CENTRAL BANK OF NIGERIA
MONETARY
MONETARY
POLICY REVIEW
POLICY REVIEW
MONETARY
POLICY REVIEW
AUGUST 2018
AUGUST 2018
AUGUST 2018
Central Bank of Nigeria
33 Tafawa Balewa Way
Central Business District
P.M.B. 0187, Garki,
Abuja
Phone: +234 (0)9 462 36011
Website: www.cbn.gov.ng
E-mail:
ISSN: 2141-6281
©2017 Central Bank of Nigeria
Mandate
§Ensure monetary and price stability
§Issue legal tender currency in Nigeria
§Maintain external reserves to safeguard the international
value of the legal tender currency
§Promote a sound financial system in Nigeria
§Act as banker and provide economic and financial
advice to the Federal Government
Vision
“Be the model Central Bank delivering Price and
Financial System Stability and promoting
Sustainable Economic Development"
Mission Statement
“To be proactive in providing a stable framework for the economic
development of Nigeria through effective, efficient and
transparent implementation of monetary and exchange
rate policy and management of the financial sector"
Core Values

· Meritocracy
· Leadership
· Learning
· Customer - Focus
Central Bank of Nigeria
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CONTENTS
Page
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Table of Contents
Statement by the Governor

vii
Chapter 1
Overview..


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

Chapter 3
Price Developments ..


Chapter 4
Monetary Policy and Liquidity Management..
..

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

Chapter 6
Economic Outlook..


Appendices


List of Tables
Table 3.1:
Inflation Rates, January – June 2017 ..
..
..

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


January - June 2018..


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


January - June 2018


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


January - June 2018..


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


January – June 2018..


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


January – June. 2018 ..


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


January – June. 2018 ..


Table 3.8:
Actual and Seasonally Adjusted Headline Inflation


January – June 2018 ..


Table 4.1:
OMO Bills Auction (January 2017 – June 2018) (N'billion)..

Table 4.2:
CBN Standing Lending Facility (January 2017 –


June 2018) (N'billion) ..


Table 4.3:
CBN Standing Deposit Facility (January 2017 –


June 2018) (N'billion) ..


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

Table 4.5:
Monetary Aggregates Outcomes (Growth in % except


otherwise stated)


Table 5.1:
Weighted Average Monthly Money Market Interest Rates


(January – June 2017)..


Table 5.2:
Average Monthly Spot Exchange Rates (July 2017 –


June 2018) (N/US$)


Table 5.3:
End-Month Exchange Rates (July 2017 – June 2018)


(N/US$)


Table 5.4:
Nominal and Real Effective Exchange Rates Indices


(Jan 2017 – Jun 2018) ..


Table 5.5:
Monthly Foreign Exchange Flows through the CBN


(July 2015 – June 2017)


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Table 5.6:
Monthly Foreign Exchange Flows through the Economy


(Jan. 2017 – June 2018) (US$ Mill
..
..
..

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


(June 2017 – June 2018)


Table 5.8:
Policy Rates of Selected Countries January – June 2018

Table 5.9:
Selected International Stock Market Indices as at


June, 2018


Table 5.10:
Exchange Rates of Selected Countries (value in currency


units to US$)


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

List of Figures
Figure 2.1:
Real GDP Growth (%) 2016 Q1 – 2018 Q2.

..

Figure 2.2:
Non-oil Sector Performance 2016Q1-2018Q1 ..
..

Figure 2.3:
Performance of the Oil Sector 2016Q1-2018Q2
..

Figure 2.4:
Agricultural Sector Contribution by Activity, 2016Q1-


2018Q2


Figure 2.5:
Industrial Sector's Contribution by Activity, 2016Q1-2018Q2 12
Figure 2.6:
Services Sub-Sector Contribution, 2016Q1-2018Q2
..

Figure 2.7:
Quarter Oil Production (2016Q1-2018Q2)..
..
..

Figure 2.8:
Monthly Bonny Light Price, January – June 2018
..

Figure 3.1:
Headline, Core and Food Inflation Rates


(January – June 2018)


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


January – June 2018 ..


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


January – June 2018 ..


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


January – June 2018


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


January – June 2018 ..


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


January – June 2018 ..


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


January – June 2018 ..


