the inflation environment remained uncertain
with the possible pressures coming from the core component in the medium term.
Domestic inflation has maintained its upward trend, and is expected to remain
within that region over the six month forecast period. More so, the Committee
observed that since its meeting in May 2012, growth prospects continued to be
threatened by developments in Europe, China, India and the US, as well as the
very slow progress in structural reforms and poor implementation of the capital
budget for 2012.

The Committee observed further that during 2008-2009 when oil prices declined
sharply and the domestic currency came under intense pressure, the CBN was
able to defend the Naira because the nation had buffers, having accumulated
substantial foreign exchange reserves when oil prices were high, but that this time
around that luxury does not exist, as the excess crude account has largely been
depleted, and is still being depleted by the tiers of government.

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

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

In the Committee’s view, these challenges would persist in the medium-to-long
term with the attendant consequences on oil receipts. The Committee noted the
fears about Europe’s debt crisis which flared recently as concerns intensified that
Spain would be next in line for a government bailout. It noted that the potential
cost of a Spanish bailout far exceeds what is available in existing emergency


CBN Monetary Policy Review

funds. Already, the European decline has taken its toll on oil demand and exports.
The rising global uncertainty and weaker external demand are causing headwinds
for export-dependent economies. The unfavorable outlook is further strengthened
by the fragile domestic conditions. The MPC is of the view that growth could
further decline during the rest of the year.

Thus, the MPC is confronted with basically three choices: first, lower the MPR in the
face of sustained slowing domestic output growth and concerns about global
growth prospects. The MPC viewed that a lowering of the rates in the face of
sustained slower growth of output and global growth prospects could further
weaken the exchange rate and adversely affect reserves at a time when the
country needs to build up buffers against external shocks. It also reiterated its view
that the growth challenge is a result of poor record of implementation of structural
reforms and the capital budget.

Second, to leave the MPR unchanged. This is against the background of upward
trending inflation figures and the precarious picture painted by the six months
inflation forecast of the Bank, revised upwards since the MPC meetings of May,
2012. Inflation is expected to average 12.0 per cent during the next six months
with core and food inflation being much higher. The forecast is mainly due to the
increase in electricity tariffs and the tariff on imported rice and wheat.

The Committee recognized that a logical response to the increasing inflationary
outlook would be an increase in the MPR, especially considering the impact of
sustained liquidity in the banking system on exchange rates. It was, however,
conscious of the impact of higher interest rates on small businesses and the
potential for higher non-performing loans on the books of banks. In addition, it is
important to leave room and flexibility for further tightening should conditions so
warrant in the near future.

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

Against the foregoing, therefore, the MPC reiterated the need to choose a policy
trajectory that would have the least negative impact on the wider economy, to
the extent that the longer-term benefits to the economy far outweigh the short-


CBN Monetary Policy Review

term costs. It was therefore, imperative to reduce the liquidity in the banking
system and minimize the upward movement in MPR.

The Committee’s Decisions
In view of the foregoing, the Committee, decided as follows:
(i)
Retain the Monetary Policy Rate (MPR) at 12.00 per cent with symmetric
corridor of +/-200 basis points by a vote of 10 to 1. One member voted to
reduce MPR by 25 basis points to 11.75 per cent.

(ii)
Voted by a decision of 10 to 1 to increase the Cash Reserve Requirement
(CRR) from 8.0 per cent to 12.0 per cent with effect from July 25th. One
person voted to retain the CRR at 8.0 per cent.

(iii)
Unanimously agreed to reduce the Net foreign exchange Open Position
(NOP) to 1.0 per cent from 3.0 per cent with immediate effect.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria

24th July, 2012


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué No. 85 of the Monetary Policy Committee
Meeting of Monday and Tuesday, September 17 and 18, 2012
The Monetary Policy Committee (MPC) met on September 17 and 18, 2012, with
10 out of the 12 members in attendance. The Committee reviewed the conditions
and challenges that confronted the domestic economy during the first eight
months of 2012 against the backdrop of international economic and financial
developments with a view to reassessing monetary policy options in the short-to-
medium term.

The International Economic Developments
The Committee noted that the global economy showed signs of further weakness
in the last three months, with the latest data not showing any evidence of
improvement up to the beginning of the third quarter of 2012. The Committee also
observed that the weak growth resulted from considerable financial market
fragilities in the euro area with resultant negative spillover effects to other regions,
uncertainty resulting from the Eurozone crisis as well as poor macroeconomic
performance in other advanced economies. Rising food and energy prices is also
a contributory factor.

