CENTRAL BANK OF NIGERIA
MONETARY
POLICY REVIEW
MONETARY
POLICY REVIEW
February 2012
February 2012
Central Bank of Nigeria
33 Tafawa Balewa Way
Central Business District
P.M.B. 0187
Garki, Abuja
Phone: +234(0)946236011
Fax: +234(0)946236012
Website
©2012 Central Bank of Nigeria
: www.cbn.gov.ng
E-mail:
ISSN: 2141-6281
iii
Mandate
Vision
Mission Statement
§
Ensure monetary and price stability
§
Issue legal tender currency in Nigeria
§
Maintain external reserves to safeguard the international
value of the legal tender currency
§
Promote a sound financial system in Nigeria
§
Act as banker and provide economic and financial
advice to the Federal Government
To be one of the most efficient and effective of the
world's central banks in promoting and sustaining
economic development.
To be proactive in providing a stable framework for the economic
development of Nigeria through the effective, efficient and
transparent implementation of monetary and exchange
rate policy and management of the financial system.
Core Values

·
Meritocracy
·
Leadership
·
Learning
·
Customer - Focus
Central Bank of Nigeria
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

vii
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 2010 - December 2011)
..

Table 2.2:
Selected CPI Component Contribution to Overall
Change (Year-On-Year) July - December 2011
..

Table 2.3:
Quarterly Consumer Price Developments in 2011
(November 2009=100)..


Table 3.1:
MPC Decisions, July – December, 2011
..
..

Table 3.2:
Nigerian Treasury Bills Auction (N'million)
(January 2009-December 2011)
..
..
..

Table 3.3:
CBN Standing Lending Facility (N'billion)
(January 2009- December 2011)
..
..
..

Table 3.4:
CBN Standing Deposit Facility (N'billion)
(January 2009-June 2011)


Table 3.5:
Foreign Exchange Supply by the CBN (US Dollar Million)

Table 3.6:
Performance of Monetary Aggregates
..
..

Table 4.1:
Weighted Average Money Market Interest
Rates (%) (Dec. 2010 – Dec. 2011)
..
..
..

Table 4.2:
Average Monthly Spot Exchange Rates
(N/US$): Jul. 2010 – Dec. 2011 ..
..
..
..

Table 4.3:
Average Monthly Foreign Exchange Forward
Rates (N/US$) (Mar. 2011 – Dec. 2011)
..
..

Table 4.4:
End-Month Exchange Rate Movements at Various
Segments of the Market (Naira per US dollars)
..

Table 4.5:
Nominal and Real Effective Exchange Rate Indices
(Jul. 2010 –Dec. 2011) ..


Table 4.6:
Foreign Exchange Demand and Supply
(US Dollar Million)


Table 4.7:
CBN Monthly Foreign Exchange Flows (US Dollar Million)

Table 4.8:
NSE All Share Index (ASI) and Market
Capitalization (MC) December 2010 –December 2011

Table 5.1:
World Economic Outlook


vi
CBN Monetary Policy Review
CBN Monetary Policy Review
Page
List of Figures
Figure 2.1:
Headline Inflation (Dec. 2010 - Dec.2011
..
..

Figure 2.2:
Headline Inflation in the Second Half of 2012 ..
..

Figure 2.3:
Headline, Core and Food Inflation (Y-Y)
(Dec. 2010 - Dec. 2011


Figure 2.4:
Headline Inflation (Y-Y): Selected Items 2011 ..
..

Figure 2.5:
Actual and Seasonally Adjusted Headline Inflation
(Jun. - Jul. 2011) ..


Figure 2.6:
Oil Price (Bonny Light) (Jan. 2010 - Dec. 2011)
..

Figure 3.1:
Monetary policy rate (Jul. – Dec. 2011)
..
..

Figure 3.2:
The performance of M2, M1 and RM
(2010 and 2011)


Figure 3.3:
The performance of NDC, Cg and Cp
(2010 and 2011)


Figure 4.1:
Weighted Average Money Market Rates
(Jul. 2010 – Dec. 2011)..


Figure 4.2:
Daily Interbank rate (Jan. - Dec. 2011)
..
..

Figure 4.3:
Daily Open - Buy - Back (Jan. – Dec. 2011)
..
..

Figure 4.4:
Daily Exchange Rate (Jan. – Dec. 2011)
..
..

Figure 4.5:
Demand and Sales at wDAS Forwards
(Mar. – Dec. 2011)


Figure 4.6:
End - Month Exchange Rate of the Naira
(July 2010 - Dec. 2011)..


Figure 4.7:
Nominal and Real Exchange Rate Indices
(Jul. 2010 – Dec. 2011)..


Figure 4.8:
Foreign Exchange Flows (Jul .2010 – Dec. 2011)
..

Figure 4.9:
Nigeria Stock Exchange All-Share Index and
Market Capitalization (Dec. 2010 – Dec. 2011)
..

Figure 4.10:
Nigeria Stock Exchange All-Share Index and
Market Capitalization (Jul. – Dec. 2011)
..
..

Figure 4.11:
NSE Market Capitalization by Sector as at
End-December, 2010 ..


Figure 4.12:
NSE Market Capitalization by Sector as at
End-June, 2011


Figure 4.13:
NSE Market Capitalization by Sector as at
End-December, 2011 ..


Figure 4.14:
Turnover and Value of FGN Bonds
..
..
..

Figure 4.15:
Nigeria Eurobond Yield Line (Jun. – Dec. 2011)
..

Figure 4.16:
FGN Bond Yield Curves 24th Dec 2010 vs
22nd Jun 2011 vs 22nd Dec 2011
..
..
..

Figure 5.1:
Fan Chart for Inflation from 2011:3 – 2013:4
..
..

vii
CBN Monetary Policy Review
CBN Monetary Policy Review
Page
List of Boxes
Appendices
Box 2.1:
Excess Crude Account (ECA) and the Sovereign
Wealth Fund (SWF)..


Box 3.1:
Euro Zone Sovereign Debt Crisis and the
Nigerian Economy ..


Box 4.1:
Performance of Interbank Guarantee
..
..
..

Communiqué No. 77, July 25-26, 2011


Communiqué No. 78, September 19, 2011


Communiqué No. 79, October 10, 2011


Communiqué No. 80, November 21, 2011


STATEMENT BY THE GOVERNOR
Monetary policy in the second half of 2011 was shaped by both domestic and
global events. On the global front, the European debt crisis which culminated in the
sovereign debt downgrading of some key European countries had implications for
the rest of the world. Some of the identified risk factors that put the ratings of several
European banks under pressure included: deteriorating sovereign creditworthiness;
elevated economic uncertainty; high funding spreads and reduced market access
at a time when many banks faced large debt maturities. Firms were confronted with
evolving challenges, such as more fragile funding conditions, wider credit spreads,
increased regulatory burdens and more difficult operating conditions. Furthermore,
the crisis in Syria and the uncertainties associated with Iran and North Korea's
nuclear programmes contributed to apprehensions about energy prices and global
output growth.
On the domestic scene, a number of factors informed the decision to tighten
monetary policy during the review period. These included; the rising level of
domestic inflation, significant increase in capital spending especially in the fourth
quarter of 2011, need to ensure exchange rate stability, declining oil prices and
foreign reserves, increased demand for foreign exchange, fiscal dominance as
well as capital flow reversals. Also, the interbank placement guarantee which was
extended thrice since 2010 terminated at end-December 2011.
The thrust of monetary policy during the review period was the containment of rising
domestic liquidity and exchange rate pressure as well as the negative spillover from
developments in the global economy.
The short to mediumterm outlook for the economy suggests that the plan to remove
subsidy on petroleum products would put significant pressure on domestic prices.
Monetary policy will continue to be proactive to contain the pressure.
Governor,
Central Bank of Nigeria.
Sanusi Lamido Sanusi, CON
ix
CBN Monetary Policy Review
CBN Monetary Policy Review


CBN Monetary Policy Review

CHAPTER 1
OVERVIEW

The maintenance of price stability remained the main focus of
monetary policy in the second half of 2011. The challenge of
managing the excess liquidity from monetary easing of 2009 –
2010 fiscal years combined with the expansionary fiscal stance,
and the relatively uncertain global economic outlook, defined
the monetary policy stance in the review period. The CBN
employed the Monetary Policy Rate (MPR) to anchor shortterm interest rates, and to rein-in inflation expectations. Open
market operations (OMO) supported by reserve requirements
and discount window operations (including the Standing
Facilities, repos and reverse repos), remained the major
instruments of monetary policy in the second half of 2011.
Efforts were made to improve communication through more
regular dialogue with market and other critical stakeholders, to
shape-up market sentiments and to track the pace of
economic activity during the review period. The Monetary
Policy Committee (MPC) held three regular meetings and one
extraordinary meeting and increased the Monetary Policy
Rate (MPR) by a cumulative 400 basis points to 12.0 per cent
during the review period. The Bank also implemented some
administrative and regulatory measures to rein-in excess
liquidity and the attendant pressures in the foreign exchange
market.

The period witnessed significant expansion in domestic liquidity
arising from expansionary fiscal policy and from the lagged
effect of monetary easing that was undertaken during the
2009-2010 period to cushion the effects of the global financial
and economic crisis. The surge in liquidity was largely on
account of bunching of capital expenditures, significant
drawdown on the Excess Crude Account (ECA) and purchase
of troubled assets of Deposit Money Banks (DMBs) by the Asset
Management Corporation of Nigeria (AMCON). Consequently,
growth in broad money (M2) stood at 15.4 per cent at endDecember 2011 compared with 4.5 per cent (annualized at 9.0
per cent) in June 2011. The development reflected significant
increases in both net foreign and domestic assets of the
...maintenance of
price stability
remained the
main focus of
monetary policy
in the second half
of 2011

......period
witnessed
significant
expansion in
domestic liquidity
arising from
expansionary
fiscal policy ...


CBN Monetary Policy Review

banking system.

Inflationary
pressures
persisted
in
the
review
period,
necessitating further tightening of the stance of monetary
policy. Headline inflation (year-on-year) stood at 10.3 per cent
in December 2011, which was slightly higher than 10.2 per cent
recorded in June 2011 mainly on account of upward
movement in food prices and transportation cost usually
associated with end of year festivities. Core and food inflation,
on year-on-year basis, stood at 10.8 and 11.0 per cent,
respectively, compared with 11.5 and 9.2 per cent in June
2011.

Interest rates rose generally, following the progressive review of
the MPR from 8.0 to 12.0 per cent and cash reserve ratio from
4.0 to 8.0 per cent. Interbank interest rates as well as the
lending and other interest rates adjusted upwards. However,
the impact of this development on credit to the real sector
was moderated by the Bank’s interventions, particularly in
some critical sectors like agriculture, Small and Medium Scale
Enterprises (SMEs) and infrastructure.

Demand pressure increased significantly at the wholesale
Dutch Auction System (wDAS) segment of the foreign
exchange market. The exchange rate was relatively stable,
although it depreciated marginally in all segments of the
market. During the second half of 2011, FGN bond auctions
were oversubscribed due to increased liquidity in the system,
the attractive coupon on the bonds and the increased interest
of foreign investors in the fixed income securities.

The domestic financial markets continued to play a critical role
in the implementation of monetary policy. This was facilitated
by the banking sector reform especially the re-capitalisation
exercise concluded in the second half of 2011 and the
extension of the CBN interbank placement guarantee for some
DMBs till December 2011.

The overall outlook for the first half of 2012 is mixed. Economic
growth prospects appear good despite downside risks
including uncertainties in the rest of the world, subsisting
Demand pressure
increased
significantly at the
wholesale Dutch
Auction System
(wDAS) segment
........... exchange
rate was relatively
stable, although it
marginally
depreciated in all
segments of the
market.


CBN Monetary Policy Review

challenges in infrastructure, late passage of the 2012
Appropriation Bill and security challenges in some parts of the
country. Inflationary pressures could intensify in the first half of
2012 from fiscal injections, exchange rate depreciation and
higher pump price of Premium Motor Spirit (PMS), thereby
placing monetary policy on a rather tight pedestal.


CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER 2
DOMESTIC PRICE DEVELOPMENTS AND THE REAL
ECONOMY

Inflationary pressures remained elevated during the second
half of 2011 owing mainly to the pass-through effects of higher
prices of imported items including energy and food. Other
factors that contributed to domestic price pressures included
expansionary fiscal policy, implementation of the national
minimum wage by the Federal Government and several State
Governments,
liquidity
injection
by
AMCON
and
high
household expenditure associated with year-end festivities.

2.1
Domestic Economic Activity
In the domestic economy, output was generally robust in spite
of the deteriorating global economic conditions. Growth in
real Gross Domestic Product (GDP) in the second half of 2011
was estimated at an average of 7.68 per cent compared with
8.60 per cent in the corresponding period of 2010. In the third
quarter, real GDP grew by 7.30 per cent and accelerated to
7.68 per cent in the fourth quarter of 2011. The overall real
GDP growth for the year was estimated at 7.32 per cent, being
marginally lower than the 7.87 per cent recorded in 2010.

The non-oil sector remained the major driver of growth as it
grew by 8.70 per cent compared with the oil sector which
grew by 7.68 per cent in the review period. Within the non-oil
sector agriculture; wholesale and retail trade; and other
services; contributed 2.70, 2.65 and 2.79 percentage points,
respectively. These were complemented by increases in crude
oil production following the sustained peace in the Niger Delta.
Other factors that accounted for output growth included
improved performance of industrial, especially manufacturing
activities.

The aggregate index of industrial production improved during
the second half of 2011 rising by 4.30 per cent to 135.1
(1990=100)
when
compared
with
the
level
in
the
corresponding period of 2010. The increase in industrial output
was
attributed
to
improvements
in
the
activities
of
Domestic price
pressures due in
part to high prices
of imported items,
new minimum
wage, and
festivities-induced
increase in
household
demand
In the domestic
economy, output
was generally
robust in spite of
the deteriorating
global economic
conditions.


CBN Monetary Policy Review

manufacturing, mining and electricity production which
increased by 2.10, 0.60, and 4.20 per cent, respectively.

The index of manufacturing production, estimated at 98.88
(1990 =100), rose by 6.00 per cent in the second half of 2011
relative to the level in the corresponding period of 2010. The
improved performance of the manufacturing subsector was
largely attributable to the cushioning effects of the CBN’s
interventions.
For
instance
the
disbursement
from
the
infrastructure intervention fund especially to the power sector,
contributed to increase in supply of electricity from 1,673 billion
KWH in June to 2,153 billion KWH in December 2011.
Consequently, the average manufacturing capacity utilization
rose by 3.80 percentage points to 56.10 per cent compared
with the corresponding period of 2010.

In contrast, economic activity slowed globally during the
period under review. World output growth rate declined to 3.8
per cent, compared with 5.2 per cent recorded in 2010, due to
the persistence of the euro area debt crisis, the weak recovery
of the US economy and political crisis in the Middle East and
North Africa (MENA) region. Global growth further weakened
due to perceptions that the euro area economy would lapse
into a mild recession following additional fiscal consolidation,
as well as the effects of tighter credit conditions on the real
economy.

2.2
Trends in Inflation in the Second Half of 2011
Domestic inflationary threat, which was experienced in the first
half of 2011due to increased government spending in the
wake of the general elections and the rising crude oil prices at
the international market moderated slightly in the third quarter
and remained within lower double-digit throughout the rest of
the period.