Figure 3.8:
Actual and Seasonally Adjusted Headline Inflation


January – June 2018 ..


Figure 4.1:
OMO Bills Auction (January – June 2018)
..
..

Figure 4.2:
Standing Lending Facility (January 2017 – June 2018)..

Figure 4.3:
Standing Deposit Facility (January 2017 – June 2018) ..

Figure 4.4:
Foreign Exchange Supply by the CBN


(January – June 2018)..


Figure 4.5:
Money Supply (M1) and (M2) (January – June, 2018) ..

Figure 4.6:
Growth in Money Supply (M1) and (M2)


(January - June, 2018) ..


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Figure 4.7:
Net Domestic Asset (NDA) (January - June 2018)
..

Figure 4.8:
NDA, NDC and Other Assets (net) (January – June, 2018)

Figure 4.9:
Domestic Credit to Private Sector (January – June, 2018)

Figure 5.1:
Weighted Average Monthly Money Market Interest Rates


(Jan.–Jun. 2018)


Figure 5.2:
Daily Interbank Call Rate (January – June 2018)
..

Figure 5.3:
Daily Open Buy Back Rate (January-June 2018)
..

Figure 5.4:
Daily Naira/US Dollar Exchange Rate (January - June 2017) 47
Figure 5.5:
Nominal and Real Effective Exchange Rates Indices


(January 2017 – June 2018).. ..
..
..
..

Figure 5.6:
Monthly Foreign Exchange Flows through the CBN


(Jul 2016 – Jun 2018) ..


Figure 5.7
Monthly Foreign Exchange Flows through the Economy


(Jul 2016 – Jun 2018) (US$ Million)
..
..
..

Figure 5.8:
NSE ASI and MC (June 2017– June 2018)
..
..

Figure 5.9:
NSE ASI and MC (December 2017 – June 2018)
..

Figure 5.10:
Portfolio Inflows (May 2017 – May 2018)
..
..

Figure 5.11:
NSE Market Capitalisation by Sector as at End-December


Figure 5.12:
NSE Market Capitalisation by Sector as at End-June 2018

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

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


(June 30, 2017 – June 29, 2018)
..
..
..

Figure 5.15:
FGN Bonds Yield Curves: end-June. 2017 vs. end-Dec. 2017


vs. end-June. 2018


Figure 5.16:
Structure of the Nigerian Capital Market (June, 2018)..

List of Boxes
Box 2.1
Trade Tensions, Trade Wars and Implications for Monetary


Policy in Nigeria


Box 4.1
Electoral Cycles and Monetary Policy in Nigeria
..