In July 2012 IMF World Economic Outlook (WEO) update projected that global
output would moderate to 3.5 per cent in 2012, which is 0.1 percentage point
lower than the forecast of April 2012. Growth in advanced economies was
projected to decline from 1.6 per cent in 2011 to 1.4 per cent in 2012, with the
slowdown being most severe in the peripheral economies, where the dampening
effects and uncertainty from tighter financial conditions are strongest.

In the US, real GDP grew at an annualized rate of 1.5 per cent in Q2 of 2012, down
by 0.5 percentage point from 2.0 per cent in Q1. The sluggish growth was primarily
due to declining aggregate consumption, government spending, and negative
terms of trade.

The euro zone is on the brink of a double-dip recession following the contraction
in output between April and June. Real output across the 17-nation bloc fell by 0.2
per cent in Q2 of 2012 while signs of further contraction are in the horizon. Rising
unemployment and large scale fiscal retrenchment coupled with increased taxes
in a number of countries constrained aggregate demand leading to cut-back on
investment and low export growth. Unemployment level across the zone has
attained a record high of 11.3 per cent, the highest since 1995, with Spain
recording the highest level and Austria the least. Weak financial markets and the
persisting sovereign debt crisis as well as rising energy prices led the European
Central Bank (ECB) to retain its main refinancing interest rate at 0.75 per cent. EU


CBN Monetary Policy Review

members remain cautious about the ECB’s Outright Monetary Transactions
scheme, which is based on strict adherence to austerity measures and fiscal
consolidation pact.

In Asia, most economies recorded significant slowdown in economic activity up to
Q2 of 2012, mainly on account of weakening exports and investment. Export
growth has moderated, reflecting the sluggish demand from Europe while
investment remained weak due to heightened volatility of capital flows and the
lagged effects of tighter domestic monetary policies. China’s real GDP growth
slowed to 7.6 per cent in Q2 from 8.1 per cent in Q1 due mainly to decline in net
exports. Growth moderated in Japan especially in Q3 due to softening in
manufacturing activity. India’s real GDP, year-on-year, moderated to 5.5 per cent
in Q2 of 2012 from 6.1 per cent in Q4 of 2011, mainly as a result of deceleration in
private consumption. Overall, the growth trajectory for the remainder of the year
tends toward a downturn, as downside risks, including weak external demand,
elevated price levels, widening twin deficits, falling investments, and rising interest
rates, remain heightened.

Robust economic activities in the MENA and Sub-Saharan Africa regions would
partly offset the declining output growth in the advanced and emerging markets
in 2012. Real GDP growth was projected at 5.0 per cent in each of the regions,
underpinned by strong natural resources prices, new natural resources exploration
and production in several countries, recovery from drought in the Sahel and parts
of Eastern Africa, strong post-conflict recovery in some countries, improved
governance
practices
and
growing
disposable
income.
Despite
these
developments, growth in the regions faces significant downside risks on the back
of increased global uncertainties.

The Committee believes that the recent quantitative easing measures by the
European Central Bank and the US Federal Reserve System could be responsible
for the high crude oil prices in the international market. It highlighted the possible
increase in carry trade and the risk of a bubble in the domestic capital market.

Domestic Economic and Financial Developments
Output
Recent macroeconomic data indicates that the economy is performing better
than forecasts although growth in the first two quarters of 2012 has remained
consistently below the corresponding growth rates in 2011. The provisional real
GDP growth rate from the National Bureau of Statistics stood at 6.28 per cent in Q2
of 2012, up from 6.17 per cent in Q1 2012 but lower than the 7.61 per cent
recorded in the corresponding period of 2011. The non-oil sector remained the


CBN Monetary Policy Review

major driver of growth recording a 7.50 per cent increase in contrast to the oil
sector, which contracted by 0.73 per cent during the period. Overall GDP growth
for fiscal 2012 has been revised upwards to 6.77 per cent from the earlier
projection of 6.50 per cent. The Committee welcomed the promising growth
performance although it expressed concern that the overall output growth
projection for 2012 is still lower than the 7.45 per cent recorded in 2011.