Headline inflation, on year-on-year basis, which was 10.2 per
cent at end-June declined to 9.4 and 9.3 per cent in July and
August, respectively, but rose to 10.3 per cent in September,
2011. It peaked at 10.5 per cent in October and November but
moderated to 10.3 per cent at end-December 2011. The
decline in inflation during the early part of the third quarter was
....improved
performance of
the
manufacturing
sub-subsector was
largely
attributable to the
cushioning effects
of the CBN’s
interventions that
moderated
interest rates,
....headline
inflation which
was 10.2 at endJune declined to
9.4 and 9.3 per
cent in July and
August, but rose
to 10.3 per cent in
September, 2011.


CBN Monetary Policy Review

attributable
to
tight
monetary
policy
which
was
complemented by early harvests. However, inflation assumed
an upward trend in the latter part of the year due to fiscal
expansion, the implementation of the new national minimum
wage policy and the anticipated deregulation of petroleum
prices.

Food inflation which was 9.2 per cent at end-June declined to
7.9 and 8.7 per cent in July and August, respectively, before
rising to 9.5 per cent in September, 2011. It, thereafter,
stabilized at 9.7 and 9.6 per cent in October and November,
respectively, before rising to 11.0 per cent at end-December
2011. Core inflation rate, which rose to 11.5 per cent apiece in
June and July 2011, declined to 10.9 per cent in August. It later
increased to 11.6 per cent in September 2011, moderated
marginally to 11.5 per cent, each, in October and November
before declining to 10.8 per cent at end-December, 2011.


Figure 2.1
Headline Inflation (Dec. 2010 - Dec.2011)
Headline Inflation


CBN Monetary Policy Review


Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Figure 2.2
Headline Inflation in the Second Half of 2012
Headline Inflation


Table 2.1
Inflation Rate
(December 2010 - December 2011)


Source: National Bureau of Statistics (NBS)


CBN Monetary Policy Review

Table 2.2
Selected CPI Component Contribution to Overall Change
(Year-On-Year) July - December 2011


Source: National Bureau of Statistics (NBS)

Analysis of Consumer Price Index (CPI) showed that housing,
water,
electricity,
gas
and
other
fuels
and
transport,
contributed most to the overall change in prices in the second
half of 2011(See Table 2.2).

Table 2.3
Quarterly Consumer Price Developments in 2011
(November 2009=100)


Source: National Bureau of Statistics (NBS)


Figure 2.3
Headline, Core and Food Inflation (Y-Y)
(Dec. 2010 - Dec. 2011)
Headline Y-Y
Core Y-Y
Food Y-Y

Source: National Bureau of Statistics (NBS)


CBN Monetary Policy Review

The contributions of transport and food components increased
from 10.3 and 9.2 per cent in June to 14.0 and 11.0 per cent in
December 2011, respectively. The index of food and nonalcoholic beverages increased from 8.5 per cent in June to
10.7 per cent in December 2011. Overall, the all items CPI grew
by 10.3 per cent at end-December 2011 compared with the
growth of 10.2 per cent at end-June 2011.


Source: National Bureau of Statistics (NBS)

2.3
Actual and Seasonally Adjusted Headline Inflation
Analysis of inflation development during the review period
indicated evidence of seasonality, first between June and
August 2011 and between September and November. Over
the former, seasonal factors including early harvests helped to
moderate headline inflation. In the latter period, however, the
effect of seasonality, though less severe, reflected in higher
actual inflation.


In the latter
period, however,
the effect of
seasonality,
though less
severe, reflected
in higher actual
inflation.


CBN Monetary Policy Review


Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
per cent
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Headline Inflation

Seasonal Adjusted

Figure 2.5
Actual and Seasonally Adjusted Headline Inflation
(Jun. - Jul. 2011)
Source: National Bureau of Statistics (NBS)

2.4
Key Factors That Influenced the Domestic Price Level
The major factors that influenced inflation in Nigeria during the
review period may be categorized into demand-pull and costpush. They formed the basis for monetary policy decisions by
the Bank during the second half of 2011.

2.4.1
Pull and Push Factors

Fiscal expansion contributed to inflation during the
second half of 2011. Government fiscal operations, both at
state and federal government levels exerted significant
pressure on inflation. With a Federal Government of Nigeria
(FGN) budget of N4.5 trillion for 2011with recurrent expenditure
accounting for over 70 per cent and a deficit of 2.85 per cent
of GDP, the fiscal operations of government exerted
substantial pressure on domestic liquidity and consequently
inflation during the period.


High oil prices, following the crisis in the Middle East and
increased quota allocation to Nigeria by OPEC, boosted
overall federation revenues which supported higher levels of
public expenditure across the tiers of government. By midOctober, the price of Bonny Light crude had risen to US$115.0
per barrel.


CBN Monetary Policy Review


Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Figure 2.6
Oil Price (Bonny Light) ( Jan. 2010 - Dec. 2011)
Oil Price (Bonny Light)
Source: Bloomberg


High rainfall in the western and southern parts of the
country destroyed some farmlands coupled with increased
desertification in the northern parts of the country, accounted
substantially for the decline in the availability of food items
during the period. Also, security challenges in some parts of the
country
hampered
effective
distribution
of
agricultural
products and locally produced items across the country,
thereby putting pressure on food prices, especially in urban
areas.


Imported inflation contributed to rising domestic prices.
For instance, imported food prices rose from 2.0 per cent in
November to 2.2 per cent in December, 2011. Similarly, prices
of energy products like diesel and kerosene which were
imported rose from 4.6 per cent in November to 5.4 per cent in
December, 2011.


The depreciation of the naira during the period
impacted negatively on the domestic price level due to
exchange rate pass-through effect. The official exchange rate
of the naira during the review period (July - December 2011)
opened at N152.27/US$ and closed at N158.27/US$, resulting in
an
average
exchange
rate
of
N155.11/US$,
and
a
depreciation of N6.00 or 3.79 per cent.


The implementation of the National Minimum wage
legislation in most states of the federation contributed to rising
..depreciation of
the naira
exchange rate
during the period
impacted
negatively on the
domestic price
level due to
exchange rate
pass-through
effect.
..the Bank made
deliberate efforts
to contain
speculative
demand in order
to stabilize the
exchange rate.


CBN Monetary Policy Review

prices of final goods and services during the period. In
addition, large-scale household expenditures during year-end
festivities also put further pressure on inflation.


Sustained Infrastructural deficit continued to put
pressure on cost of transportation, thereby, creating supply
bottlenecks, especially in the agricultural sector.

2.4.2
Moderating Factors

In the second half of 2011, the CBN tightened
monetary policy to control excessive liquidity and thus tame
inflation expectations. For instance, the CRR and MPR were
raised from 4.0 and 8.0 per cent in June, to 8.0 and 12.0 per
cent, respectively. Furthermore, attention was paid to
administrative measures aimed at minimizing the speculative
components of the growing demand for foreign exchange
with a view to reducing the pressure it exerted on the value of
the naira as well as the rate of inflation.


The Bank also made deliberate efforts to contain
speculative demand in order to stabilize the exchange rate.
Some of the measures were: special intervention at the
interbank foreign exchange market; downward review of net
open position of authorized dealers; restriction of the
petroleum marketers from wDAS market and increased supply
of foreign exchange at the wDAS; prohibition of DMBs from
accessing the standing lending facility (SLF) and wDAS window
on the same day.


Steady supply of petroleum products during the review
period aided the smooth running of economic activities and
enhanced the distribution of goods and services and the
movement of economic agents across the country.


Other factors included the release of grains from the
Strategic Grains Reserve to augment supply from current
harvest assisted in lowering inflation expectations during the
second half of 2011.


CBN Monetary Policy Review

Box 2.1
Excess Crude Account (ECA) and
the Sovereign Wealth Fund (SWF)

The Excess Crude Account (ECA) was established in 2004 with
the primary objective of protecting government budgets
against shortfalls arising from volatile crude oil price. It is an
inter-generational
fund
aimed
at
discouraging
total
consumption of current earnings.

The ECA was primarily funded from revenue derived from
Crude Oil Sales, Petroleum Profit Tax (PPT) and Royalties above
the budgeted benchmark of the FGN for each year. There are
two types of excess revenue accounts; the Foreign Excess
Revenue Account, which is maintained in U.S dollar, and the
Domestic
Excess
Revenue
Account,
which
is
naira
denominated. Surging crude oil prices led to the ECA
increasing almost four-fold; from US$5.10 billion in 2005 to over
US$20.00 billion by November 2008, which accounted for more
than one-third of Nigeria's external reserves at that time.
By June 2010, the account had been drawn down to less than
US$4.00 billion due to budget deficits at all levels of
government and the steep drop in oil prices.

In 2010, Nigeria's National Economic Council approved a plan
to replace the ECA with a national Sovereign Wealth Fund
(SWF) since the ECA had no legal backing. In May 2011, the
National Assembly passed the Nigeria Sovereign Investment
Authority (NSIA) Bill, 2010, which sought to establish a SWF to
manage excess earnings from the country’s crude oil sales. It
was later signed into law by the President.

The SWF became operational in October 2011 with US$1.00
billion drawn from US$6.00 billion in the ECA. The Fund is
designed to ensure that some of Nigeria’s oil wealth is saved
and could be tapped on a regular basis to finance the
government’s running costs. The fund would help the country
to save for the future and invest in strategic infrastructural
projects as well as act as a buffer against volatile oil prices.


CBN Monetary Policy Review

The NSIA will receive monthly allocation of a portion of oil and
gas revenue above the budgeted revenue as approved by
the National Assembly. The NSIA will manage the SWF
comprising the following:

Future Generations Fund,

Stabilization Fund, and

Nigeria Infrastructure Fund.
Future Generations Fund
Saving for future generations is a bold attempt to discourage
the total consumption of current earnings. The guiding
principle is that earnings above budget projections need not
be spent but saved and invested to earn more income for the
present and future generations. It is anticipated that a
significant proportion of the Fund will be used for long-term
investment assets.

Stabilization Fund
Nigeria’s heavy dependence on crude oil revenue for the
funding of annual budgets and development plans exposes its
economy to the vagaries of oil price fluctuations. Oil revenue
projections are based on oil price and output assumptions.
When price and output projections do not tally with reality, the
result is that planned economic objectives are not realised.

The objective of economic stabilization fund was an attempt
to shield the economy from the volatile nature of international
crude oil prices and uncertainties associated with daily crude
output
production.
For
instance,
crude
oil
output
is
occasionally affected by disturbances within the oil-producing
region. The economic stabilization fund would help in
smoothing the process of budget implementation since
revenue shortages can be augmented from the Fund.

Nigeria Infrastructure Fund
The Infrastructure Fund, the largest of the three components, is
designed to complement the overall development efforts of
governments at all levels. Projects that are expected to be
financed from the Fund should have the capacity to impact
directly and positively on the lives of the people.


CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER 3
MONETARY POLICY

The conduct of monetary policy during the second half of 2011
focused on the achievement of price and exchange rate
stability, following the significant progress made in the
resolution of the banking sector crisis. In order to mitigate the
impact of huge injections of liquidity in the first three quarters of
2011, the Bank maintained a tight monetary policy stance in
the review period. In addition to the statutory meetings, the
Bank convened an extraordinary meeting of the Monetary
Policy Committee (MPC) in October 2011, specifically to
address the challenge of the rising system liquidity and the
attendant demand pressure in the foreign exchange market.

3.1
Highlight of Monetary Policy Measures
In the period under review, the Bank tightened further its
stance of monetary policy that commenced in September
2010. The MPR was raised three times in the second half of
2011; from 8.00 to 8.75 per cent in July, 9.25 per cent in
September and 12.00 per cent in October. In addition, the
Cash Reserve Requirement (CRR) which was raised to 4.00 per
cent in May was again increased to 8.00 per cent in October.
Other measures included a reduction of the foreign exchange
net open position of banks from 5.0 per cent to 1.0 per cent in
October later increased to 3.0 per cent in the same month.

At the MPC Meeting of November 2011, both the MPR and
CRR were left unchanged because it was considered that the
earlier restrictive measures needed to be allowed to work
through to moderate the inflationary impulses on a more
sustained basis. However, in order to ensure exchange rate
stability in the face of declining external reserves, the foreign
exchange mid-point was adjusted from N150.00/US$1.00 to
N155.00/US$1.00 while the band of +/- 3.00 per cent was
retained.

3.2
Decisions of Monetary Policy Committee (MPC)
The MPC at its July meeting noted the decline in inflation,
negative real interest rate and uncertain outlook for economic
...monetary policy
in the second half
of 2011 focused
on the
achievement of
price and
exchange rate
MPR was raised
three times in the
second half of
2011;...


CBN Monetary Policy Review

activity. The Committee recognized the need to attract more
capital inflow to ease pressure on external reserves. It therefore
voted
to
tighten
monetary
policy.
Consequently,
the
benchmark rate (MPR) was raised by 75 basis points to 8.75 per
cent by a majority vote of 8 members. The interest rate
corridor of +/-200 basis points around the MPR was, however,
retained.

At the meeting of September 2011, the Committee noted the
expansionary fiscal stance as shown by high recurrent
expenditure component of the federal budget as well as the
anticipated liquidity injection from AMCON interventions. In
addition,
month-on-month
headline
inflation
had
risen
accompanied by increased demand pressure in the foreign
exchange market. To address inflationary pressures and
achieve positive real interest rates, the MPC raised the MPR
from 8.75 per cent to 9.25 per cent in September 2011.

At the Extraordinary meeting of October 10, 2011, the MPC
recognized the need to focus clearly on the Bank’s primary
mandate and maintain its credibility by sending strong signals
of consistent commitment to price and exchange rate stability.
In this context, the MPC took a more aggressive tightening
stance by raising the MPR from 9.25 to 12.00 per cent and the
CRR from 4.0 to 8.0 per cent. Besides, the foreign exchange
net open position (NOP) was reduced from 5.0 per cent to 1.0
per cent of shareholders’ fund unimpaired by losses with effect
from Friday, October 14, 2011. It was further agreed that the
reserve averaging method of computation be suspended in
favour of daily maintenance until further notice.

At the MPC meeting of November 21, 2011, the Committee
observed persisting demand pressure in the foreign exchange
market and sluggish external reserve accretion signaling the
need to tighten system liquidity. However, it was noted that
real lending rates were already high with negative impact on
the real activities. The MPC observed that December being a
festive period with high level of economic activities retained
existing measures to allow the full impact of the previous
tightening to run out. Consequently, the MPC retained the MPR
At the
Extraordinary
meeting of
October 10, 2011,
the MPC .......took
a more aggressive
tightening stance
by raising MPR
from 9.25 per cent
to 12.00 per cent
and CRR from 4.0
per cent to 8.0 per
cent..


CBN Monetary Policy Review

at 12.0 per cent and the symmetric interest rate corridor of +/-
200 basis points. Similarly, the CRR was retained at 8.0 per cent.


Table:3.1
MPC Decisions, July – December, 2011
Items
July
September
October
November
MPR
Raised by 75
basis
points
from 8.00 to
8.75 per cent
Raised by 50
basis
points
from 8.75 to
9.25 per cent
Raised by 275 basis
points from 9.25 to
12.00 per cent
Retained
the
MPR at 12.00
per cent
MPR
Corridor
No Change
No Change
No Change
No Change
SDF Rate
Raised
to
6.75%
Raised to 7.25
per cent
Raised to 10.00 per
cent
No Change
SLF Rate
Raised
to
10.75%
Raised
to
11.25 per cent
Raised to 14.00 per
cent
No Change
CRR
No Change
No Change
Raised CRR from
4%
to
8%
and
Suspended
Reserve Averaging
No Change
LR
No Change
No Change
No Change
No Change
NOP
No Change
No Change
Reduced from 5.0
to 1.0 per cent;
later raised to 3.0
per cent
No Change
FX Rate
Mid
–
Point
No Change
No Change
No Change
Adjusted
from
N150.00/US$1.0

toN155.00/US$1
.00 with a band
of +/- 3%
FX Band
No Change
No Change
No Change
No Change


CBN Monetary Policy Review

3.3
Monetary Policy Instruments
During the second half of 2011, the Bank employed a number
of monetary policy instruments to achieve monetary and price
stability
against
the
challenges
in
the
domestic
and
international financial and economic environment. The
overriding consideration of the Bank during the period was to
promptly respond to threats to price and exchange rate
stability as well as maintain financial system safety and
soundness.