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STATEMENT BY THE GOVERNOR
M
onetary policy in the first half of 2018 continued to be shaped by
developments in the global and domestic economic and financial
environment. At the global level, the key influences were: increased
monetary policy divergence among the advanced economies; continued
uncertainties surrounding the BREXIT negotiations and sustained monetary policy
normalization in the US as the Fed hiked interest rate and gave forward guidance of
more in the future. Others included the U.S withdrawal from the Iranian nuclear deal,
the emerging trade tensions between the US and other major world economies as
well as pockets of geo-political tensions. These, notwithstanding, the global
economy continued on the path to recovery, stemming from the strengthening of
domestic investment demand and relatively easier financing conditions in the
advanced economies, as well as sustained recovery in oil and other commodity
prices, amid limited spillovers of trade tensions to the financial markets. As a result,
global output growth was projected to rise to 3.9 per cent in 2018 from 3.7 per cent in
2017.
In the domestic economy, the promising developments during the period were:
improved fiscal receipts and accretion to external reserves as a result of sustained
recovery in oil and other commodity prices, improved oil production, improvements
in the 2017 capital budget implementation which was extended into the first half of
2018, sustained development finance interventions in the real sector by the Central
Bank of Nigeria, and continued implementation of Economic Recovery and Growth
Plan (ERGP). The outcome was reflected in improving but still fragile economic
recovery in the first half of the year. Consequently, Gross Domestic Product (GDP)
growth moderated to 1.95, and 1.50 per cent (year-on-year) in the first and second
quarters of 2018 from 2.11 per cent in the fourth quarter of 2017.
On price developments, the Bank could report that notwithstanding the continuing
liquidity surfeit in the banking system, inflationary pressure moderated in the review
period as headline inflation declined progressively from 15.13 per cent in January to
11.23 per cent in June 2018. The development largely reflected the relative stability
in the foreign exchange market, improvements in food supply, and stability in utility
prices.
Monetary policy in the review period, was informed by key considerations which
included; the slow output recovery; high but moderating inflation rate which
remained above the Bank's target range; continuing liquidity surfeit in the banking
system; weak macro-prudential indicators; growing sovereign debt and low fiscal
vii
buffers. These developments and the need to achieve the Bank's mandate of price
and exchange rate stability provided the basis for the sustenance of the tight
monetary policy stance in the first half of the year. Consequently, the Bank kept the
Monetary Policy Rate (MPR) at 14.0 per cent and retained its standing facility
corridor at +200/-500 basis points. The Cash Reserve Ratio (CRR) and Liquidity Ratio
(LR) were also held constant throughout the review period at 22.5 and 30 per cent,
respectively. The Bank also continued its reliance on Open Market Operations as
main tool for liquidity management, complemented with regular foreign exchange
interventions. Although the Nigerian capital market opened on a bullish note in the
review period, the market witnessed a lull towards the end of the period, on account
of a weak corporate environment and sustained capital reversals in response to ongoing monetary policy normalization in the US. Consequently, the All Share Index
(ASI) only recorded a marginal increase of 0.09 per cent from 38,243.19 at endDecember 2017 to 38,278.55 at end-June 2018.
The broad outlook for the domestic economy in 2018 is promising. The economy is
expected to continue on the path of recovery, anchored on higher oil prices and
production, and prospects for improved agricultural performance, electricity
supply and continuing reforms in the foreign exchange market. The price outlook
indicates continuing moderation in the second half of the year towards the Bank's
single digit inflation objective. The upside risks to inflation in the near-term would be
the implementation of the expansionary 2018 budget and spending towards the
2019 general elections. In view of the near-term outlook, the Bank would continue to
manage liquidity conditions in the domestic economy, to ensure that risks to inflation
and growth are minimized.
GODWIN I. EMEFIELE
Governor, Central Bank of Nigeria
August 2018
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CHAPTER ONE

1.0
OVERVIEW

he monetary policy environment in
the first half of 2018 was clouded
by developments in the global and
domestic economies. On the global
front, the key developments were:
increased monetary policy divergence
amongst the advanced economies;
continued
uncertainties
surrounding
the
BREXIT
negotiations;
emerging
trade war between the US and other
major
world
economies;
sustained
monetary policy normalization in the US
with implications for capital reversals
from
the
emerging
markets
and
developing economies; pull-out of the
US from the Iranian nuclear deal; as
well as pockets of geopolitical tensions.
The
moderating
developments
included the apparent return of peace
to the Korean peninsula, following the
meeting between the US and North
Korean
leaders,
and
the
commencement
of
trade
talks
between China and the US to avert the
looming trade war.

On the domestic scene, the major
challenges to monetary policy were:
the continuing liquidity surfeit in the
banking
system;
fragile
economic
recovery;
high
but
moderating
inflationary
pressure;
as
well
as
pressures in the foreign exchange
market. Nevertheless, headline inflation
declined progressively from 15.13 per
cent in January to 11.23 per cent in
June 2018. Food inflation was the major
driver
of
overall
moderation
in
consumer prices during the period,
although,
core
inflation
also
contributed.