The growth drivers within the non-oil sector remained agriculture; wholesale and
retail trade; and services; which contributed 1.94, 1.69, and 3.16 per cent,
respectively. The Committee noted that the relatively robust growth projections
despite the slowing global economy reflected the continuing favorable conditions
for increased agricultural production, improved security situation and power
supply.

Prices
The Committee observed that the inflationary pressures experienced during the
first half of 2012 appear to be moderating in the third quarter. The year-on-year
headline inflation declined to 11.7 per cent in August 2012 from 12.8 per cent in
July while core inflation decelerated to 14.7 from 15.0 per cent during the same
period. Also, food inflation declined sharply to 9.9 per cent in August 2012 from
12.1 per cent in July. The significant decline in year-on-year food inflation was
attributed to the decrease prices of both processed foods (from 4.2 to 3.6 per
cent) and farm produce (from 7.9 to 6.4 per cent). The Committee observed that
the inflationary pressures from the partial removal of petroleum subsidy in January,
2012 appear to have waned in Q3, 2012, and that given the relatively stable
exchange rate regime, the pass-through to domestic prices was low during the
period. The Committee, however, recognized the upside risk to inflation in the
near-term to include increased spending in the fourth quarter and monetized
capital flows following the US QE3.

Monetary, Credit and Financial Markets’ Developments
Broad money supply (M2) grew by 3.50 per cent in August 2012 over the level at
end-December, 2011, which annualized to 5.25 per cent. The annualized growth
rate is significantly lower than the growth rate of 15.43 per cent recorded in 2011.
Aggregate domestic credit (net) declined by 3.82 per cent in August 2012,
annualized to a decline of 5.73 per cent from the level at end-December 2011
level. The decline in aggregate domestic credit (net) in August 2012 was due to a
huge fall in credit to Government (net), which declined by 246.47 per cent or
369.71 per cent on annualized basis. This development reflected the combined
effects of the significant growth in Federal Government deposits with the banking
system and contraction on claims to government. The introduction of a Treasury


CBN Monetary Policy Review

Single Account (TSA) appeared to have had the desired effect of reducing
government borrowing.

Interest rates in all segments of the money markets rose initially, in response to the
increase in the Cash Reserve Requirement (CRR) by 400 basis points at the MPC
meeting of July 23 and 24, 2012. The rates, however, trended downwards toward
the end of the review period. The inter-bank call and OBB rates, which opened at
17.85 and 14.99 per cent, closed at 14.19 and 13.56 per cent, respectively, during
the review period. Developments in the interest rate structure indicated that the
retail lending rates remained high in August 2012. The average maximum lending
rate increased marginally to 23.76 per cent in August 2012 from 23.45 per cent in
July. However, the average interest bearing deposit rate declined to 6.24 per cent
in August 2012 from 6.64 per cent in July. Thus, the spread between the average
maximum lending rate and the average interest-bearing deposit rate widened to
17.53 per cent in August 2012 from 16.81 per cent in July. The Committee
expressed concerns that lending rates have remained high and enjoined the Bank
to sustain its efforts towards the reduction in interest rate spread, while stabilizing
interbank rates to sustain liquidity and facilitate intermediation in the banking
system. The Committee noted that this can only be achieved by sustaining the
current efforts at reducing overheads in the banking industry and deepening
capital market reforms to diversify sources of finance for the real economy, and
complement bank loans.

The Committee observed that the recovery in the Nigerian capital market
continued during the review period, as equities market indicators were positive.
The All-Share Index (ASI) increased by 9.96 per cent between June 29, 2012 and
August 31, 2012, while Market Capitalization (MC) increased by 9.64 per cent
during the same period. Equity Market Median PE ratios at 9.86 in August 2012, fell
below the long-run median of 10.77 by 0.91 or 8.44 per cent, suggesting bargain
valuations and an imminent rebound. The Committee observed that the
performance of the NSE during the period was consistent with the global trends,
especially in the wake of monetary expansion.