3.3.1
Monetary Policy Rate (MPR)
The Monetary Policy Rate remained the major signaling
instrument in the second half of 2011 as it served as the
benchmark policy rate, supported by the SLF. The Bank
adjusted the MPR thrice; first from 8.00 to 8.75 per cent in July,
9.25 per cent in September and further to 12.0 per cent in
October. These actions were aimed at attracting capital
inflows and addressing negative real interest rate pressure on
the exchange rate and the negative impact of huge injection
of liquidity.


3.3.2
Reserve Requirements
The Bank retained the use of reserve requirements (cash
reserve requirement and liquidity ratio) during the period under
review to compliment the MPR and other instruments in
moderating pressures on consumer prices and the exchange
rate. The cash reserve requirement (CRR) was changed once
in the review period, from 4.00 to 8.00 per cent in October
The MPR served as
the benchmark
policy rate,
supported by the
SLF.


CBN Monetary Policy Review

2011, and maintained at that level for the rest of the year. Over
the same period, the Bank replaced reserve averaging
method of computing CRR with daily maintenance to
enhance liquidity management. The liquidity ratio, however,
was left unchanged at 30.00 per cent throughout the second
half of 2011.

3.3.3
Open Market Operations (OMO)
The Bank continued to use open market operations (OMO) as
a major medium of monetary policy implementation in the
second half of 2011. Nigeria Treasury Bills (NTBs) were the main
securities for OMO operations during the period. Total
subscription to NTBs in the second half of 2011 stood at
N1,582.01 billion compared with N1,466.48 billion in the first
half of 2011 and N1,269.40 billion in the corresponding period
of 2010, representing an increase of 7.88 per cent and 24.62
per cent, respectively. For fiscal 2011, total subscription to NTBs
stood at N3,048.48 billion compared with N2,003.95 billion for
2010, representing an increase of 52.12 per cent. The increase
in 2011 was 8.02 percentage points higher than the increase of
43.92 per cent recorded in 2010, reflecting aggressive
tightening measures applied in 2011.


Total subscription
to NTBs in the
second half of
2011 stood at N1,
582.01 billion
compared with
N1, 466.48 billion in


CBN Monetary Policy Review

Table 3.2
Nigerian Treasury Bills Auction (N'million)
(January 2009-December 2011)
Date

%
Change
over the
Previous
Year
Jan
115,466.62
149,834.17
205,585.55

Feb
80,106.56
100,217.01
216,924.18

Mar
80,000.00
65,000.00
284,056.99

Apr
101,356.24
160,494.88
215,067.41

May
120,217.01
100,217.01
204,607.78

Jun
120,000.00
158,700.00
340,233.10

1st Half

Jul
125,356.17
250,912.17
209,740.15

Aug
105,217.01
141,157.45
218,924.18

Sep
91,648.64
206,567.24
280,557.25

Oct
170,260.38
167,012.31
309,951.29

Nov
120,217.01
205,930.87
242,930.87

Dec
162,557.83
297,909.82
319,906.69

2nd Half


Cumulative
Figure


3.4
Standing Lending/Deposit Facilities
The Bank retained the use of the standing facilities to provide
liquidity cover for DMBs and also, make the MPR more
effective as an anchor for interbank interest rates. The volume
of SLF in the second half of 2011 stood at N25,047.27 billion
compared with N17,628.64 billion in the first half of 2011 and
N3,340.60 billion in the corresponding period of 2010; the
cumulative value of SLF in the period translated to 42.08 and
649.78 per cent increases, respectively. The breakdown of the
total facilities for the second half showed demand for SLF rising
from N3,341.91 billion in July to N7,698.83 billion in September.
Following the monetary policy actions in October, demand for
..the Bank
retained the use
of the standing
facilities to
provide liquidity
cover for DMBs


CBN Monetary Policy Review

the facility moderated to N2,057.10 billion in December 2011
(see Table 3.3).


Table 3.3
CBN Standing Lending Facility (N'billion)
(January 2009- December 2011)
Date

Percentage
change over
the preceding
year
Jan
846.18
135.50
565.51

Feb
3,457.57
-
1,369.60

Mar
4,592.69
-
3,425.47

Apr
3,875.48
-
3,328.35

May
2,581.43
270.97
3,722.41

Jun
3,691.75
21.70
5,217.30

1st Half

Jul
4,675.02
55.76
3,334.91

Aug
3,733.78
0.00
2,714.70

Sep
2,287.90
73.10
7,698.83

Oct
1,231.61
983.44
6,675.79

Nov
537.58
1,374.80
2,592.94

Dec
1,022.60
853.50
2,057.10

2nd Half

Total


Following the suspension of reserve averaging in October 2011,
the standing deposit facility (SDF) became active as opposed
to low and no activity in the second and third quarters of 2011
when reserve averaging was practiced. Meanwhile, all excess
reserves of DMBs were remunerated at the SDF rate while
reserve averaging lasted. At N1,435.82 billion, SDF in the
second half of 2011 was lower than the N3,132.04 billion
recorded in the first half of 2011and N17,882.89 billion in the
corresponding period of 2010 when monetary easing policy
was in place (see Table 3.4).


Following the
suspension of
reserve averaging
in October 2011,
the standing
deposit facility
(SDF) became
more active.


CBN Monetary Policy Review

Table 3.4
CBN Standing Deposit Facility (N'billion)
(January 2009-June 2011)
Date

2011*
% Change
over the
preceding
year
Jan
-
5,622.63
1,864.84

Feb
-
6,101.90
721.62

Mar
-
9,413.45
325.75

Apr
-
6,853.06
49.65

May
-
1,735.45
73.00

Jun
-
5,563.64
97.18

1st Half

Jul
162.00
4,055.52
-

Aug
1,453.38
6,849.71
-

Sep
1,058.75
4,224.80
-

Oct
3,106.30
1,117.30
422.50

Nov
1,050.59
443.78
436.47

Dec
1,797.92
1,191.78
576.85

2nd Half


Cumulative
Figure
8,628.94
53,173.02
4,567.86


3.5
Foreign Exchange Intervention
During the review period, the Bank intervened in the foreign
exchange market primarily to sustain the stability of the naira.
The Bank increased its supply of foreign exchange to the
market in response to higher demand. Total supply by the Bank
during the review period stood at US$23,458.00 million
compared with US$17,002.68 million and US$16,025.95 million in
the first half 2011 and the corresponding period of 2010,
respectively (Table3.5). This represents an increase of 37.97 and
46.38 per cent over the levels in first half of 2011 and the
corresponding period of 2010, respectively. By increasing
supply, the Bank effectively restored confidence in the market
which was already facing rising speculative pressures. In
addition to the regular intervention at the wDAS and BDC
segments, the Bank made special sales amounting to
..the Bank
intervened in the
foreign exchange
market primarily
to sustain the
stability of the
naira exchange
rate.


CBN Monetary Policy Review

US$2,776.88 million at the interbank market in order to calm the
market.

Table 3.5
Foreign Exchange Supply by the CBN (US Dollar Million)
YEAR

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

Feb
1,838.85


Mar

Apr

May

Jun

1st Half

Jul

Aug

Sep

Oct

Nov

Dec

2nd Half

Total


3.6
Performance of Monetary Aggregates
Broad money (M2) witnessed significant increase in the second
half of 2011. It grew by N1, 122.95 billion or 9.22 per cent as
against N651.86 billion or 5.66 per cent in the first half of the
year (Table 3.6). The overall growth of 15.40 per cent in 2011
exceeded
the
annual
target
of
13.75
per
cent
by
1.65percentage points. Narrow money (M1) increased by
N1,125.86 billion or 19.95 per cent as against N71.29 billion or
1.28 per cent in the first half of the year. On the whole, M1
grew by 21.49 per cent for fiscal 2011 as against the target of
Broad money
witnessed
significant
increase in the
second half of
2011.


CBN Monetary Policy Review

9.41 per cent, thereby exceeding the target by 12.08
percentage points.

The huge growth in M1 was partially driven by the number of
festivals during the period, which increased transactional
demand for money. In addition, inflation expectation arising
from the planned removal of subsidy on PMS in early 2012
contributed to the accumulation of inventories by some
economic agents, hence, an increase in narrow money.


Table 3.6
Performance of Monetary Aggregates

Change
in
2011:H1
Change
in 2011:H2

Target
Actual
Deviation
Target
Actual
Deviation
Actual
Actual
M2 (N’b)
13,916.83
11,525.5


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 (%)


..inflation
expectation
arising from the
planned removal
of subsidy on PMS
in early 2012
contributed to the
accumulation of
inventories...
hence, an
increase in narrow
money.


CBN Monetary Policy Review

Reserve Money (Base money) also increased significantly
during the review period. It grew by N719.17 billion or 34.82 per
cent as against N219.39 billion or 11.88 per cent in the first half
of the year. Overall, reserve money was N2, 784.27 billion at the
end of fiscal 2011 which was above the indicative benchmark
of N2, 515.28 for the year by N268.99 billion or 10.69 per cent.
The upward review of the CRR of DMBs liquidity injection by
fiscal and AMCON operations contributed largely to the
growth of reserve money during the period.

Aggregate domestic credit increased by N3,494.71 billion or
39.22 per cent during the period compared with N199.92 billion
or 2.30 per cent in the first half of the year. In relation to the
corresponding period of 2010, aggregate credit grew by 4.07
per cent. The growth in aggregate credit during the review
period was driven by increases in both credits to government
and the private sector. Credit to government increased by
N533.59 billion or 50.11 per cent in the second half of the year
compared with N57.04 billion or 5.09 per cent in the first half.
The sharp increase in the second half of the year was partly
attributable to the need to meet government’s fiscal
commitments in the second half of the year.

For fiscal 2011, aggregate credit increased by 42.43 per cent,
exceeding the annual target of 36.61 per cent by 5.8
percentage points. Credit to government increased by 52.65
per cent against the annual target of 29.29 per cent. Despite
..growth in
aggregate credit
during the period
was driven by
increases in both
credit to
government and
the private sector.


CBN Monetary Policy Review

the surge in credit to government, the public sector remained
a net creditor to the banking system at the end of 2011.


Credit to the private sector increased by N3,161.13 billion or
32.34 per cent in the second as against a decline of N57.13
billion or 0.05 per cent in the first half of the year. Similarly,
credit to the private sector improved significantly compared
with the level in the corresponding period of 2010, when it
declined by N399.11 billion or 3.95 per cent. At 31.58 per cent,
growth in private sector credit exceeded the annual target of
29.09 per cent by 2.49 percentage points. The increasing trend
in the second half of 2011 could largely be attributed to the
improvement in financial conditions of the DMBs resulting from
significant sale of their non-performing loans (NPLs) to AMCON.
Net Foreign Assets (NFA) of the banking system rose by N726.94
billion or 11.26 per cent compared with a decline of N52.93
billion or 0.81 per cent in the first half of 2011. The improvement
in the second half of 2011 was largely attributed to the high
price of crude oil. In addition, the increased interest rates led
to more capital inflows in the second half of 2011 as
investment in fixed income securities became more attractive.
For fiscal 2011, NFA increased by 10.36 per cent, exceeding
the annual target of 6.67 per cent.


Credit to the
private sector
increased by
....... 32.34 per
cent in the second
half of the year as
against a decline
of ...... 0.05 per
cent in the first


CBN Monetary Policy Review

Box 3.1
Euro Zone Sovereign Debt Crisis and the Nigerian Economy

Economic activities in some Euro area countries like Portugal,
Ireland, Italy, Greece and Spain (PIIGS)
were largely
constrained due to rising sovereign debt crisis and domestic
unemployment.
Inflationary
pressures
and
suppressed
aggregate demand also persisted in some of these countries.
With public debt at unsustainable levels, these countries have
continued to struggle to limit government spending. Credit
conditions remained generally tight accompanied by high
commodity prices. As a consequence, economic activity in
the euro area slowed sharply in the second half of 2011.

Deteriorating sovereign creditworthiness and high economic
uncertainty weakened lender credit profiles, while European
banks continued to be vulnerable to the debt crisis. Identified
risk factors included; elevated economic uncertainty, high
funding spreads and reduced market access at a time banks
faced large debt maturities. The downgrade of France, the
Eurozone’s second-largest economy, made it even harder
and, potentially, more expensive for the euro-zone's bailout
fund to help troubled states. Europe’s debt crisis has effectively
increased the risk of government and bank defaults, making
financial institutions across the world wary of lending to each
other, thus further driving up the cost of credit. These
developments had implications for developing countries,
including Nigeria, with large savings-investment gaps.

One
of
the
channels
through
which
the
foregoing
developments impacted on the Nigerian economy is in
reduction in the size of credit lines, especially to local financial
institutions
and
non-financial
corporations.
In
the
circumstance, terms and conditions of credit could become
more stringent. This has implications for liquidity conditions in
the domestic money market. Economic slowdown in Europe
would reduce global demand for crude oil, depress price and
eventually weaken Nigeria’s fiscal position. Trade, particularly
non-oil exports to Europe is likely to be affected negatively in
the event of a prolonged crisis. All of these suggest significant


CBN Monetary Policy Review

downside risk to domestic output and financial stability.
Monetary policy would be expected to play a major stabilizing
role in the short to medium-term; first, by proactively ensuring
that system liquidity was maintained at optimal levels; second,
that key prices (interest and exchange rates) were stable;
third, ensuring effective coordination with the fiscal authorities;
and
finally,
monetary
policy
must
aim
at
cultivating
confidence through effective communication.


CBN Monetary Policy Review

CHAPTER 4
DOMESTIC FINANCIAL MARKETS

4.1
Money Market
Activities in the money market during the second half of 2011
were influenced, largely by rising inflation and structural factors
on the one hand, and the significant increase in government
spending, especially in the fourth quarter of 2011. The
interbank placement guarantee which was extended from
May 2010 to end-June 2011 and further to end-December
2011, terminated in the review period. The guarantee helped
to impart confidence to participants in the money market (Box
4.1). Also, key interbank rates moved in tandem with the
upward review of the Monetary Policy Rate (MPR) especially
following the Special MPC meeting of October 2011 that raised
the rate from 9.25 to 12.00 per cent. However, the sharp rise in
the MPR has had the effect of pushing up retail lending rates
and widening further the spread between average lending
rates and consolidated deposit rates.

The money market remained the most active segment of the
financial market in providing the mechanism for trading in
short-term financial assets. The reforms of the banking sector
bolstered liquidity in the market and improved the creation of
credit by the banks. Transactions in the money market were
largely
done
using
government
securities
for
OMO,
Repurchase Agreements (Repos) and Discount Window (DW)
operations.

Following the upward reviews of MPR, the increase in money
market rates improved real returns on asset holding and
provided incentive for portfolio reallocation in favour of nairadenominated assets. In addition, it increased the cost of
holding foreign currency for speculative purposes and
reduced
significantly
the
tendency
to
pre-pay
dollar
obligations.

However, the rise in interest rates carried the risk of possible
losses on fixed income positions and slowing the recovery of
the equities market. Furthermore, high interest rates were a
Activities in the
money market
during the second
half of 2011 were
influenced, largely
by rising inflation
and structural
Following the
upward reviews of
the MPR, the
increase in money
market rates
improved real
returns on asset
holding and
provided
incentive for
portfolio
reallocation in
favor of nairadenominated
assets


CBN Monetary Policy Review

disincentive to credit growth. However, the need to promptly
contain the risks to inflation arising from fiscal expansion and
rising
global
prices
of
food
and
energy,
dominated
considerations by the MPC in setting policy in the review
period.