The domestic economy continued on
the path of growth, which remained
fragile. The development was due
largely to increased fiscal receipts and
accretion to reserves as a result of
sustained recovery in oil and other
commodity
prices,
improved
oil
production
and
continued
implementation
of
the
Economic
Recovery and Growth Plan (ERGP).
Others included: improvements in 2017
capital budget implementation which
extended into the first half, continued
development finance interventions in
the real sector by the Central Bank of
Nigeria (CBN), and stability in the
foreign exchange market. As a result,
data from the National Bureau of
Statistics (NBS) showed that real GDP
growth moderated to 1.95 per cent
(year-on-year) in the first quarter of
2018, from 2.11 per cent in the
preceding quarter. This was in contrast
to the contraction of 0.91 per cent in
the corresponding quarter of 2017. The
oil sector remained the main driver of
growth as it grew by 14.77 per cent
compared with 11.20 per cent in the
preceding quarter and a contraction
of 15.60 per cent in the corresponding
period of 2017. The sustained growth of
the oil sector was traceable to the
continued peace in the Niger Delta
region, which had positive impact on
oil production. Similarly, the non-oil
sector grew by 0.76 per cent in the first
quarter of 2018 compared with the
growth of 0.45 and 0.72 per cent in the
T
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preceding and corresponding quarters
of 2017, respectively. The growth in the
non-oil
sector
reflected
the
performance
of
Industry
(3.52%),
Agriculture (3.0%) and Services (0.59%).
However, the Construction and Trade
sectors contracted by 1.54 and 2.57
per cent, respectively, in the first
quarter of 2018. In the second quarter,
real GDP growth further declined to
1.50 per cent (year-on-year) from 1.95
and 0.72 per cent in the preceding
quarter and the corresponding period
of 2017. The oil sector was the main
driver of the decline as it contracted by
3.96 per cent from a growth of 14.77
per cent in the preceding quarter and
3.53 per cent in the corresponding
period of 2017. The non-oil real GDP,
however, grew in the second quarter of
2018 by 2.05 per cent up from 0.76 and
0.45 per cent in the preceding quarter
and the corresponding period of 2017.
The growth in non-oil real GDP largely
reflected
the
performance
of
construction (7.66%), services (4.19%)
and agriculture (1.19%), although trade
contracted by 2.14 per cent in the
second quarter of 2018.

During the first half of 2018, activities in
the Investors and Exporters foreign
exchange
window
intensified
and
provided
stability
in
the
foreign
exchange
market.
However,
new
challenges
emerged
following
the
sustained normalization of monetary
policy
in
some
major
advanced
economies, thereby intensifying capital
reversals from the emerging market
economies,
including
Nigeria.
The
development led to renewed pressure
in
the
foreign
exchange
market.
Consequently, the Bank had to intensify
its heterodox approach to foreign
exchange policy, by implementing
additional measures to stem these new
sources of pressure in the market. These
measures included: increased foreign
exchange sales to BDCs from twice to
thrice weekly as well as the conclusion
and implementation of the bilateral
currency swap between the Central
Bank of Nigeria and the People’s Bank
of China. The currency swap was
intended to facilitate the settlement of
transactions
between
economic
agents
in
both
countries
without
recourse to a third currency (notably
the
US
dollar),
thereby
reducing
pressure on the exchange rate. The
Bank also sustained the implementation
of
existing
measures
including:
intensification
of
the
policy
on
repatriation of export proceeds as well
as return of unutilized foreign exchange
sourced
from
CBN
auctions;
the
restriction of access to 41 items; and
the use of Bank Verification Number
(BVN) in BDC transactions, to rein-in
speculative practices and arbitrage
opportunities in the market.

The Nigerian financial markets were
moderately
stable,
although
performance
continued
to
reflect
trends in the global and domestic
economic and financial environments.
In the pursuit of its price and monetary
stability mandate, the Bank continued
to deploy various monetary policy
instruments in the first half of 2018. The
following instruments were deployed:
the Monetary Policy Rate (MPR), the
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Cash Reserve Ratio (CRR), Liquidity
Ratio (LR), Open Market Operations
(OMO)
and
Discount
Window
Operations.
In
addition
to
these
instruments, the Bank maintained its
intervention in the foreign exchange
market.

The Bank sustained its reliance on open
market operations (OMO) as the main
tool
in
managing
banking system
liquidity in the first half of 2018.
Consequently, actual OMO sales in the
review period increased to N9,743.76
billion compared with N7,472.21 billion
and N3,874.27 billion recorded in the
preceding and corresponding periods
of 2017, respectively. This represented
an increase of 151.50 per cent and
30.40 per cent, above the levels in the
first
and
second
halves
of
2017,
respectively. The high level of OMO
sales was attributed to the incidence of
Deposit
Money
Banks
(DMBs)
discounting OMO bills before maturity
in
the
secondary
market,
thus
expanding the monetary base and
leading to a rise in the growth rate of
money supply.