External Sector Developments
At the Wholesale Dutch Auction System (WDAS), the exchange rate during the
period, July 25 – August 31, 2012, opened at N157.40/US$ and closed at
N157.36/US$, representing an appreciation of N0.04k. The appreciation was due to
the combined effects of the increase in Cash Reserve Requirement, reduction in
the Net open position and the policy barring DMBs/Discount Houses from
accessing Lending windows (SLF and Repo) and WDAS simultaneously. At the
interbank segment, the selling rate opened at N160.05/US$ and closed at


CBN Monetary Policy Review

N158.15/US$, representing an appreciation of N1.90 or 0.01 per cent. The
appreciation experienced in this segment was due to increased supply of foreign
exchange by oil companies to the interbank market. At the BDC segment of the
foreign exchange market, the selling rate opened at N163.00/US$ and closed at
N161.00/US$, representing an appreciation of N2.00k or 0.01 per cent for the
period. The appreciation recorded in this segment was traced to the low demand
of foreign exchange by end users vis-à-vis the high supply of foreign exchange at
the interbank market and the apparent taming of speculative activities.

The Committee noted with satisfaction that the premia between the rates at the
WDAS and the interbank; and between the wDAS and the BDCs; narrowed
towards the end of the review period, and therefore encouraged the Bank to
sustain and complement existing measures to discourage speculative demand in
the market. In general, the Committee noted that the decisions taken at the last
meeting of the MPC had produced the desired result.

In the same vein, the Committee expressed satisfaction with the significant
accretion to external reserves during the period. Gross external reserves as at
September 5, 2012 stood at US$ 41.81 billion, representing an increase of US$ 6.40
billion or 18.07 per cent above the level of US$35.41 billion at end-June 2012.
External reserves increased by US$ 8.88 billion or 27.0 per cent on a year-on-year
basis compared with US$ 32.93 billion at end- August 2011. The increase in the
reserve level was driven mainly by proceeds from crude oil and gas sales and
crude oil related taxes. The foreign reserves level could finance over seven months
of imports.

The Committee’s Considerations
Given developments in the global and domestic economy and the financial
markets, the Committee noted that the weak global growth indices called for
cautious optimism by policymakers. The resolution of the euro area debt crises
remains a major concern even with the approval of the efforts of the European
Central Bank to address the debt crises in the euro area by the German
Constitutional Court. It further noted that its decisions at the July MPC Meeting
appeared to have had some positive impact in a number of areas, namely: a
deceleration in year-on-year inflation in August 2012, stability of short term interest
rates around the Monetary Policy Rate (MPR), buildup in external reserves and
stability in the exchange rate. However, core inflation is still high at 14.7 per cent in
August. The threat of increased inflow of hot money arising from the actions of the
US Fed to further stimulate the economy through its QE3 activities and its capital
reversal implications were noted.


CBN Monetary Policy Review

The Committee noted the rise in oil prices but cautioned against a hasty
deployment of the windfall to immediate consumption as the trend could be
reversed. Monetary policy could not, therefore, under the circumstance, react to
what may be purely temporary developments.

Despite the threats from a combination of global and domestic factors, the
Committee noted that the level of economic growth in the third quarter of 2012
remained robust and the year-end forecast would likely be met owing largely to
the improvements in power supply and the steady progress of reforms, actions in
respect of the alleged fraud in the petroleum subsidy regime and improved fiscal
operations. The Committee noted that these measures, generally take time to
impact the real economy.

With this development, the Committee observed that the inflation outcome for the
remaining period of the year is likely to be lower than the initial forecast of 14.7 per
cent. The Committee would continue to monitor developments in the price level,
and remain firm in its commitment to price stability as its mandate. The Committee
also noted that the growth rate of real output, though impressive by global trends,
was on the downward trend since Q1 2010 most especially in the agricultural
sector. It was of concern to the Committee that the declining output in the
agricultural sector was traceable to the security challenges and high intensity of
rainfall which has led to flooding in several parts of the country. It noted that the
measures taken at the last MPC meeting have succeeded in stabilizing the foreign
exchange market as well as enhancing the build up in external reserves.

Overall, the MPC believes that the current rise in crude oil prices and the tight
monetary policy regime presented an opportunity for building reserve buffers in
the light of the uncertainties surrounding the global economy.
The Committee, therefore, identified the key policy challenges to include:
1.
Protecting the domestic economy and building external reserves buffer;
2.
Potential large inflow of “hot money” resulting from further monetary
easing in the US and Europe and improved yield on fixed income
instruments;
3.
Persisting high core inflation rates;

The Committee noted that this moderation in headline inflation has not been
accompanied by a significant decline in core inflation. Given the unpredictability
of food prices, there is a need to watch this trend as we approach year-end
before altering the present monetary stance.