Box 4.1
Performance of Interbank Guarantee

In July 2009, the CBN introduced the Interbank Guarantee
mechanism through which the Bank guaranteed all interbank
placements including pension funds and foreign credit lines.
The guarantee, which replaced the expanded discount
window operations (EDWs), remained in place until December
31, 2011. Before the guarantee, DMBs with surplus funds
preferred to place them at the Standing Deposit Facility of the
CBN rather than lend to other DMBs that were in deficit position
because of perceived high counter-party risks. The Interbank
guarantee scheme produced desired results as transactions in
the interbank market were devoid of discrimination on
account of perceived high counter-party risks while the
guarantee lasted.

The guarantee succeeded in lowering the interbank lending
rates. Between July 2009 when the guarantee was introduced
and December 2011, the interbank rates ranged between 2.0
and 15.7 per cent, compared to 8.0 and 20.0 per cent
between July 2008 and July 2009. In addition, the guarantee
helped to moderate high volatility of rates in the market.

The guarantee, nevertheless, had some downsides. For
instance, the interbank rates fell most of the time significantly
below the MPR rendering it partially ineffective and also
reflecting in operators’ perceived distortions in the pricing of
credit in the interbank money market. More fundamentally, the
guarantee obscured some vital signals from the market
thereby constraining appropriate policy actions. In response
to these, and considering that the objectives of the guarantee
including the resolution of banking sector crisis were fully
achieved, the Bank discontinued the interbank guarantee at
the expiration of its tenure on December 31, 2011.


CBN Monetary Policy Review

4.1.1
Developments in Short-Term Interest Rates
One of the challenges of monetary management during the
second half of 2011 was how the containment and stabilization
of short-term money market interest rates which were volatile
and trended upwards. Movements in call and OBB rates were
largely dictated by the level of liquidity, which in turn, was
influenced by the fiscal operations of the three tiers of
government and the lag impact of CBN quantitative easing
measures in the previous period.

Table 4.1
Weighted Average Money Market Interest Rates (%)
(Dec 2010 – Dec 2011)
Month
Monetary
Policy
Rate
Overnight
Interest
Rates
NIBOR
Call Rate
OpenBuy-Back
7-Day
30-Day
Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11


One of the
challenges of
monetary
management
during the second
half of 2011 was to
contain and
stabilize short-term
money market
interest rates
which were rising


CBN Monetary Policy Review

Interbank Call Interest Rates
During the review period, the weighted average interbank rate
which was 11.70 per cent in June 2011 moderated to 10.50 per
cent in September, 2011. The rates rose further to 14.10 per
cent in October before closing at 15.50 per cent by December
2011. When compared with the 8.03 per cent recorded in
December 2010, the interbank rate rose by 7.47 percentage
points. The steep rise in the average interest rate was largely a
response to policy measures that were implemented in the
review period to cope the threat to inflation (figure 4.1).


(ii) Open Buy-back Rate
The average weighted open buy-back (OBB) rate, which was
9.59 per cent in June 2011, increased to 12.38 per cent in
October and further to 14.06 per cent in December, 2011. The
figures showed a significant leap in the OBB rates when
compared with the values of 1.80, 7.53 and 6.86 per cent
recorded in the corresponding period of 2010, respectively.
..steep rise in the
average interest
rate was largely a
response to policy
measures that
were
implemented in
the review period


CBN Monetary Policy Review

The upward trend in OBB rate was in tandem with the
movement in the MPR and other interbank rates. When
compared with the December 2010 rate of 6.86 per cent, the
OBB rates in December 2011 grew by 7.20 percentage points
over the twelve months period (Figure 4.1).


A major explanation for the observed upward trend in OBB
rates was the steady rise in the monetary policy rate in the
review period as the Bank increased the MPR three times to
address inflationary concerns and exchange rate pressures.
OBB rates, however, were within the +/-200 basis points band
around the policy rate indicating that it tracked the
movement in the MPR as well as reflecting that market
sentiments were consistent with the policy stance.

iii
Nigeria Interbank Offered Rate
During the review period, the Nigeria Interbank Offered Rate
(NIBOR) remained the traditional market reference rate as in
other jurisdictions. The NIBOR for 7-day and 30-day tenors
moved in tandem with interbank call and OBB interest rate in
the second half of 2011(Figure 4.1). The NIBOR for 7-days and
30-days tenors which at end-June 2011 stood at 11.75 and
12.83 per cent, respectively, rose to 16.30 and 16.74 per cent in
December
2011.
Compared
with
the
rates
in
the
corresponding period of 2010, NIBOR was 9.31 and 11.50 per
cent for 7-day and 30-day tenors, respectively in the
corresponding period of 2010. The high rates recorded during
the second half were expected given the tight posture of
monetary policy.
...average
weighted OBB
rate, which was
9.59 per cent in
June 2011,
increased to 12.38
per cent in
October and
further to 14.06
per cent in
December, 2011.
Generally, the
short -term interest
rates were
relatively higher
during the second
half of 2011.


CBN Monetary Policy Review

The relatively high short-term rates during the second half of
2011translated to higher lending rates and lower credit to the
real sector, as DMBs maintained a cautious approach to
lending. Lending rates remained substantially high throughout
the review period partly also because of the more stringent
regulatory framework in which risk management principles
were strongly enforced.

4.2
The Foreign Exchange Market
The overall policy thrust of the CBN remained the need to
engender a stable exchange rate around the mid-point of
N150/US$ with a band of +/- 300 basis points. The Bank,
however, responded to persistent foreign exchange demand
pressures by reviewing upward, the target mid-point to
N155/US$ in October, 2011with the band of +/- 300 basis points
retained.


4.2.1
Spot Rates
The spot rate at the official window of the foreign exchange
market, the wDAS averaged N154.99/US$ in the second half of
2011 compared with the average of N153.31/US$ in the first
half of 2011 and N150.52/US$ in the corresponding period of
2010, representing a depreciation of 1.08 and 2.88 per cent,
respectively.
In the interbank foreign exchange market (IFEM), the spot rate
averaged N157.98/US$ during the review period compared
The Bank,
however,
responded to
persistent foreign
exchange
demand pressures
by reviewing
upward the target
mid-point....
..depreciation in
the spot rates
across all
segments of the
foreign exchange
market was
attributed to
demand pressures


CBN Monetary Policy Review

with N154.07/US$ in the first half of 2011 and N151.72/US$ in the
corresponding period of 2010. The movement in rates showed
a depreciation of 2.47 and 3.96 per cent in both periods,
respectively. Similarly, spot rates at the BDC segment
averaged N161.17/US$ in the second half of 2011 compared
with N157.25/US$ in the first half of 2011 and N153.67/US$ in the
corresponding period of 2010, representing a depreciation of
2.43 and 4.65 per cent, respectively.

The depreciation in the spot rates across all segments of the
foreign exchange market was attributed to demand pressure
emanating mainly from high liquidity in the banking system and
the financing of refined petroleum product imports. The spread
between the wDAS and BDC rates peaked at N11.92 in July
2011 before narrowing to N5.09 in December 2011due to the
impact of tight monetary policy (Table 4.2).
Table 4.2
Average Monthly Spot Exchange Rates (N/US$):
Jul. 2010 – Dec. 2011

CBN
IFEM
BDC
Jul-10
150.09
150.20
152.50
Aug-10
150.78
151.85
153.00
Sep-10
151.35
154.50
155.00
Oct-10
149.99
150.85
153.00
Nov-10
150.24
150.90
152.50
Dec-10
150.66
152.00
156.00
2010: H2 Average
150.52
151.72
153.67
Jan-11
151.85
152.20
155.00
Feb-11
152.07
153.35
156.00
Mar-11
153.04
155.22
157.50
Apr-11
154.45
154.72
157.00
May-11
155.13
156.40
159.00
Jun-11
153.31
152.52
159.00
2011: H1 Average
153.31
154.07
157.25
Jul-11
151.96
153.00
164.00
Aug-11
153.92
155.00
157.00
Sep-11
156.15
159.60
160.00


CBN Monetary Policy Review

4.2.2
Forward Rates
The CBN commenced foreign exchange forward transactions
with authorized dealers in March 2011. The introduction of the
forwards market was expected to smoothen out the demand
for foreign exchange by reducing speculative demand that
exerted sustained pressure on the Naira. Thus, during the
second half of 2011, the 1-month forward rate averaged
N154.45/US$ compared with the average of N153.73/US$ in the
first half of 2011, indicating a depreciation of 0.47 per cent. The
average forward rate for 2-month tenor was N155.95/US$ as
against N154.95/US$ in the first half of 2011, reflecting a
depreciation of 0.64 per cent. Similarly, the forward rate for 3month tenor transactions recorded a depreciation of 2.12 per
cent to an average of N158.17/US$ in the second half of 2011,
compared with an average of N154.81/US$ in the first half of
the year.
Table 4.3
Average Monthly Foreign Exchange Forward Rates (N/US$)
(Mar. 2011 – Dec. 2011)

1-MONTH
2-MONTH
3-MONTH
Mar-11
152.43
153.85
154.27
Apr-11
153.75
154.30
154.46
May-11
154.47
155.52
156.71
Jun-11
154.29
155.49
153.45
2011: H1 Average
153.73
154.95
154.81
Jul-11
151.57
152.97

Aug-11
152.40
153.75
154.91
Sep-11
154.47
155.54
156.47
Oct-11
155.68
156.99
158.34
Nov-11
153.75
155.48
158.06
Dec-11
158.85
160.99
163.05
2011: H2 Average
154.45
155.95
158.17
Oct-11
151.75
159.35
160.00
Nov-11
157.87
161.20
161.00
Dec-11
158.27
159.70
165.00
2011: H2 Average
154.99
157.98
161.17
2011 Average
154.15
156.02
159.21
1-month forward
rate averaged
N154.45/US$
compared with
the average of
N153.73/US$ in the
first half of 2011.


CBN Monetary Policy Review

The average demand at the wDAS Forward Market increased
by 46.08 per cent from US$280.59 million in the first half of 2011
to US$520.42 million during the review period. Also, total sales
by the CBN increased by 41.42 per cent from US$215.13 million
in the first half of 2011 to US$367.23 million in the second half of
the year.


4.2.3
End-Period Exchange Rate
The naira depreciated in all segments of the market mainly as
a result of the high demand for foreign exchange,
compounded by the activities of speculators. Thus, the naira
depreciated at the wDAS by 3.14 and 4.81 per cent from
N153.31/US$ at end-June 2011 and N150.66/US$ at endDecember
2010,respectively,
to
N158.27/US$
at
endDecember 2011 (Table 4.4).

Similarly, the naira depreciated by 3.64 per cent from
N159.70/US$ to N165.00/US$ at the BDC segment and 4.50 per
cent from N152.52/US$ to N159.00/US$ at the interbank market,
between the first and second half of 2011. When compared
with end-December 2010, the naira depreciated by 5.46 and
4.82 per cent from N156.00/US$ and 152.00/US$ at the BDC
and interbank market, respectively (Table 4.4).


The Naira
depreciated in all
segments of the
market mainly as
a result of the high
demand for
foreign exchange
to finance
imports...


CBN Monetary Policy Review

Table 4.4
End-Month Exchange Rate Movements at Various
Segments of the Market
(Naira per US dollars)

CBN
IFEM
BDC
Jun-10
149.49
150.00
152.50
Jul-10
150.09
150.20
152.50
Aug-10
150.78
151.85
153.00
Sep-10
151.35
154.50
155.00
Oct-10
149.99
150.85
153.00
Nov-10
150.24
150.90
152.50
Dec-10
150.66
152.00
156.00
Jan-11
151.85
152.20
155.00
Feb-11
152.07
153.35
156.00
Mar-11
153.04
155.22
157.50
Apr-11
154.45
154.72
157.00
May-11
155.13
156.40
159.00
Jun-11
153.31
152.52
159.00
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


CBN Monetary Policy Review

4.2.4
Nominal and Real Effective Exchange Rate Indices
The Nominal Effective Exchange Rate (NEER) index decreased
by 2.81 to 99.73 at end-December 2011 from 102.54 at endJune 2011. The Real Effective Exchange Rate (REER) index also
fell by 7.04 to 84.56 at end-December 2011 from 91.60 at endJune 2011. Compared with end-December 2010, the NEER
increased by 1.86 while the REER decreased by 6.65 (Table 4.5
and Figure 4.7).

On the average, both the NEER and REER decreased at endDecember 2011 when compared with the level at end-June
2011, reflecting a real exchange rate appreciation relative to
the currencies of Nigeria’s major trading partners.

Table 4.5
Nominal and Real Effective Exchange Rate Indices
(Jul. 2010 –Dec. 2011)

NEER
REER
Jul-10
96.09
91.55
Aug-10
95.65
90.03
Sep-10
98.88
91.80
Oct-10
98.51
91.67
Nov-10
96.42
90.19
Dec-10
97.87
91.21
2010: H2 Average
97.24
91.08
Jan-11
99.72
93.31
Feb-11
99.90
93.73
Mar-11
101.55
91.20
Apr-11
104.28
94.65
May-11
102.99
93.07
Jun-11
102.54
91.60
2011: H1 Average
101.83
92.93
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
The Nominal
Effective
Exchange Rate
(NEER) index
decreased by
2.81 to 99.73 at
end-December
2011...


CBN Monetary Policy Review

4.2.5
Demand and Supply of Foreign Exchange
Total demand for foreign exchange at the wDAS during the
review period increased by 15.02 per cent to US$20,020.37
million from US$17,405.43 million recorded in the first half of 2012.
Compared with the US$15,368.91 million demanded in the
corresponding period of 2010, the demand for foreign
exchange rose by 30.27 per cent. Total supply of foreign
exchange at the wDAS amounted to US$15,146.87 million in the
second half of 2011, compared with US$14,627.53 million
recorded in the first half, representing an increase of 3.55 per
cent. It rose by 15.45 per cent from US$13,120.15 million in the
second half of 2010 (Table 4.6).

The CBN responded to persistent demand pressures in the
foreign exchange market by increasing supply to match
genuine demand. Though, the forwards segment of the market
provided some relief to the high demand on the spot market,
its impact was insufficient to stave-off demand pressures.


CBN Monetary Policy Review

Table 4.6
Foreign Exchange Demand and Supply
(US Dollar Million)

wDAS Demand
wDAS Sales
Jul-10
1,795.82
1,835.20
Aug-10
2,789.10
1,948.52
Sep-10
4,391.83
3,593.54
Oct-10
2,503.67
2,342.08
Nov-10
1,853.37
1,561.68
Dec-10
2,035.12
1,839.13
2010: H2 Total
15,368.91
13,120.15
Jan-11
2,800.42
2,000.00
Feb-11
2,041.09
1,794.85
Mar-11
3,612.36
3,274.38
Apr-11
2,780.41
2,375.58
May-11
2,845.62
2,549.89
Jun-11
3,325.53
2,632.83
2011: H1 Total
17,405.43
14,627.53
Jul-11
3,065.41
2,643.34
Aug-11
4,504.49
2,899.05
Sep-11
4,076.18
3,850.00
Oct-11
3,904.58
2,607.00
Nov-11
3,054.43
1,749.62
Dec-11
1,415.28
1,397.86
2011: H2 Total
20,020.37
15,146.87


4.2.6
Foreign Exchange Flows
Gross foreign exchange inflow into the economy was
US$27,631.39 million in the second half of 2011, compared with
US$19,574.33 million and US$14,865.04 million in the first half and
the corresponding period of 2010, representing increases of
41.16 and 85.88 per cent, respectively (Figure 4.8 and table 4.7).
The increase in inflow was mainly attributed to the rise in both
price and output of crude oil. Foreign exchange outflow
recorded an increase of 39.46 per cent from US$20,530.92
million to US$28,244.16 million between the first half and second
half of 2011. Outflow increased by 37.05 per cent compared
with the total outflow of US$20,891.28 million in the second half
.. increase in
inflow was mainly
attributed to the
rise in both price
and output of
crude oil.