The
monetary
aggregates,
largely,
performed
below
their
indicative
targets in the review period. The
development was as a result of the
contraction in Net Domestic Assets
(NDA) which was, however, unable to
surpass the substantial growth in Net
Foreign Assets (NFA) of the banking
system. The contraction of NDA was
traceable
to
the
substantial
contraction in credit to government,
due to increased government receipts
from crude oil sales, which reduced
recourse
to
borrowing
from
the
domestic financial markets. The huge
growth in NFA, however, was due to
the rise in global crude oil prices which
improved
accretion
to
external
reserves.

The money market remained active,
with market rates reflecting liquidity
conditions in the banking system. The
rates fluctuated widely outside the
Standing Facilities corridor with no clear
direction, indicating a high degree of
uncertainty
in
the
market.
The
uncertainties primarily were traceable
to low fiscal activities as reflected in the
delayed Federal Government budget
for
2018,
government’s
recent
preference for borrowing from the
international
market,
delays
in
Federation
Account
Allocation
Committee (FAAC) disbursements and
implementation of additional measures
to manage demand pressure in the
foreign exchange market. Rates at the
uncollateralized segment of the market
were
higher
compared
with
the
collateralized OBB rates reflecting the
heightened risks and uncertainties in
the market.

In the first half of 2018, the Nigerian
capital market opened on a bullish
note
reflecting
improved
growth
sentiments
as
the
economy
was
recovering from recession as well as
increased activities at the Investors and
Exporters window. However, towards
the end of the period, the market
witnessed
some
lull
in
activities,
following sustained spate of capital
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reversals arising from the continued
monetary policy normalization in some
advanced
economies,
low
fiscal
activities
following
the
delayed
passage of the 2018 FGN budget and
fragile
economic
recovery,
all
culminating
in
a
weak
corporate
environment. Consequently, the AllShare Index (ASI) increased by 0.09 per
cent to 38,278.55 as at end-June 2018
from 38,243.19 at end- December 2017.
Similarly it also increased by 15.58 per
cent compared with 33,117.48 at endJune 2017.

In the first half of 2018, activities in the
bonds market were dominated by
transactions in debt instruments of the
Federal Government of Nigeria (FGN).
There was also some activity in the Subnational government and corporate
bonds
segments,
with
the
latter
recording the least share by market
volume. At 5.90 per cent, the 10-year
dollar-denominated
bond
yield
for
Nigeria increased by 143 basis points at
end-June 2018, from 4.47 per cent at
end-December 2017. When compared
with end-June 2017 yield of 4.80 per
cent, it increased by 33 basis points
with, the developments traceable to
the perception of rising sovereign risk
by investors.

On the outlook for inflation available
estimates suggest that consumer prices
will continue their downward trajectory
in the near –to-medium term. Headline
inflation
rate
(year-on-year)
decelerated to 11.23 per cent in June
2018, compared with 15.13 per cent
recorded in January, 2018. Staff
projections show that the year-on-year
headline inflation would moderate to
10.94, 10.66, 10.41, 10.26 and 10.01 per
cent
in
July,
August,
September,
October
and
November
2018,
respectively. Inflation is, however,
forecast to inch up slightly to 10.36 per
cent in December 2018. The upside risks
to
inflation
would
include
the
implementation of the 2018 budget
and
spending
towards
the

general elections. Others are: poor
power
supply;
increased
cost
of
transportation; and persistent clashes
between
herdsmen
and
farmers;
leading to disruptions in the food supply
and distribution chain. As the Bank
continues
to
manage
liquidity
conditions in the domestic economy,
inflationary
developments
would
continue to be monitored to ensure
that the downside risks of inflation to
growth are minimized.