CBN Monetary Policy Review

Decisions:
In view of the foregoing, the Committee by a unanimous vote decided as follows:
1.
Retain the Monetary Policy Rate (MPR) at 12 per cent with +/-200 basis
points corridor;
2.
Retain the Cash Reserve Requirement (CRR) at 12.0 per cent.
3.
Retain the Net Open Position at 1.0 per cent.

Thank you.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria

18th September, 2012


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué No. 86 of the Monetary Policy Committee
Meeting of Monday and Tuesday November 19 and 20, 2012
The Monetary Policy Committee (MPC) met with nine out of the twelve members
in attendance. The Committee reviewed the domestic and global economic
conditions and financial environment as well as the challenges that faced the
Nigerian economy during the first ten months of fiscal 2012, with a view to
reassessing monetary policy options in the near-to-medium term.

The International Economic Situation
The Committee noted the continued deceleration in global output, which resulted
from a combination of austerity-driven euro-zone developments, weak recovery in
some Asian economies, and slowdown in major emerging market economies. In
addition, high and rising unemployment, fragile financial conditions, weak housing
markets, and deterioration in both public and private sector balance sheets in
some major industrial countries posed major risks to global economic recovery.
Thus, global output growth in 2012, which was earlier projected at 3.5 per cent in
July 2012 by the IMF was revised downward to 3.3 per cent in the October 2012
World Economic Outlook; that of 2013 was also revised downward from 3.9 to 3.6
per cent. According to the October 2012 projection, there is a high probability of
global growth falling below 2.0 per cent in 2012 and this would mirror the recession
in the advanced economies and the slowing output growth in key emerging
markets and developing economies.

Growth in the advanced economies is estimated at 1.3 per cent in 2012 and 1.6
per cent in 2013, reflecting a downward revision of 0.1 and 0.3 percentage point,
respectively. The US economy continued on the path of modest recovery as real
output expanded by 2.0 per cent in the third quarter of 2012 compared with 1.3
per cent in the second quarter, reflecting the positive contributions from personal
consumption expenditure, government spending, private inventory and residential
housing investment in the face of current low mortgage rates. However, the
recent hurricane Sandy across the east coast of the United States, constitutes an
immediate risk to the sustainability of the recent growth rally and its impact is
expected to truncate US recovery in the last quarter of 2012. Another major risk to
the medium term growth trajectory is the US “fiscal cliff”. The IMF has suggested a
gradual resolution of the fiscal impasse in order to avoid the possibility of a sharp
contraction. The Euro zone is officially in recession in addition to the persisting
uncertainty over agreements on a fiscal union, the start of European Central
Bank’s (ECB) oversight of European banks and the fragility of the Greek, Spanish
and other peripheral economies. Real GDP in the zone is projected to contract by
0.4 per cent in 2012 with unemployment rising to 11.50 per cent. The core


CBN Monetary Policy Review

economies in the zone are expected to experience low but positive growth during
2012-13 while most economies in the periphery are expected to suffer sharp
output contraction in 2012 because of tight fiscal policies and weak financial
conditions. The German economy recorded slight recovery with unemployment
falling to 6.5 per cent while the United Kingdom snapped out of a recession,
recording a growth rate of 1.0 per cent after three successive quarters of
contraction. Rising uncertainty about the viability of the Euro zone and the
possibility that the euro area crisis will escalate remains a major downside risk to
growth and financial sector stability. Overall, continued austerity measures in the
euro area are having negative spill-over effect on the German economy which is
now wobbling on the verge of a recession due to widespread drop in aggregate
demand.