CBN Monetary Policy Review

of 2010. The high volume of foreign exchange outflow was
mainly due to demand pressures to finance importation of
refined petroleum products.

In the second half of 2011, foreign exchange flows resulted in a
net outflow of US$612.77 million, reflecting an improvement
over the net outflow of US$956.59 million in the first half of 2011
and US$6,026.24 million in the corresponding period of 2010
(Table 4.7).

Table 4.7
CBN Monthly Foreign Exchange Flows
(US Dollar Million)

INFLOW
OUTFLOW
NET FLOW
Jul-10
2,289.00
3,282.56
-993.56
Aug-10
2,564.49
3,061.05
-496.56
Sep-10
2,701.52
5,078.74
-2,377.22
Oct-10
2,339.28
3,463.47
-1,124.19
Nov-10
2,209.35
2,169.84
39.51
Dec-10
2,761.40
3,835.62
-1,074.22
2010: H2
14,865.04
20,891.28
-6,026.24
Jan-11
7,062.55
969.33
6,093.23
Feb-11
7,173.18
148.45
7,024.73
Mar-11
6,333.20
32.15
6,301.05
Apr-11
4,815.10
152.36
4,662.74
May-11
7,353.66
507.50
6,846.16
Jun-11
6,807.36
123.49
6,683.88
2011: H1
39,545.05
1,933.26
37,611.78
Jul-11
7,815.98
212.57
7,603.40
Aug-11
8,732.50
345.83
8,386.67
Sep-11
7,516.53
448.63
7,067.90
Oct-11
7,714.71
168.99
7,545.72
Nov-11
5,953.40
142.13
5,811.27
Dec-11
4,545.97
302.15
4,243.82
2011: H2
42,279.09
1,620.30
40,658.79
2011 Total
81,824.14
3,553.57
78,270.57


CBN Monetary Policy Review

4.3
Capital Market
The Nigerian stock market in the second half of 2011 remained
bearish, reflecting a continuation of the trend in the first half of
the year. The market recorded significant divestment and low
liquidity; a development attributed mainly to low return on
equity, tight monetary policy, strict regulatory control over
margin lending and corporate governance issues. In addition,
the protracted euro zone sovereign debt problems that led to
a downgrade in credit rating of some countries, lingering U.S.
limited fiscal space as well as prevailing real estate and
inflation problems in key emerging market economies, posed
challenges to global equities trading, including Nigeria.

4.3.1
Market Turnover
Aggregate stock market turnover during the second half of
2011 was 40.06 billion shares valued at N262.25 billion
exchanged in 497,025 deals, compared with 49.52 billion
shares valued at N372.70 billion exchanged in 733,762 deals in
the first half of 2011, and a turnover of 38.55 billion shares
valued at N360.60 billion in the second half of 2010. Relative to
the first half of 2011, market turnover fell by 19.10 per cent
during the review period but rose by 3.92 per cent when
compared with the corresponding period of 2010.


... Nigerian stock
market in the
second half of
2011 remained
bearish, mirroring
the trend in the
first half of the
year.


CBN Monetary Policy Review

4.3.2
Equities Market
The All-Share Index (ASI) decreased by 17.01 per cent to
20,730.63 at end-December 2011, from its level of 24,980.20 at
end-June 2011, compared with the 2.42 per cent decrease in
the second half of 2010. On a year-on-year basis, the ASI
decreased by 16.31 per cent from 24,770.52 at end-December

to
20,730.63
at
end-December
2011.
Market
Capitalization (MC) decreased by 18.27 per cent to N6.53
trillion at end-December 2011 from N7.99 trillion at end-June
2011, and 17.45 per cent when compared with the N7.91 trillion
recorded at end-December 2010 (Table 4.7 and Figure 4.9).

Table 4.8
NSE All Share Index (ASI) and Market Capitalization (MC)
December 2010 – December 2011
Date
All Share Index (ASI)
Market Capitalization
(Equities)
(N’ Trillion)
Dec-10
24,770.52
7.91
Jan-11
26,830.67
8.58
Feb-11
26,016.84
8.32
Mar-11
24,621.21
7.87
Apr-11
25,041.68
8.00
May-11
25,866.62
8.27
Jun-11
24,980.20
7.99
Jul-11
23,826.99
7.62
Aug-11
21,497.61
6.88
Sep-11
20,373.00
6.50
Oct-11
20,934.96
6.63
Nov-11
20,003.36
6.29
Dec-11
20,730.63
6.53
Source: Nigerian Stock Exchange (NSE)

...All-Share Index
(ASI) decreased
by 17.01 per cent
.....at endDecember 2011,
from its
level.......at endJune 2011.


CBN Monetary Policy Review

Source: Nigerian Stock Exchange


Source: Nigerian Stock Exchange

The lull in performance of the Nigerian stock market in the
second half of 2011 was traced to a number of global and
domestic factors. On the global scene, the U.S., euro zone and
major emerging market economies faced persistent fiscal
challenges stoked up by sustained high energy, commodity
and food prices. As a result, consumer confidence and output
growth dipped, leading to adverse consequences on global
equities.

On the domestic scene, policy and money market interest
rates turned positive in real terms from October 2011 and
remained so for the rest of the year. Consequently, improved
..real interest rates
turned positive
from October
2011 and
remained so for
the rest of the
year ...


CBN Monetary Policy Review

return on money market instruments seemed to have made
investment in equities market relatively unattractive.

4.3.3
Sectoral Contribution of Equities Market Capitalization
The building materials sector was the most capitalized with its
overall share of the market rising to 29.0 per cent at endDecember 2011, from 27.0 per cent at end-June 2011.
Compared with the 26.0 per cent at end-December 2010, the
sector’s share of market capitalization increased by 3.0
percentage points. The banking sector was next with 28.0 per
cent share of overall market capitalizationas at endDecember,
2011.
However,
the
sector’s
market
share
progressively declined from 36.0 and 30.0 per cent at endDecember 2010 and end-June, 2011, respectively (Figures 4.11,
4.12 and 4.13). The development reflected the de-listing of the
shares of three banks that were nationalised in August 2011
and the growth in the building and construction industry.
Dangote Cement (Building Materials) maintained its lead as
the most capitalized company with market capitalization of
N1.72 trillion at end-December 2011. Other leading sectors
were the breweries and food, beverages and tobacco with
respective market shares of 17.0 and 10.0 per cent at endDecember 2011.

Breweries
11%
Banking
36%
Food, Bev. and
Tobacco
11%
Conglomerates
4%
Insurance
2%
Petroleum Marketing
4%
Foreign Listing
2%
Building Materials
26%
Other Sectors
4%
Figure 4.11
NSE Market Capitalisation by Sector as at End-December, 2010
Source: Nigerian Stock Exchange


..building
materials sector
was the most
capitalized with its
overall share of
the market rising
to 29.0 per cent
at end-December


CBN Monetary Policy Review

Breweries
14%
Banking
30%
Food, Bev. and
Tobacco
12%
Conglomerates
4%
Insurance
2%
Petroleum Marketing
4%
Foreign Listing
2%
Building Materials
27%
Other Sectors
5%
Figure 4.12
NSE Market Capitalisation by Sector as at End-June, 2011
Source: Nigerian Stock Exchange

Breweries
17%
Banking
28%
Food, Bev. and
Tobacco
10%
Conglomerates
1%
Insurance
2%
Oil and Gas
4%
Building Materials
29%
Other Sectors
9%
Figure 4.13
NSE Market Capitalisation by Sector as at End-December, 2011

Source: Nigerian Stock Exchange

4.3.4
Bonds Market
The FGN bonds market slowed activity in the second half of
2011. The volume and value of activities dropped by 16.4 and
15.3 per cent, respectively, from 5.01 billion and N4.44 trillion in
the first half of 2011 to N4.19 billion and N3.76 trillion,
respectively in the second half. However, the value of FGN
bonds traded grew to N8.20 trillion at end December 2011
from N4.44 trillion at end June 2011. Some sub-national and
corporate bonds were issued during the review period.
The bonds market
witnessed a
slowdown in
growth and
activity in the
second half of

CBN Monetary Policy Review

4.3.4.1 Federal Government (FGN) Bonds
Total transactions in FGN bonds in over-the-counter (OTC)
market in the second half of 2011 was 4.19 billion units valued
at N3.76 trillion in 29,625 deals compared with 5.01 billion units
valued at N4.44 trillion in 37,053 deals during the first half and a
turnover of 5.60 billion units worth N5.64 trillion in 48,682 deals
recorded in the corresponding period of 2010 (Figure 4.14). The
decline in OTC market was largely attributed to the fact that
only six FGN bonds were actively traded out of the twenty-six
issues outstanding during the review period. In addition, the
inability to trade the remaining twenty FGN bonds due to lack
of depth and benchmarking by the money market also
impacted on trading activities in the bonds market.


Source: Nigerian Stock Exchange

4.3.4.2 FGN Eurobond
The Federal Government of Nigeria’s Eurobond continued to
be traded in the review period. Yield on the bond decreased
by 3 basis points from 6.06 per cent at end-June 2011 to 6.03
per cent at end-December 2011. Weak global economic and
financial conditions and in particular, investors’ concern about
the euro area sovereign debt crisis, the twin challenges of
trade and fiscal deficit in the U.S. and the fragility of some
internationally active banks, continued to facilitate the
redirection of capital flows in favour of emerging markets and
developing economies. In the domestic economy, measures
..twin challenges
of trade and fiscal
deficit in the US
and the fragility of
some
internationally
active banks,
continued to
facilitate the
redirection of
capital flows in
favour of
emerging
markets...


CBN Monetary Policy Review

taken by the Bank to stabilize the exchange rate and increase
the stock of external reserves also assisted in shoring up investor
confidence (figure 4.15).


Source: Bloomberg

4.3.4.3 Yields on Federal Government Bonds
The FGN bonds yield curve for December 22, 2011 shifted
upwards by 607 basis points compared with that of December
24, 2010 and also by 273 basis points compared with that of
June 22, 2011 (Figure 4.16). The upward shift in the yield curve is
traceable to the substantial cumulative increase in the MPR in
the period. Yields on all FGN bonds closed the year above the
10.3 per cent inflation rate at end December 2011.


CBN Monetary Policy Review

Source: Data obtained from Financial Markets Dealers’ Association

4.3.5 State Government Bonds
Total value of state government bonds issued in the second
half of 2011 was N84.0 billion, compared with theN245.5 billion
issued in the first half. The development was accounted for by
the listing of only three (3) state government bonds in the
review period compared with eight (8) in the first half. The
bonds were: Edo State Government N25.0 billion14.0 per cent
Fixed Rate Infrastructure Development Bond 2017; Delta State
Government N50.0 billion 14.0 per cent Bond due 2018 and
Niger State N9.0 billion 14.0 per cent Fixed Rate Development
Bond due 2018.

4.3.6 Corporate Bonds
In the second half of 2011, two private corporations namely,
Nigerian Aviation Handling Company (NAHCO) and Dana
Group, issued bonds. NAHCO issued N2.15 billion, (Fixed Rate
Bond Series 1 2011/2016 under the N5 billion debt issuance
programme), while Dana Group issued N8.01 billion Bond at
MPR + 7 per cent maturing in December 2018. In the first half of
2011, five corporations from the banking sector (GTBank, UBA,
First Bank, Access Bank and Diamond Bank) provided the lead
in corporate bond offerings seeking to raise N1,800.0 billion
from the market.


Total value of
state
governments
bonds issued in
the second half of
2011 was N84
billion, compared
with the N245.5
billion issued in the
first half.


CBN Monetary Policy Review

CHAPTER 5
ECONOMIC OUTLOOK

5.1 Overview
Global economic recovery during the second half of 2011 was
threatened by fiscal pressures and financial system fragility in
the euro area, trade and fiscal deficit crises in the U.S. and
nascent real estate bubbles in China. In addition, concerns
about fiscal sustainability widened sovereign spreads for most
countries, while rising food and commodity prices weakened
growth in global output in most advanced economies. The
euro area crisis necessitated bailout funds from the European
Central Bank (ECB), European Union (EU) and the International
Monetary Fund (IMF). In contrast, commodity exporting
nations, including sub-Saharan African countries, benefited
from the favourable price development and registered
appreciable output growth.

Overall, at 3.8 per cent, global output growth in 2011 was
mainly
driven
by
the
performance
of
emerging
and
developing economies. Consequently, global output in 2012
may remain modest as downside risks persist. Some of these
risks include financial sector imbalances and fiscal sustainability
pressures in the euro area and tensions between Iran and
some western countries, which could impact negatively on
energy and commodity prices. Also, the contagious social and
political unrest in the Middle East and North Africa (MENA)
region could impede global financial stability and output
growth in 2012.

On the domestic front, the banking sector and capital market
reforms, relative peace in the Niger Delta region, the proposed
deregulation in the downstream petroleum sector as well as
government’s resolve to improve power supply, agriculture
and manufacturing sectors might boost output in 2012.
However, the heightened security risk in the country poses
challenge to the growth prospect for 2012, while the proposed
deregulation of the downstream petroleum sector may be
inflationary in the short-term.
Global economic
recovery during
the second half of
2011 was
threatened by
fiscal pressures
and financial
system fragility in
the euro area ...
..heightened
security risk in the
country poses
challenge to the
growth prospect
for 2012...


CBN Monetary Policy Review

5.1.1
Global Output1
Growth in global output in the second half of 2011 declined to
2.77 per cent from 4.30 per cent in the first half. Growth in the
advanced economies was 1.76 per cent, down from 2.20 per
cent in the first half. In the emerging and developing
economies, growth was 6.63 per cent in the second half of
2011 as against 6.50 per cent in the first half. In Developing
Asia, growth declined to 7.09 per cent in the second half from
9.60 per cent in the first half of 2011. Similarly, in Latin America
and the Caribbean countries, output growth decelerated from
4.60 per cent in the first half of 2011 to 3.56 per cent in the
second half.

Provisional data from the WEO indicates that annual output
growth in 2011 for Advanced Economies was 1.6 per cent;
Emerging
and
Developing
Economies,
6.2
per
cent;
Developing Asia, 7.9 per cent; Latin America and the
Caribbean, 4.6 per cent; MENA, 3.1 per cent and sub-Saharan
Africa, 4.9 per cent (Table 5.1).

The outlook for the global economy in the first half of 2012
suggests that economic growth would moderate at 2.02 per
cent, reflecting the possibility of sustained sovereign debt crisis
and fiscal tightening in the euro area with dampening effect
on economic activity in the rest of the advanced economies.

For Emerging and Developing economies, especially subSahara African countries, the outlook suggests sustained
recovery. However, the real estate bubble in China and
inflation pressures in both India and Brazil may constrain
economic activities in these countries. In the MENA region, the
outlook is mixed (Table 5.1). While countries like Tunisia are
settling down for reconstruction and rehabilitation, the political
situation in Libya, Syria and Egypt are still tenuous. Also, Iran’s
nuclear ambition and the impending U.S./Western European’s
economic sanctions may depress the prospects for growth in
the region.


1 Quarterly and half year data were obtained from Bloomberg, while the
annual data was from the WEO
Growth in global
output in the
second half of 2011
declined to 2.77 per
cent recorded
during the first
For Emerging and
Developing
economies,
especially subSahara African
countries, the
outlook suggests
sustained
recovery.