The domestic economy is expected to
continue on the path of recovery. Real
GDP grew at 1.95 per cent (year-onyear) in Q1 2018, representing a
stronger growth of 2.87 percentage
points compared with -0.91 per cent in
Q1 2017. However, the outcome
represented
a
decline
of
0.16
percentage point compared with 2.11
per cent recorded in Q4 2017. Similarly,
real GDP grew by 1.50 per cent in Q2
2018 representing an expansion of 0.78
percentage point when compared
with the growth of 0.72 per cent in the
corresponding period of 2017. The
outcome was, however, a decline
when compared with the growth of
1.95 per cent in Q1 2018. The outlook
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for 2018 and beyond is positive, as the
economy is projected to grow by 2.1
per cent in 2018 and 1.9 per cent in
2019 (IMF, 2018). Similarly, the World
Bank projects a growth of 2.5 per cent
in 2018 and 2.8 per cent in 2019. The
outlook is anchored on higher crude oil
prices
and
production,
improved
electricity
supply,
prospects
of
improved
agricultural
performance
and continuing reforms in the foreign
exchange
market,
among
others.
Nevertheless, the unemployment rate
remained high at 18.8 per cent,
requiring targeted fiscal spending to
further strengthen output and create
jobs. The downside risks to the outlook
are: ongoing security challenges; loss of
market share for Nigeria’s crude oil
export; increased political uncertainty
due to electioneering activities, which
may trigger capital outflows; and weak
private
sector
credit
growth.
The
conduct of monetary policy by the
Bank will, therefore, continue to be
anchored
on
the
Medium-Term
Framework,
with
the
objective
of
minimizing the upside risks to inflation
and downside risks to growth.


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CHAPTER TWO

2.0
OUTPUT
IN
THE
DOMESTIC
ECONOMY

n the first half of 2018, the domestic
economy continued on the path of
growth, which however, remained
fragile. The development was due
largely to increased fiscal receipts and
accretion to reserves as a result of
sustained recovery in oil and other
commodity
prices,
improved
oil
production
and
continued
implementation
of
the
Economic
Recovery and Growth Plan (ERGP).

Available
data
from
the
National
Bureau of Statistics (NBS) showed that
real Gross Domestic Product (GDP)
growth moderated to 1.95 per cent
(year-on-year) in the first quarter of
2018, from 2.11 per cent in the
preceding quarter. The growth was in
contrast to the contraction of 0.91 per
cent in the corresponding quarter of
2017. The oil sector remained the main
driver of growth as it grew by 14.77 per
cent, compared with 11.20 per cent in
the
preceding
quarter
and
a
contraction of 15.60 per cent in the
corresponding period of 2017. The
sustained growth of the oil sector was
traceable to the continued peace in
the Niger Delta region, which had
positive impact on oil production.
Similarly, the non-oil sector grew by 0.76
per cent in the first quarter of 2018
compared with the growth of 0.45 and
0.72 per cent in the preceding and
corresponding
quarters
of
2017,
respectively. The growth in the non-oil
sector reflected the performance of
Industry (3.52%), Agriculture (3.0%) and
Services (0.59%). The Construction and
Trade sectors, however, contracted by
1.54 and 2.57 per cent, respectively, in
the first quarter of 2018.

In the second quarter of 2018, real GDP
grew by 1.50 per cent (year-on-year)
which was lower by 0.45 percentage
point when compared with 1.95 per
cent in the preceding quarter. It was,
however,
an
increase
of
0.78
percentage point compared with the
growth
of
0.72
per
cent
in
the
corresponding period of 2017. The oil
sector was the main driver of the
decline as it contracted by 3.96 per
cent in Q2 2018 compared with the
growth of 14.11 and 3.53 per cent in
the
preceding
quarter
and
the
corresponding period of 2017. The nonoil sector, however, grew by 2.05 per
cent compared with the growth of 0.76
and 0.45 per cent in the preceding
quarter and the corresponding period
of 2017, respectively. Growth in the
non-oil
sector
reflected
the
performance of construction (7.66%),
services (4.19%) and agriculture (1.19%),
although the trade sector contracted
by 2.14 per cent in the second quarter
of 2018.


I
CBN Monetary Policy Review

Figure 2.1
Real GDP Growth (%) 2016 Q1 – 2018 Q2

Source: NBS

2.1 DOMESTIC ECONOMIC ACTIVITIES
During the first half of 2018, real GDP
growth was driven by activities in both
the oil and non-oil sectors. In the first
quarter of 2018, the oil sector was the
main driver of growth, as it grew by
14.77 per cent. This represents an
increase of 30.37 and 3.57 percentage
points relative to -15.60 and 11.20 per
cent
in
the
corresponding
and
preceding
quarters
of
2017,
respectively. Average daily crude oil
production rose to 2.0 million barrels per
day (mbpd) in the first quarter of 2018,
which was 0.05 and 0.25 mbpd higher
when compared with the average
daily production of 1.95 and 1.75 mbpd
in
the
preceding
and
the
corresponding
quarters
of
2017,
respectively.