In emerging Asia, growth was estimated to have significantly weakened to less
than 7 per cent in the first half of 2012. Latest data indicate that growth in China
slowed for the seventh consecutive quarter to 7.40 per cent in Q3, 2012, lower
than the Q2, 2012 figure of 7.60 per cent. The Peoples Bank of China (PBC) had
already embarked on sequential monetary easing operations in order to loosen
liquidity conditions and stimulate growth. This will, however, increase the risk of
inflating real estate prices and a possible bubble with potential adverse impact on
the Chinese financial system. In India, output is expected to expand by 5.80 per
cent in 2012 as against 6.50 per cent in 2011 with the slowdown resulting from
waning business confidence, sluggish structural reforms, policy rate hikes designed
to rein in inflation, and flagging external demand. In other parts of Asia, growth
has dipped, hampered by the weak performance of the Chinese economy. Most
countries continue to be affected by weak export growth while the Monetary
Authorities have responded with expansionary monetary policy. Output growth for
2012, at 5.1 per cent, up from 3.3 per cent in 2011for the Middle East and North
Africa (MENA) region, could be considered robust in the face of global realities,
but there is a sharp difference in growth performance between the oil and non-oil
exporting countries in the region. For the non-oil exporting economies, growth is
projected to register just above 2.0 per cent and 6.6 per cent for the oil exporting
economies. Economic activities in the non-oil exporting countries have remained
suppressed by the growth deceleration in the major trading partner-economies,
internal conflicts and pervading political/economic uncertainties. The robust
growth projection for the oil exporting countries, on the other hand, is anchored
on increased government expenditure supported by historically high oil prices.
Despite these developments, the Committee is of the view that growth for the
MENA Region in the medium term is faced with the risk of weak external demand,
instability in the region and an increasingly constrained environment for private


CBN Monetary Policy Review

sector activity. However, Africa’s robust growth is not likely to affect the downward
trend in global output because of its small share (2.7 %) of global output.
Overall, the Committee believes that the fiscal gridlock in the US, the lingering
euro zone financial and economic crisis, as well as the softening output growth in
the key emerging Asian economies, could have serious implications for the
domestic economy in the near-to-medium term. Specifically, any negative shock
to the current high prices of crude oil would have adverse implications for fiscal
revenue flows and the external current account position, even though current
forecasts and developments in the Middle East do not suggest the possibility of a
shock in the near term.

Domestic Economic and Financial Developments
Output
The National Bureau of Statistics has revised the real Gross Domestic Product (GDP)
growth for fiscal 2012 downwards to 6.61 per cent from the earlier projection of
6.85 per cent, indicating that the economy is encountering growth challenges not
previously anticipated. The estimates revealed a real GDP growth rate of 6.48 per
cent in the third quarter of 2012, up from 6.39 per cent in the second quarter but
lower than the 7.37 per cent recorded in the corresponding period of 2011. The
non-oil sector remained t
The Committee noted with concern the continuing decline in the contribution of
the oil sector to growth, in an area of strong oil price performance, which became
apparent in the last half of 2011 and also the decline in the contribution of
agriculture to growth since Q3, 2011, in spite of the investment in the Agricultural
transformation initiatives of the Federal Government. The relatively robust growth
projections for 2012 despite the slowdown in the global economy reflected the
continuing favorable conditions for increased agricultural production, the impact
of the banking sector reforms and the initiatives by government to stimulate the
real economy. In this regard, the Committee welcomed the recent improvements
in electricity generation which has impacted positively on manufacturing activities
and overall capacity utilization. The Committee enjoined the Federal Government
to sustain the efforts.

The Committee, however, observed that the recent flooding in several parts of the
country, current security challenges and corruption scandals posed serious
downside risks to growth in the near-to-medium term. Indeed, it noted that the full
impact of the widespread flooding was yet to manifest while the cost to the
economy was yet to be estimated. The committee noted the combined effects of
the high tariffs, floods and drought on global wheat supplies which have led to
higher prices of wheat in Nigeria.


CBN Monetary Policy Review

Prices
The Committee noted that inflationary pressure, which moderated in the third
quarter of 2012, re-emerged in October 2012. The year-on-year headline inflation
inched up to 11.70 per cent in October 2012 from 11.3 per cent in September
while food inflation increased to 11.1 per cent from 10.2 per cent in September.
Core inflation continued its sequential four-month moderation to 12.40 per cent
from 13.10 per cent in September while the risk of food inflation remained hawkish,
thus creating mixed price signals. The major drivers of inflation during the period
include food and housing, water, electricity, gas and other fuels. The pick-up in
food inflation contradicted recent trends and may not be unconnected with
effects of the floods on farmlands, the impact of which poses an upside risk to
inflation in the near-term, coupled with continued imported food inflation.
Although core inflation continued its moderation, the Committee considered the
current level to still be elevated, driven largely by: processed foods (3.7 per cent);
housing, water, electricity, gas and other fuels (4.2 per cent); clothing and
footwear (1.4 per cent); transport (1.10 per cent); furnishing, household equipment
and housing maintenance (0.7 per cent); and education (0.6 per cent). However,
the major drivers of core inflation remained outside the scope of monetary policy
alone which was helpless in addressing the structural components of inflation. In
the meantime, fuel prices have risen generally above the official pump price even
without the total removal of oil subsidy.