CBN Monetary Policy Review

5.1.2
Global Inflation
Global inflation rose to 3.88 per cent in the second half of 2011
from an average of 3.45 per cent in the first half, largely due to
rising commodity and energy prices. It is, however, projected
to slow down to 2.60 per cent in the first half of 2012 as a result
of declining demand and stabilizing commodity prices. In the
Advanced economies, inflation averaged 2.73 per cent in the
second half of 2011 as against 2.60 per cent in the first half and
is projected to decline to 1.86 per cent in the first half of 2012.
Similarly, inflation in the U.S. averaged 3.54 per cent in the


Table 5.1
World Economic Outlook

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


Source: IMF World Economic Update, January 2012
Global inflation
......, projected to
slow down to 2.6
per cent in the first
half of 2012 as a
result of declining
demand and
stabilizing
commodity prices.


CBN Monetary Policy Review

second half of 2011 as against 2.40 per cent in the first half and
is predicted to ease to 2.20 per cent in the first half of 2012.

In sub-Saharan Africa, a number of factors including strong
domestic and foreign exchange demand, high import prices
and rising energy costs combined to put pressure on consumer
prices in 2011. This situation could continue in the first half of
2012 in view of the not-too-good outlook for the global
economy.

5.1.3
Global Energy Prices
World crude oil prices averaged US$108.21 per barrel in the
second half of 2011, down from US$116.90 per barrel in the first
half, representing a decrease of 7.43 per cent. The IMF
baseline oil price projection for 2012 which is US$99.00 per
barrel is lower than the average price at end-December 2011.
The projected decline in oil prices derives largely from the high
prospects of a slower in demand in 2012.

5.1.4
Domestic Output Growth
The overall growth outlook for the domestic economy in the
first half of 2012 remains optimistic. Provisional data from the
National Bureau of Statistics (NBS) showed that output in the
second half of 2011 grew by 7.54 per cent as against 7.18 per
cent in the first half of 2011. NBS’s current estimates show that
the domestic economy would grow at 7.2 per cent in 2012. This
estimate takes into account prospects of sustained weakness
in the global economy and a cautious view of domestic
conditions such as security in the Niger Delta region, oil
production, and implementation of Federal Government’s
initiatives relating to infrastructure renewal and development
(including power and roads) and agriculture. The non-oil sector
is expected to drive output growth in 2012. However, the major
risk remains the euro area debt crisis which could adversely
affect Nigeria’s exports of crude oil earnings and government
revenue.

5.2
Outlook for Inflation and Monetary Policy Thrust in 2012
5.2.1
Inflation Outlook
Inflation at the end of the second half of 2011 was 10.3 per
cent down from 11.8 per cent in 2010. Staff forecasts suggest
..projected
decline in oil
prices is largely
attributed to
anticipated slack
in demand arising
from low
economic
activities
..overall growth
outlook for the
domestic
economy
remained
optimistic.


CBN Monetary Policy Review

that inflation would be in the region of 11.2 to 13.8 per cent in
the first half of 2012. Key downside risks include; anticipated
fiscal injections in relation to the proposed 2012 budget,
planned deregulation of the downstream sector of petroleum
industry, the proposed new tariff regimes on imported food
products such as rice and flour as well as the upward review of
electricity tariff. However, moderating factors would include
the lag effects of tight stance of monetary policy in 2011,
expected good harvest of agricultural produce and high
prospects of a stable naira exchange rate.

Figure 5.1 presents inflation fan chart for the period 2011:3 –
2013:4 simulated among others, under the assumption of full
deregulation of the downstream sector of the petroleum
industry. The chart shows that inflation would assume an
upward trend in the first half of 2012.

Figure 5.1
Fan Chart for Inflation from 2011:3 – 2013:4


5.2.2
Monetary Policy Thrust in 2012
Given the persistent inflationary pressures, it is expected that
the current restrictive stance of monetary policy would
continue in the near-term. In addition to traditional instruments
of monetary control like reserve requirements and discount
window operations, the Central Bank would continue to
explore other means, including administrative measures and
Given the
persisting
inflationary
pressures, it is
expected that the
current restrictive
stance of
monetary policy
would continue in
the near –term.


CBN Monetary Policy Review

closer coordination with the fiscal authorities to ensure price
stability. The global financial crisis has brought to the fore the
importance
of
synergy
between
monetary
and
other
macroeconomic policies. In this regard, the Bank would
continue to place higher premium on macro-prudential issues
in 2012.


CBN Monetary Policy Review

APPENDICES
Communiqués of the Monetary Policy Committee
(June – December 2011)

Central Bank of Nigeria Communiqué No. 77 of the Monetary Policy Committee
Meeting, July 25 – 26, 2011

The Monetary Policy Committee (MPC) met on 25th and 26th July, 2011 to review
domestic economic conditions during the first half of 2011 and the challenges
facing the Nigerian economy against the backdrop of developments in the
international economic and financial environment in order to chart the course of
monetary policy in the second half of the year.

On the global scene, the Committee noted with concern the enormity of the
challenges being faced by the US and euro zone countries as well as the major
emerging market economies such as the fiscal position of Brazil, possible real
estate bubbles in China and seemingly intractable inflation in India, which may
impact the Nigerian economy adversely through several channels. The economic
slowdown and the commodity price inflation in the international economy as well
as the rapid increase in prices of some asset classes in some emerging market
economies remain serious threats to the global economic recovery. There are
continuing widespread threats of inflationary pressures fuelled by the sustained
high energy, commodity and food prices in the global economy. Headline
inflation in many of the major emerging market economies is now exceeding 6 per
cent and is running close to or above central banks’ targets in a number of other
larger economies.

The performance of the global financial markets was mixed. Many national
currencies in Africa depreciated against the US dollar while in many emerging
markets, currencies appreciated vis-à-vis the US dollar during the first half of 2011.
Furthermore, most stock markets around the world showed weak recovery during
the period due to high inflation, weakening consumer confidence and
government finances, particularly in the US and euro zone. The unfolding debt
crises in the European periphery could damage confidence and output in the
near-term while the US debt and unemployment situation pose grave danger to
the international economy, given the reserve currency role of the US dollar and
the size of the US economy. It is not unlikely that the US will lose its AAA rating and
actual default is possible unless a deal can be worked out between the White
House and the Congress.


CBN Monetary Policy Review

On the domestic scene, the Committee noted that inflationary pressures which
were traceable to the high expenditure levels associated with the April 2011
general elections as well as the effects of rising international energy, commodity
and food prices had moderated by June 2011. This development was due in part
to the tight monetary policy stance of the Bank since September of 2010.
However, the Committee observed that the inflation outlook appears uncertain
owing to the expected implementation of the new national minimum wage policy
and the imminent deregulation of petroleum prices. Significant injection of liquidity
from FAAC in the third quarter coupled with the impact of AMCON recapitalizing
intervened banks to the tune of N1.6 trillion will both add to inflationary pressures.
The Committee welcomed the favorable growth projections but cautioned that
the current security challenges, infrastructural bottlenecks and the uncertainty in
the international economy as well as fiscal developments could undermine
investors’ confidence and output growth in the near term.

The Committee expressed serious concerns about the continued sluggish growth
of credit to the private sector during the first half of the year which is attributed,
among other factors, to the heightened credit risk in the real economy as a result
of the persisting structural problems occasioned by the inadequate power supply
and critical infrastructure deficit. It also observed that the lending rates of deposit
money banks (DMBs) remained relatively high.

Key Domestic Macroeconomic and Financial Developments
Domestic Output:
Provisional data from the National Bureau of Statistics (NBS) indicate that real
Gross Domestic Product (GDP) grew by 6.64 per cent in the first quarter of 2011
down from the 7.36 per cent in the corresponding period of 2010. The non-oil
sector remained the major driver of growth, recording 8.65 per cent growth rate in
the first quarter of 2011. Overall, GDP growth rate was projected at 7.80 per cent
for 2011, which the Committee believed, is still reasonably robust by major
emerging market standards, but which may be placed at risk in the event of
crystallization of various negative developments in the developed and emerging
markets.

Domestic Prices:
Inflationary pressures remained elevated during the first quarter of 2011 but
moderated towards the end of the second quarter. The year-on-year headline
inflation rate, declined from 12.8 per cent in March and 12.4 per cent in May 2011
to 10.2 per cent in June 2011. The downward movement in inflation in June 2011
was due to the moderation in both food and core inflation. Food inflation fell for
the first time since February 2008 to below 10 per cent. It declined from 13.6 per


CBN Monetary Policy Review

cent in March and 12.2 per cent in May to 9.2 per cent in June 2011. Core inflation
decreased from 12.8 per cent in March and 13.0 per cent in May to 11.5 per cent
in June 2011. Staff projections indicate that both headline and food inflation
would continue to moderate in the second half of the year. However, core
inflation is projected to increase during the same period driven mainly by cost of
energy, power and imports.

Monetary, Credit and Financial Market Developments:
Broad money (M2) grew by 5.66 per cent in June 2011 over the endDecember2010 level, which when annualized, translated to a growth rate of 11.32
per cent. Aggregate domestic credit (net) grew by 2.30 per cent in June 2011
over the 2010 December level which annualized to a growth rate of 4.60 per cent.
The sluggish growth in aggregate credit was mainly due to the weak expansion in
private sector credit which grew marginally by 1.45 per cent or 2.9 per cent on an
annualized basis.

Interest rates in all segments of the interbank money market moved up in
response to the upward review of the MPR for most part of the period since the last
meeting of the MPC. The weighted inter-bank call rate, which stood at 9.73 per
cent prior to the last MPC meeting rose steadily, peaking at 13.64 per cent on
June 13, 2011 while the OBB rate also trended upward reflecting the increase in
the MPR. Developments in the interest rate structure indicated that retail lending
rates remained relatively high. The average maximum lending rate declined to
22.02 per cent in June 2011 from 22.19 per cent in May 2011 while the average
prime lending rate declined to 15.76 per cent from 15.81 per cent during the same
period. Thus, the spread between the average maximum lending rate and the
consolidated deposit rate narrowed marginally to 19.22 per cent.

Stock market performance remained bearish during the review period as the All-
Share Index (ASI) decreased by 3.4 per cent between March 31, 2011 and July 21,
2011. Market Capitalization (MC) also declined by 3.4 per cent during the same
period. The Committee noted that the Nigerian stock market performance is
consistent with the stock market performances around the rest of the world, and
reflects a growing risk aversion on the part of portfolio investors as well as domestic
concerns on the ongoing banking sector resolution. This will be addressed later in
this communiqué.

External Sector Developments
At the wDAS, the exchange rate closed at N151.61 (including the 1% commission)
on 22nd July, 2011, representing an appreciation of 2.14 per cent over the
N154.91/US$ on 23rd May, 2011. The Inter-bank selling rate opened at N156.67/US$


CBN Monetary Policy Review

on 23rd May, 2011 and closed at N152.33 on 22nd July, 2011, representing an
appreciation of 2.77 per cent. At the BDC segment of the market, the exchange
rate closed at N166.00/US$ on 22nd July, 2011, representing a depreciation of 4.40
per cent over the opening rate of N159.00/US$ on 23rd May, 2011. In the light of
this, the Committee noted that the premium between the rates at the wDAS and
the interbank market narrowed towards the end of the review period, while that
between the wDAS and the BDCs widened which is not unconnected with the
measures taken to limit sales to BDCs. However, while strengthening of currency is
an important factor in mitigating inflationary pressures, the spread may lead to
arbitrage by players and fuel unhealthy speculation.

The Committee noted the modest accretion to external reserves in recent months,
but remained concerned about the sustained low level of accretion in the face of
higher oil output, higher oil exports volume and higher oil prices. Gross external
reserves stood at US$33.73 billion as at 21st July, 2011, representing an increase of
US$1.84 billion or 5.77 per cent over the level attained on 30th June, 2011. Given
that the current oil price level may not be sustained in the event of a slowdown in
global economic recovery, the Committee reiterated the need for pursuing
policies to foster macro-economic stability, economic diversification as well as
encouraging foreign capital inflows.

The Committee commended the CBN for the limit placed on the foreign
exchange sales to the BDCs. However, in view of the widening premium between
the wDAS and BDC rates, the Committee encouraged the CBN to review the
existing limit. The decision and communication in this regard will be made by the
Bank.

With regard to banking system stability, the Committee was informed that 3 of the
intervened banks had signed Transaction Implementation Agreements (TIAs) and 3
more are expected to sign TIAs within the next two to three weeks. The remaining
two are already the subject of interest from prospective core investors, and the
CBN is closely monitoring developments. It is expected that all the intervened
banks would be fully re-capitalized by 30th September, 2011.

Committee’s Considerations
The Committee recognized the decline in inflation rate and the slowdown in GDP
growth rate as well as credit to private sector which would ordinarily advice
maintaining rates at current levels. However, the consensus of the Committee is
that the outlook is uncertain due to dark clouds on the International horizon and
the rising spectra of a structural fiscal deficit. In view of the need to proactively
address the impact of huge injections of liquidity in the third quarter to correct the


CBN Monetary Policy Review

negative real interest rate situation in the market and attract foreign capital
inflows to build up reserves to protect the economy against possible external
shocks, the Committee decided as follows:

Decisions:

1.
To tighten monetary policy by a majority decision of 10 to 2.

2.
To raise the MPR by 75 basis points from 8.0 to 8.75 per cent by a majority
vote of 8 members in its favour, 1 member favoured 50 basis point increase
while 3 members voted for holding the MPR at 8.0 per cent.


3.
To maintain the corridor at +/- 200 basis points around the MPR.


Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
July 26, 2011


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué No. 78 of the Monetary Policy Committee
Meeting, September 19, 2011

The Monetary Policy Committee (MPC) met on 19th September, 2011 to review
domestic economic conditions during the first eight months of 2011 and the
challenges facing the Nigerian economy against the backdrop of developments
in the international economic and financial environment in order to reassess the
challenges facing monetary policy for the rest of 2011.

On the global scene, the Committee noted that current international
developments presented substantial economic uncertainties, clouding the outlook
for global growth and inflation. These developments included: increasingly weak
and volatile global financial markets, deepening debt crisis in the Eurozone, global
implications of slow growth at a time of limited fiscal flexibility, rising commodity
and food prices, and costly natural disasters. There is a general expectation that
there would be a slowdown in almost all advanced economies in the near term,
raising fears of a second recession. These developments, in the Committee’s view,
affect the domestic economy through trade and financial flows. Also,
international financial markets present a very volatile and uneven picture,
reflecting a high degree of uncertainty.

The Committee also noted that, there is increasing concern about the
sustainability of public debt globally. The high fiscal deficits suggest that policies to
usher in fiscal discipline are critical for restoring public confidence in Government
finances. The Committee welcomed the Federal Government’s expressed intent
to contain fiscal deficits within credible limits over the medium term.

On the domestic front, the MPC noted that inflationary pressures faced by the
domestic economy had slightly moderated following the series of monetary policy
tightening measures adopted by the Bank, complemented by a favourable
harvest. The output growth remained robust, although the current security
challenges could undermine investors’ confidence and output in the near term.
Nonetheless, the inflation outlook appears uncertain despite the expected
favorable agricultural production, the stability in expectations engendered by the
imminent conclusion of the banking sector reforms, and the prospects for a return
to a regime of fiscal prudence in the medium-term following the reconstitution of
the Federal Government of Nigeria (FGN) Economic Management Team. It is
against this backdrop that the Committee considered the monetary policies
required to attain the objectives of price and financial stability in the short to
medium term.