Monetary, Credit and Financial Markets Developments
Broad money supply (M2) grew by 8.23 per cent in October 2012 over the level at
end-December, 2011, which annualizes to 9.87 per cent. Aggregate domestic
credit (net) declined by 3.48 per cent in October 2012. The decline in credit to
government between June and October implies that the Federal Government is
increasingly becoming a net creditor to the banking system which perhaps
reflects the impact of better fiscal management including the introduction of
Treasury Single Account. Interest rates in all segments of the money market
moderated between September 19 and October 30, 2012, reflecting increased
liquidity in the banking system induced by the release of statutory revenue to subnational governments, the repayments of matured CBN bills and absence of repo
operations during the review period.. The interbank call and OBB rates, which
opened at 16.77 and 16.40 per cent on September 19, 2012, closed at 12.03 and
11.70 per cent, respectively, on October 30, 2012. The average interbank call and
OBB rates for the period were 11.68 and 11.38 per cent, respectively.


CBN Monetary Policy Review

The foregoing notwithstanding, the Committee was concerned that the
moderation in money market rates was only beneficial to prime customers, who
enjoyed a fair degree of reduction in rates on their loan facilities. The average
prime lending rate declined from 16.96 per cent in July to 16.48 per cent in
October. The average maximum lending rate, however, increased from 23.45 to
24.65 per cent during the period while the weighted average savings and term
deposit rate stabilized at 5.30 per cent during the period. The Committee,
therefore enjoined the Bank to fast track the financial inclusion strategy to ensure
the effectiveness of the transmission mechanism of monetary policy with a view to
improving the financial intermediation process, and reducing the high spread
between deposit and lending rates in the banking industry.

The Committee observed that the rally in the Nigerian capital market continued as
equities market indicators trended upward in the review period. The All-Share
Index (ASI) increased by 22.37 per cent from 21,599.57 to 26,430.92 between June,
29 and October 31, 2012. Market Capitalization (MC) also increased, by 22.15 per
cent, from N6.90 trillion to N8.42 trillion during the same period. The positive
performance of the ASI and MC were due to strong investor confidence following
improved second quarter financial performance of blue-chip companies, as well
as excellent results from a reinvigorated banking industry.

External Sector Developments
At the Wholesale Dutch Auction System (wDAS), the exchange rate during the
review period opened at N157.36/US$ on August 30, 2012 and closed at
N157.30/US$ on October 31, 2012, representing an appreciation of N0.06k or 0.04
per cent. The average wDAS exchange rate during the period was N157.33/US$.
At the BDC segment of the foreign exchange market, the selling rate opened at
N161.00/US$ on August 30, 2012 and closed at N159.00/US$ on October 31, 2012,
representing an appreciation of N2.00k or 1.24 per cent for the period. At the
interbank segment, the selling rate opened at N158.10/US$ on August 30, 2012 and
closed at N157.06/US$ on October 31, 2012, representing an appreciation of
N1.04k or 0.66 per cent. The appreciation recorded in all segments of the market
could be traced to the combined effects of tight monetary conditions, improved
supply of foreign exchange to the market by oil companies; increased inflows from
portfolio investors and the policy that barred the DMBs from accessing the CBN
Lending window (SLF and Repo) and wDAS simultaneously.

The Committee noted with satisfaction the premia between the rates at the wDAS
and the interbank and between the wDAS and the BDCs narrowed towards the
end of the review period, from N0.74/US$ and N3.64/US$ to N0.03/US$ and
N1.68/US$, respectively, suggesting the need to sustain and further complement


CBN Monetary Policy Review

existing measures to discourage speculative activities in the foreign exchange
market. In general, the Committee noted that the decisions taken at the previous
MPC meetings were yielding the desired results.
The Committee expressed satisfaction with the significant accretion to external
reserves which stood at US$ 45.68 billion as at November 15, 2012, representing an
increase of US$ 10.27 billion or about 29.00 per cent from the level of US$35.41
billion at end-June 2012. External reserves had increased by US$ 13.04 billion or
39.95 per cent over the December 2011 level of US$ 32.64 billion. The increase in
the foreign reserves level was driven mainly by proceeds from crude oil and gas
sales and crude oil-related taxes, as well as reduced funding of the wDAS due to
increase inflow of foreign direct investment. The foreign reserves level could
finance over 10 months of imports. The Committee urged the Central Bank to
continue to monitor the inflow and destination of FDIs and remittances conscious
of the risks to financial stability of a rapid outflow of hot money.