CBN Monetary Policy Review

Key Domestic Macroeconomic and Financial Developments
Output and Prices:
The Committee observed that the output growth rate for the second quarter 2011
remained robust. Provisional data from the National Bureau of Statistics (NBS)
indicated that real Gross Domestic Product (GDP) grew by 7.72 per cent in the
second quarter of 2011, which is above the 7.69 per cent recorded in the second
quarter of 2010. Overall GDP growth for 2011 is projected at 7.85 per cent which is
slightly lower than the 7.87 recorded in 2010. The non-oil sector remained the
major driver of growth, recording 8.82 per cent growth rate compared with 1.81
per cent for the oil and gas sector in the second quarter of 2011. The growth
drivers remained agriculture, wholesale and retail trade, and services, which
contributed 2.48, 1.88 and 2.52 per cent, respectively.

Domestic Prices.
The Committee noted that the moderation in inflationary pressures, which
commenced towards the end of the second quarter of 2011, continued into the
third quarter. The year-on-year headline inflation rate decreased from 9.4 per cent
in July 2011 to 9.3 per cent in August and core inflation decelerated from 11.5 per
cent to 10.9 per cent during the same period. However, food inflation rose to 8.7
per cent in August 2011, from 7.9 per cent in July.

The harvesting of early maturing crops, especially maize, tomatoes, vegetables,
potatoes and fruits played a key role in the moderation of headline inflation. The
recently announced government policies and programmes are likely to have a
salutary impact on agricultural output, if speedily implemented.
These
expectations are however currently under threat from anticipated fiscal injections,
increased government borrowing to finance the huge fiscal deficit in the 2011
budget, the recent upward revision of electricity tariffs and the anticipated
deregulation of petroleum product prices, among other factors.

Monetary, Credit and Financial Market Developments
Broad money (M2) grew by 8.55 per cent in the eight months to August 2011,
which annualized to a growth rate of 12.82 per cent. Aggregate domestic credit
(net) grew by 14.72 per cent in August 2011 when compared with the level in
December, 2010. On annualized basis, the growth in net domestic credit
translated to 22.08 per cent compared with the growth rate of 15.0 per cent in the
corresponding period of 2010.

The growth in aggregate credit was accounted for by increases in credit to the
Federal Government and the private sector. Credit to the Federal Government
grew by 18.99 per cent, which annualized to 28.48 per cent, close to the indicative


CBN Monetary Policy Review

benchmark of 29.29 per cent for 2011. Similarly, credit to the private sector grew
by 10.88 per cent, which annualized to 16.32 per cent, as against the benchmark
of 23.34 per cent. With the banking crisis approaching a final resolution with the
recapitalization of banks, it is expected that banks will increase lending once
integration issues are concluded.

Interest rates in all segments of the interbank money market rose in response to the
upward review of the MPR at the previous MPC meeting. The Inter-bank and Open
Buy Back (OBB) rates both opened at 7.49 per cent on July 27, 2011 and rose to
11.0 per cent and 10.36 per cent on September 15, 2011, respectively. The retail
lending rates which had remained relatively high, however, declined during the
period. The average maximum lending rate declined to 22.27 per cent in August,
2011 from 22.42 per cent in July. The weighted average saving rate rose to 1.46 per
cent from 1.42 per cent over the same period. The consolidated deposit rate
declined during the period from 2.42 to 2.30 per cent. Thus, the spread between
the average maximum lending rate and the consolidated deposit rate narrowed
marginally from 20.0 per cent to 19.97 per cent during the period.

The bearish performance of the stock market continued during the review period
as the All-Share Index (ASI) decreased by 15.5 per cent from 24,980.20 at endJune, 2011 to 21,106.67 on September 16, 2011. Market Capitalization (MC)
decreased by 15.7 per cent from N7.99 trillion to N6.73 trillion during the same
period. Despite the bearish performance, the equity market was more or less fairly
valued as reflected in the NSE Price-Earnings (PE) ratios of 10.82 in August 2011,
which was close to the 10-year 8-month median of 11.57. Moreover, the
performance of the NSE during the review period is consistent with the
performance of other stock markets around the world, and reflects lingering risk
aversion and deleveraging on the part of foreign institutional investors who are key
players on the NSE.

External Sector Developments
At the wDAS, the exchange rate, during the period (July 27 – September 15, 2011)
opened at N150.00/US$ and closed at N153.52/US$ ,representing a depreciation
of N3.52 or 2.35 per cent. At the inter-bank segment, the selling rate opened at
N151.80/US$ and closed at N156.30/US$, representing a depreciation of N4.50 or
2.96 per cent during the period. The exchange rate recorded a modest
appreciation at the BDC segment where the selling rate opened at N163.00/US$
and closed at N158.00/US$, representing an appreciation of N5.00 or 3.07 per
cent. The appreciation recorded in the BDC segment of the market was attributed
to the increased supply of foreign exchange by the CBN and the removal of
ceilings on DMBs’ sales to BDCs.


CBN Monetary Policy Review

The Committee noted that the premium between the rates at the WDAS and the
interbank stabilized towards the end of the review period, while that of the BDCs
narrowed significantly, suggesting the need to sustain existing measures to
improve the efficiency of the market.

The Committee also noted the modest accretion to external reserves during the
period. Gross external reserves stood at US$34.85 billion on 15th September, 2011,
representing an increase of US$1.12 billion or 3.32 per cent above the level of
US$33.73 billion attained on July 21, 2011. The increase was mainly accounted for
by increased inflows of royalties into the federation account, reflecting the
upward trend in international oil prices and stable oil production in the Niger Delta.
Besides, foreign direct and portfolio investments increased over the last eight
months. Foreign capital inflows for the first eight months of 2011 stood at US$5.66
billion which is US$1.06 billion or 23.04 per cent higher than the US$4.60 billion
recorded in the corresponding period of 2010.

The Committee’s Considerations
The key concerns noted by the Committee were:

1.
Continuing expansionary fiscal stance and high component of recurrent
expenditure;
2.
Liquidity surge expected from AMCON intervention, following conclusion of
bank recapitalization;
3.
Sharp rise in month-on-month headline inflation rate despite falling
headline inflation rate on year-on-year basis;
4.
Need to have positive real interest rates; and
5.
Persisting demand pressure in the foreign exchange market, driven by
significant liquidity injections and reflecting structural deficiencies that
have perpetuated the import dependence of the economy.

The Committee considered that given the difficult and uncertain international
environment, it is important to ensure that the current trends in growth are
sustained and price stability is maintained. The recent data on inflation showed
that the headline inflation rate has been maintained within single digit for two
consecutive months. However, concerns remain about sustaining the present
inflation trend. The Committee viewed the rise in the monthly headline inflation
rate in August which, while justifiable from the point of view of the large household
expenditures on account of festivities, was sharp and out of line with the trend in


CBN Monetary Policy Review

the preceding 11 months. Besides, the anticipated high liquidity in the near future
would have a bearing on inflation. The fiscal stance continues to be expansionary.
The announcement of a target of one (1) per cent annual reduction in
government recurrent spending when viewed in the context of the anticipated
injections associated with the implementation of the new national minimum wage,
suggests that the fiscal retrenchment is likely to be drawn-out. In addition, there is
the weight of structural factors such as the announced hikes in electricity tariffs
and the expected removal of petroleum subsidy. Moreover, the AMCON injection
of N3.0 trillion is going to add to liquidity surge with attendant adverse impact on
prices. It is for these reasons that the Committee felt the need for further tightening
of monetary policy.

On the other hand, the Committee noted that rates have been increased in the
last four consecutive MPC meetings and that high lending rates increase the cost
of finance for SMEs and this has an adverse consequence for growth and job
creation. However, having considered the arguments for and against tightening,
the Committee voted for maintaining the stance of tightening in the short term.

The Committee emphasized that for monetary policy to be effective it would
need to be complemented by other policies, both structural and fiscal. Monetary
policy can only address the monetary aspects of inflation while fostering growth
and financial stability. The need for accelerating fiscal retrenchment and structural
adjustment can therefore not be overemphasized.

Decisions:
In the light of the above considerations the Committee decided as follows:
1. A majority of 8 to 3 members voted for a tightening of monetary policy.
2. Seven (7) members voted for a 50 basis-point increase in MPR from 8.75 to 9.25
per cent. One (1) member voted for a 100- basis-point increase in MPR. The 3
remaining members voted to maintain the MPR at the current rate.
3. A Unanimous decision to: a. maintain the current symmetric corridor of +/-200
basis points around the MPR; and b. retain the current CRR of 4.0 per cent

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
September 19, 2011


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué No. 79 of the Monetary Policy Committee
Meeting, October 10, 2011

The Monetary Policy Committee (MPC) held an extraordinary meeting on 10th
October, 2011 in response to unusual developments in the global and domestic
economy, with potential negative impact on domestic liquidity conditions and
renewed threats to price and exchange rate stability.

The global economic horizon remains highly uncertain, with the signs getting more
ominous as policy makers find it increasingly difficult to take the necessary
economic decisions that may avert a new wave of recession. Three self-reinforcing
negatives continue to define the global economy: the sovereign debt crisis in the
Eurozone, significant undercapitalization of internationally-active banks, and
negative market sentiment leading to continuing flight to cash as a safe haven
and deleveraging. The first and second aspects intensify the third, and without
confidence and some appetite for financial assets and credit, the debt crisis and
financial solvency concerns in turn become deeper.

As a result of these concerns about the Eurozone, coupled with the US deficit
problem, inflation in emerging markets, debates about a soft or hard-landing in
China and other pessimistic scenarios, there is a trend towards reversal of capital
flows to emerging and frontier markets. This is coupled with a recent depreciation
in the national currencies of many economies in Asia and Latin America including
India, Indonesia, Malaysia, South Korea, Brazil, Chile, Colombia, and Mexico,
among others. In Africa, the national currencies of Kenya, South Africa, Gabon,
Ghana and Nigeria have also been under pressure. Central banks have generally
responded through direct intervention in the foreign exchange market to stabilize
the currency and, in some cases, a significant hike in policy rates. It is worthy of
note that fund managers have not been eager to exit environments with relatively
high real rates of interest and benign inflation outlook.

The Domestic Economy and Committee’s Deliberations
The growth outlook for the economy does not appear to have changed much,
driven largely by the positive forecasts for the non-oil sector as noted in the last
MPC communiqué. Inflation had come down to 9.3 per cent in August but, as
indicated in the same communiqué, a combination of monetary, fiscal and
structural factors continue to advise against complacency.

The naira has come under increasing pressure, and has recently traded outside
the band of N150 +/- 3.0 per cent. In the Committee’s view, the increasing
pressure on the domestic currency has been emanating from a number of sources


CBN Monetary Policy Review

not all of which can be addressed by purely monetary interventions. First, there are
concerns about the likely impact of a double dip recession on oil prices and
already declining foreign reserves. Second, there are also concerns about the
delay in implementing fundamental economic decisions that will shore up
reserves. Specifically, it is estimated that simply passing the Petroleum Industry Bill
(PIB) and removing subsidies on Premium Motor Spirit (PMS) will add at least US$10
billion to national reserves annually. The petroleum subsidy for 2011 alone is
estimated to be about US$6 billion. A substantial part of oil production (about 40
per cent) is currently in deep offshore wells. Based on the terms agreed in the
1990s when oil price was under US$30, royalty from oil wells deeper than 1,000
metres is zero per cent and the nation is paid only 20 per cent of the profit by oil
companies after deducting their expenses. As a result, the country has had limited
benefits from high oil prices and increasing output, with most of the gains going to
multinational oil companies under an inequitable fiscal arrangement.

Similarly, the Committee expressed concerns about the genuineness of demand
for petroleum imports. This year alone, oil importers have bought over US$7.0 billion
from wDAS, thereby, depleting the Nation’s external reserves. This demand, in the
Committee’s view, might have been fuelled by rent-seeking and subsidies.

It is imperative that the enabling legislation for correcting fiscal terms be put in
place under a Petroleum Industry Bill (PIB) that reflects international best practice.
Unfortunately, discordant voices are delaying these processes to the long-term
detriment of the economy. Whereas the labour unions have genuine concerns
about the impact of subsidy removal on the poorer segments of society, the stark
reality is that the country is living above its means.

The Greek government recently passed a budget in which 33,000 public sector
workers had to be retrenched as a result of failure to take difficult but necessary
economic decisions in the past. Nigeria cannot afford to delay, any further, the
reforms of the petroleum industry.

Third, the draft 2012 budget and the underlying assumptions are based on an oil
price of US$75 per barrel and an output of 2.4 million barrels per day. This makes
the 2012 budget even more expansionary than the 2011 budget and further
dampens any hope for an early fiscal retrenchment. The fiscal authorities have
clearly signaled a commitment to medium-term consolidation and indeed the
projected deficit in 2012 is lower than the deficit in the 2011 budget. This
notwithstanding, the projected increase in spending, particularly the high levels of
recurrent expenditure, would suggest increasing pressure on prices in general.


CBN Monetary Policy Review

Fourth, structural bottlenecks in the Nigerian economy that perpetuate import
dependence make import-demand highly inelastic.

Finally, real interest rates have been low, partly driven by a cautious approach to
monetary tightening at a time of financial system instability. Although the MPC
recognized inflationary pressures and has consistently acted prudently in policy
tightening based on expectations, a gradualist approach has been the pattern
thus far, given the situation with the banking system and equity markets.

Policy Issues and Dilemmas
In the face of the spectre of declining oil prices, declining foreign reserves,
increased demand for foreign exchange, fiscal dominance and capital flow
reversals, monetary policy must bear a larger burden of economic adjustment.
The MPC has, therefore, to make difficult choices, each of which has clear costs
and benefits.

One option is protecting reserves by reducing the supply of dollars at the wDAS.
This will lead to a rapid depreciation of the currency and the emergence of a
parallel market, leading to further pressures on the Naira, imported inflation and a
general loss of confidence on the part of investors.

Indeed, the impact on price and exchange rate stability will be such as to
undermine the key mandates of the Central Bank. Given the highly inelastic
demand for imports, it is doubtful that increasing the cost of dollars will significantly
reduce quantity demanded. Indeed, genuine demand will be compounded by
high levels of speculative demand.

A second option is to address monetary and liquidity conditions more aggressively.
By tightening liquidity and raising domestic interest rates, a number of advantages
follow. First, this is the logical response to fiscal expansion, especially with the
anticipated capital releases in the fourth quarter as well as repayment of backlog
of Nigeria National Petroleum Corporation (NNPC) debt to the Federation
account. Second, it provides an incentive for reallocation of portfolios by
improving real returns of holding the naira as a store of value. Third, it increases,
after a lag, the rates paid on deposits and savings, thus reversing any tendency
towards disintermediation and capital flight. Finally, it increases the cost of foreign
currency positions held for speculative purposes, and reduces the tendency to
pre-pay dollar obligations with naira liabilities.

The option has disadvantages in the form of high lending rates, financial cost to
the banking system and possible losses on fixed income instruments due to capital


CBN Monetary Policy Review

losses. Besides, tightening of liquidity would run the risk of slowdown in credit
growth. Having considered the pros and cons of each option (and combinations
of options), the Committee is of the view that given the completion of shareholder
meetings on all banks and approvals from the courts for many, the risks to the
banking system of tighter liquidity conditions have been significantly reduced, as
the banks are in the process of receiving all approvals and fresh capital including
AMCON bonds. Now that the banking system recapitalization is complete,
monetary policy can be freed from concerns about its impact on financial system
stability.

The Committee reaffirmed its belief that maintaining exchange rate stability,
especially in times of global uncertainty, is crucial to the mandate of price stability.
Moreover, the interest of the economy is best served, by maintaining an
unequivocal stance of non-accommodative monetary policy, given the existing
fiscal conditions.

The Committee also reaffirmed its commitment to improving returns on naira assets
and protecting the capital of investors against erosion due to huge exchange rate
losses, in order to encourage appropriate asset allocation decisions.

The Committee recognized the need to remain very clear on the Bank’s primary
mandate and maintain the credibility it has established so far by sending strong
signals of continuing commitment to price and exchange rate stability. Finally, the
Committee noted that the Committee of Governors has already commenced full
investigation of compliance with rules governing foreign exchange transactions by
authorized dealers and endorsed the declared commitment to sanction all
infractions and improve the level of supervision and compliance in the market.

Decisions:
1.
The monetary policy rate (MPR) is raised by 275 basis points from 9.25 per
cent to 12.0 per cent (by a vote of 8 in favor and 1 in favor of status quo);

2.
Maintain the current symmetric corridor of +/-200 basis points around the
MPR (by unanimous vote);

3.
The cash reserve ratio(CRR) is increased from 4.0 per cent to 8.0 per cent
from the maintenance period beginning October 11, 2011 by a vote of 7
to 2 (2 members voted for a 6.0 per cent CRR);


CBN Monetary Policy Review

4.
The net open position (NOP) is reduced from 5.0 per cent to 1.0 per cent of
share-holders funds with immediate effect and with full compliance by
Friday, October 14, 2011 (by unanimous vote); and

5.
It was further agreed that the reserve averaging method of computation
be suspended in favour of daily maintenance until further notice.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
October 10, 2011


CBN Monetary Policy Review

Central Bank of Nigeria Communiqué No. 80 of the Monetary Policy Committee
Meeting, Monday, November 21, 2011

The Monetary Policy Committee (MPC) met with 11 out of the 12 members present
on 21st November, 2011 to review domestic economic conditions up to the early
part of Q4 2011 and the challenges facing the Nigerian economy against the
background of developments in the international economic and financial
environment in order to reassess the options for monetary policy for the remaining
part of the year and Q1 2012.

The Committee noted that international economic and financial conditions had
deteriorated with possible threats of financial shocks from Europe, making it very
difficult to correct the serious imbalances that have developed in the international
economy since the peak of the global economic and financial crises. Most of the
major industrial economies are at present economically weak and are expected
to remain in recession with high unemployment rates and large unsustainable
fiscal imbalances for an extended period, going by the recent forecasts of most
international institutions. Inflation rates, with the exception of Japan, are expected
to be higher than in 2010. It is projected at around 3.0 per cent in 2011 in the US,
the Euro-area and the UK compared with 1.9 per cent in 2010. The ratio of
government debt to GDP for the European Union remains high and has led to a
change of governments in Greece and Italy and a likely election of conservative
government in Spain. It has also led to the adoption of tougher austerity measures
including staff rationalization and privatization. In the case of some countries of
the Euro area, the markets are still not certain that the risk of sovereign default will
be addressed expeditiously and in an efficient manner. These concerns have
opened up issues relating to financial stability, given the considerable exposures of
banks and other financial institutions to government securities across countries.
Consequently, financial markets have become nervous with their uncertainties
reflected in the volatility of stock, bond and foreign exchange markets. Current
account imbalances are also projected to be high in 2011 in both the US and the
Euro area.

The Committee noted that, with the limited available fiscal space, the burden of
economic adjustment has fallen on central banks in the industrial economies.
However, as the policy rates are close to zero, the only recourse available to
central banks to promote recovery is through quantitative easing. In resorting to
quantitative easing, the Committee is concerned that central banks, particularly,
in the US and UK, are failing to recognize the limitations of monetary policy and
delaying the difficult but inevitable structural adjustment required by the
developed world to avoid a recession. A significant amount of sovereign debt


CBN Monetary Policy Review

needs to be written off, systemically important banks need to be recapitalized
(and if necessary nationalized) and stronger austerity measures need to be put in
place in the US and the Europe. Concerns over elections in 2012 in the US,
Germany and France seem to be getting in the way of these tough decisions.
Failure to act quickly may lead Europe into a prolonged recession that could lead
to a permanent loss of competitiveness and economic vibrancy.

Emerging countries are also projected to record lower growth rates in 2011 than in
2010. Given the high degree of real and financial integration with the industrial
economies, a quick rebound in growth in 2012 does not seem to be realistic at this
point in time. In many emerging countries, inflation rates are relatively high. There
are also concerns about financial asset prices and the growing nonperforming
loans of banks. In China, early signals of a collapse in property prices have
emerged and should the real estate bubble burst, this will have an impact on
China’s growth prospects. Fiscal imbalances have also been high in many
countries.

Growth performance of industrial and emerging economies in 2012 is vital for
Nigeria’s economic performance. Oil demand, in the Committee’s view, would
soften as a consequence of slow global growth and would necessitate
comprehensive and sound policy actions to help diversify the domestic economy
away from oil. The impact of external developments on the domestic economy
working through the channels of trade, finance and confidence has, in the
Committee’s view, been strong and would need to be addressed efficiently and
expeditiously.

On the domestic front, the Committee observed a mild resurgence of inflationary
pressures at the end of the third quarter and beginning of the fourth quarter of the
year, after they had moderated following a series of monetary policy tightening
measures. The inflation outlook, however appears mixed, and is complicated by
the fact that the full effects of the recent aggressive monetary tightening
measures are yet to be felt. Latest output growth projections remained robust,
even though lower than earlier projected. The Committee observed no major
threats to financial system stability and welcomed the conclusion of the banking
sector recapitalization exercise, which places the banks in a strong position to
weather external shocks and also lays the foundation for strong earnings and
credit growth.


CBN Monetary Policy Review

Key Domestic Macroeconomic and Financial Developments
Output and Prices:

The Committee observed that the robust output growth recorded since the
beginning of the year has been sustained. Real output growth was estimated at
7.40 per cent in Q III of 2011 as against 7.86per cent in the corresponding quarter
of 2010, according to the latest estimates of the National Bureau of Statistics (NBS).
Non-oil GDP was estimated to grow sharply by 8.81 per cent in Q III of the current
year as compared with 8.38 per cent recorded in Q III of the previous year. For the
year as a whole, real GDP growth was projected at 7.69 per cent, slightly lower
than the 7.87 per cent attained in 2010.

The Committee noted with satisfaction that the expected output performance in
2011 was higher than the average growth of 6.63 per cent recorded since 2004. As
investments increase and productivity improves, real GDP could double in less
than ten years from now if the potential growth is elevated slightly over the
average growth recorded in the last seven years.

The year-on-year headline inflation rate rose to 10.5 per cent in October 2011
from 10.3 per cent in September. Similarly, food inflation rose to 9.7 per cent in
October 2011 from 9.5 per cent in September. However, core inflation declined
marginally to 11.5 from 11.6 per cent in September.

Coming on the heels of a series of monetary policy measures, and at a time of
global uncertainty, the numbers send mixed signals for inflationary expectations in
spite of the uptick in year-on-year headline inflation. For instance, all broad
measures declined on a month-on-month basis. Headline inflation declined by 0.9
per cent in October compared to an increase of 1.4 per cent in September. This
was a result of a month-on-month decline of 0.8 and 0.7 per cent in food and nonfood inflation compared to increases of 1.9 and 0.9 per cent, respectively, in the
preceding month.

On the fiscal front, the Ministry of Finance continued to stress its commitment to a
tighter fiscal stance and has already indicated a reduction in the benchmark
price of oil from US$75.0 per barrel to US$70.0 per barrel. It has also adopted an
exchange rate assumption consistent with the current stance of monetary
authorities. Although, the Sovereign Wealth Fund is subject to continuing political
negotiations between States and Federal Governments, it would appear from
public statements on both sides that a positive resolution would be reached very
soon. The risk to inflation from removal of fuel subsidy is ever-present. However,
whenever the policy becomes effective, the Central Bank stands ready to react to


CBN Monetary Policy Review

any second round effects of a price adjustment. As a matter of policy, the Central
Bank will not respond to first-round shocks, as tightening money supply in such a
circumstance will be pro-cyclical. Finally, in view of the external developments
above, any softening in oil prices will impact negatively on government revenue
receipts. Given the concerns over the budget deficit, such a development would
lead to a forced adoption of belt-tightening measures, thus, providing the muchneeded fiscal support in the effort to rein in inflation. In such a circumstance,
further tightening may also turn out to be pro-cyclical, especially, as the full effects
of recent measures are still working their way through the system. Given the cost of
borrowing in current tight monetary conditions, the Committee projects that in the
face of revenue shocks, the likely reaction of the authorities will be a reduction in
non-essential spending, rather than an increase in public debt.

Monetary, Credit and Financial Market Developments
Provisional data indicate that aggregate domestic credit (net) grew by 24.57 per
cent in October 2011 over the end-December 2010 level, and by 29.48 per cent
when annualized, which was below the indicative benchmark of 32.58 per cent
for 2011. The growth in aggregate credit (net) in October 2011 was due to
increases in credit to the private sector as well as State and Local governments.
Credit to the private sector grew by 24.24 per cent (29.09 per cent on annualized
basis) which was higher than the indicative benchmark of 23.34 per cent for 2011.
However, credit to the Federal Government which fell by 21.65 per cent (25.98 per
cent on annualized basis), was below the indicative benchmark growth rate of
29.29 per cent for 2011. This was due to the fiscal surplus of N307.84 billion in July
2011 following the sharing of the arrears of budget augmentation (January-April,
2011) which reduced the need for government borrowing.

Rates at the interbank money market moved in tandem with the upward reviews
of the MPR at the MPC meetings during the period. The average interbank call
and Open buy back (OBB) rates rose from 11.38 and 11.16 per cent before the
extra-ordinary MPC meeting, held in October 2011, to 15.00 and 13.70 per cent,
respectively, after the meeting, reflecting the spike in the MPR. In addition, the
upward review of the CRR and the sterilization of the funds helped to push up
inter-bank rates to a high of 18.06 per cent on October 14, 2011. The Interbank
and OBB rates, which opened at 10.74 and 10.63 per cent on September 19, 2011
rose to 17.09 and 14.00 per cent on October 31, and closed at 14.30 and 13.26 per
cent, respectively, on November 15, 2011. Other factors responsible for the
upward movement in rates included the various OMO auctions conducted to
mop-up excess liquidity, as well as the low level of liquidity in the banking system
following the deadlock at the Federation Accounts Allocation Committee
meeting which culminated in the late release of statutory revenue to the three


CBN Monetary Policy Review

tiersof government. However, the purchase of AMCON bonds by the Bank and the
injection of funds, moderated rates in the market.

The Committee also noted that deposit money banks have improved the rates on
fixed-term deposits. Thus, the average weighted three-month deposit rate has
gone up to 7.06 per cent in October from 5.49 per cent in September. Also, the
rates on deposits for 12 months increased from 4.47 per cent in September to 4.90
per cent in October, 2011. The average weighted interest bearing deposit rate
stood at 4.93 per cent in October compared with 4.02 per cent in September. This
increase in rates had been anticipated by the Committee and is likely to continue
especially as we approach the December 31, 2011 deadline for the removal of
the CBN guarantee on the interbank market. Lending rates have also gone up in
response to tighter conditions in the money market.

The Committee observed that the bearish performance of the Nigerian capital
market continued for most of the year. The All-Share Index (ASI) decreased by 18.0
per cent on a year-to-date basis from 24,770.52 at end-December 2010 to
20,311.51 on November 18, 2011. Market Capitalization (MC) also declined, by
19.2 per cent, from N7.91 trillion to N6.39 trillion over the same period due partly to
the delisting of acquired banks. The bearish market is consistent with the trends
globally in a very uncertain world where fund managers have resorted to a flight
to safety. High yields on fixed income securities and subdued activity from
investors in the wake of the Euro Zone crisis should advise against undue optimism
for a rally in stocks in the short-term. However, strong earnings and fundamentals
mean that the market is at present very attractive to long-term investors but not
speculators.

External Sector Developments.
The Committee observed some restoration of stability in the Foreign exchange
market since the last MPC meeting. The average exchange rate appreciated at
all three segments of the market during the period. At the wDAS market, the
exchange rate opened at N158.48/US$ (including 1% commission) on October 11,
2011 and closed at N156.05/US$ on November 18, 2011, representing an
appreciation of N2.43k or 1.53 per cent within the period. At the inter-bank
segment, the selling rate opened at N158.90/US$ and closed at N158.62/US$,
representing an appreciation of N 0.28k or 0.17 per cent. At the BDC segment, the
selling rate opened at N165.00/US$ and closed at N160.00/US$, representing an
appreciation of N5.00k or 3.03 per cent for the period. The external reserves
position has continued to improve, closing at US$34.38 billion of international
reserves as at November 17, 2011.


CBN Monetary Policy Review

The Committee felt that external developments have in general responded
favorably to monetary policy stance adopted in the last MPC meeting in October.
It urged the Central Bank to be vigilant with respect to the developments in the
foreign exchange market and maintain its stance in favour of stable exchange
rates, and send clear signals that will help anchor the expectations of investors,
manufacturers, and policy makers in the short-to-medium term.

The Committee’s Considerations
The Committee reviewed its decisions over the course of 2011 and their impact on
the Bank’s core mandate of maintaining price stability. It noted that Nigeria had
been ahead of all other African countries in anticipating the impending danger of
inflation and started its monetary tightening cycle at a time other African Central
Banks were still holding or reducing policy rates. It noted that these decisions have
helped in controlling pressures on the general price level and in maintaining a
relatively stable equilibrium in the foreign exchange markets. Where this
equilibrium is disturbed by external factors, the ability to respond rapidly has
succeeded in quickly restoring stability.

The Committee also noted the mixed signals sent by inflation numbers for October
2011. The slight uptick in headline inflation year-on-year represents only a 20 basispoint increase from a high base of 10.3 per cent, and it is important not to
exaggerate its significance. The index of all items except food declined marginally
year-on-year, and all three broad indices (headline, food and core) showed a
month-on-month decline in October, against month-on-month increases in the
previous month.

On the fiscal side, a moderated oil benchmark price coupled with very strong
public statements of commitment to fiscal consolidation by the fiscal authorities,
give rise to optimism about long-awaited support on the fiscal side. Global
headwinds may lead to a softening of commodity markets, thus reducing the
resources available to fiscal authorities and contributing to a disinflationary
process. The Committee noted the continuing demand pressures in the foreign
exchange market and the slow rate of reserve accretion as indicators that liquidity
conditions may still need further tightening.

On the other hand, lending rates are already high and having impact on the real
sector, and global headwinds may make further tightening counter-productive
and pro-cyclical should oil price fall significantly. Also, a combination of small fiscal
adjustments and moderate depreciation in the exchange rate of the naira should
compensate for maintaining current interest rate stance. Finally, the Committee
noted that December is usually a period of muted economic activity, and an


CBN Monetary Policy Review

appropriate time to pause and assess the full impact of the recent tightening
decisions after a lag.

Decision
The Committee decided as follows:

1.
By a unanimous vote to retain the MPR at 12.0 per cent and the symmetric
band at +/-200 basis points.

2.
To retain the CRR at 8.0 per cent.

3.
To
adjust
the
mid-point
of
target
official
exchange
rate
from
N150.00/US$1.00 to N155.00/US$1.00 and maintain the band of +/-3.0 per
cent. This means that the naira should float roughly within a range of
N150.00/US$1.00–N160.00/US$1.00, unless extraordinary shocks necessitate
a change in stance.

4.
To encourage the CBN to continue to seek convergence between wDAS
and interbank rates to reduce arbitrage opportunities, avoid speculative
attacks, and the emergence of a multiple-exchange rate environment.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
November 21, 2011


CBN Monetary Policy Review

CBN Monetary Policy Review