The Committee’s Considerations
The Committee noted that developments in the global economy characterized
by general uncertainty on the back of the deceleration in global growth sustained
by the fragile financial conditions, weakening labor and housing markets and
deteriorating public and private balance sheets across advanced and emerging
economies, have implications for the domestic economy and, therefore, demand
careful consideration in arriving at an appropriate decision of monetary policy.
The uncertainty surrounding the resolution of the fiscal cliff in the US and the
downside risk created by Hurricane Sandy on US output in Q4 are also important
factors to consider. The Committee noted that if the fiscal cliff was not resolved
quickly, it would negatively impact the already ballooning deficits and
subsequently tip the economy into a recession with downside risks to oil price
developments. The Committee noted that the lack of clear direction for the
resolution of the Euro area crises will continue to signal a likely recession in the area
in the near term. Developments in the domestic economy in the past three months
highlight some new pressure points to macroeconomic stability.

The Committee was of the view that despite the high interest rates, additional
shocks to the economy emanating from the devastating floods, imported inflation
and the upward adjustment in electricity tariffs continue to stoke inflationary
pressure. The Committee noted the conflicting price signals coming from the latest
inflation numbers from the National Bureau of Statistics, with headline and food
inflation trending upwards, while core inflation rate continued to moderate for the
fourth consecutive month. This according to the Committee has created
uncertainty as to the appropriate policy stance at this time. However, since the
factors underpinning the inflationary pressures were mainly structural, a monetary


CBN Monetary Policy Review

response may not be appropriate at this time. Furthermore, the Committee
observed that while there were compelling arguments for monetary easing at this
time based on the continuous moderation of core inflation, slowdown in GDP
growth and evidence of fiscal prudence, the short-term gains may not be
sufficiently adequate to overturn the long term implications of sending a wrong
signal that the tightening cycle was permanently over. With regard to the balance
sheet of the Federal Government, the Committee was of the view that it has
become imperative to shift away from looking at the size of the deficit and
borrowing alone, to emphasizing the quality of expenditure and decisions on the
allocation of resources. The Committee commended the fiscal authorities for
keeping the fiscal deficit firmly in line with the 2012 budget and improving the
revenue profile of the Federal Government by plugging several of the fiscal
leakages. It called on the Government to significantly increase capital spending
and increase its focus on improving on governance and transparency in the
public service. On the oil price benchmark used in the 2013 budget, the MPC
reaffirmed its support for the maintaining the US$75/barrel proposed by the fiscal
authorities and noted that this has become even more critical in light of evidence
that output projections may have been overly optimistic. In this regard, the
Committee called on the Government and the National Assembly going forward,
to borrow from the Chilean experience with regard to the setting of the
parameters for the preparation of the National Budget to avoid the perennial
rancor between the Executive and the Legislature on benchmark oil price.
Specifically, the Committee called for the setting up of an independent legal
structure that will set the benchmark output and price underpinned by the long
term trajectory of output and price, by independent experts who are shielded
from political interference and interests.
In view of these developments, the Committee was faced with three choices:
(i)
An increase in rates in response to the up tick in headline and food
inflation;

(ii)
A reduction in rates in view of declining core inflation and GDP growth;

(iii)
Retaining current monetary policy stance in view of conflicting price
signals and global uncertainties;

The Committee’s Decisions
The Committee considered and rejected option 1 as being potentially procyclical
considering the structural nature of recent inflationary pressures. While
acknowledging the merit of the arguments in favour of option 2, it was also
rejected as likely to send wrong signals of a premature termination of an
appropriately tight monetary stance.


CBN Monetary Policy Review

The Committee therefore, decided by a unanimous vote to maintain the current
policy stance i.e. to retain the MPR at 12 per cent with a corridor of +/- 200 basis
points around the midpoint; and retain the CRR at 12.0 per cent and the Liquidity
Ratio at 30 per cent.

Thank you.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria

20th November, 2012