Growth
of
the
non-oil
sector
moderated to 0.76 per cent in the first
quarter of 2018 from 1.45 per cent in
the
preceding
quarter
of
2017.
However, compared with 0.72 per cent
in
the
corresponding
period,
it
increased by 0.04 percentage point.
Activities in the non-oil sector were
driven
by
transportation
(14.45%),
financial
institutions
and
insurance
(13.30%), utilities (8.01%), fishing (4.25%),
crop
production
(3.45%),
manufacturing
(3.39%),
and
Information & Communication (1.58%).
These compare with the growth rates of
10.55, 0.67, 2.35, 5.49, 3.50, 1.36 and
2.73 per cent, respectively, in the
corresponding quarter of 2017.

In the second quarter of 2018, the nonoil sector was the major driver of
growth. It expanded by 2.05 per cent
up from 0.76 per cent in the preceding
quarter and 0.45 in the corresponding
period in 2017. Activities in the non-oil
sector were driven by transportation
(21.76%),
Information
&
Communication
(11.81%),
utilities
(8.91%),
forestry
(3.96%),
arts
&
entertainment (3.48%), solid minerals
(2.86%),
accommodation
&
food
services
(2.43%),
administrative
&
support services (2.07%), and crop
production (1.49%). This compares with
their respective growth rates of -6.11, -
1.15, 23.98, 3.89, -0.62, 2.28, -4.05, -1.72
and 3.21 per cent in the corresponding
quarter of 2017.
The decline in real GDP growth in Q2
2018 was largely due to the contraction
in the oil sector by 3.95 per cent
compared with the growth of 14.11
and 3.53 per cent in the preceding
quarter and the corresponding period
of 2017, respectively. Average daily
crude oil production declined to 1.84
million barrels per day (mbpd) in the
second quarter, which was 0.16 and
0.03 mbpd lower when compared with
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the daily average production of 2.0
and 1.87 mbpd in the preceding
quarter and corresponding period of
2017, respectively.

Figure 2.2:
Non-oil Sector Performance 2016Q1-2018Q1

Source: NBS

Figure 2.3
Performance of the Oil Sector 2016Q1-2018Q2

Source: NBS

2.2
Sectoral Analysis
This section reviews the economy’s
sectoral
performance,
taking
into
account key institutional factors that
contributed to output growth in the
review period.

2.2.1 Agriculture

Real GDP growth in the agricultural
sector in the first quarter of 2018 stood
at 3.00 per cent, representing a decline
of 1.23 and 0.39 percentage points
when compared with 4.23 and 3.39 per
cent
in
the
preceding
and
corresponding
quarters
of
2017,
respectively. The decline in the sector
was driven by crop production which
fell to 3.45 per cent from 4.58 and 3.50
per
cent
in
the
preceding
and
corresponding quarters, respectively. In
addition,
the
livestock
subsector
contracted by 1.85 per cent compared
with expansion of 0.19 and 1.72 per
cent
in
the
preceding
and
corresponding
quarters
of
2017,
respectively.
The
decline
in
the
agricultural
sector
was,
however,
moderated by the growth of 4.25 and
2.94 per cent in fishing and forestry,
compared with 4.05 and 2.83 per cent,
respectively, in the preceding quarter
of 2017. The overall contribution of the
sector to real GDP in the first quarter of
2018 stood at 21.65 per cent, which
was lower than 26.13 per cent in the
preceding quarter but slightly higher
than
21.43
per
cent
in
the
corresponding quarter of 2017.

In the second quarter, real GDP
agricultural output growth was 1.19 per
cent, a decline of 1.91 and 1.92
percentage points when compared
with 3.00 and 3.01 per cent in the
preceding
quarter
and
the
corresponding
period
of
2017,
respectively. The decline in the sector
was driven by crop production which
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significantly
fell
to
1.49
per
cent
compared with 3.45 in the preceding
quarter and 3.21 per cent in the
corresponding
period
of
2017.
In
addition,
livestock
and
fishing
contracted by 1.95 and 1.35 per cent,
respectively,
compared
with
the
contraction
of
1.85
per
cent
for
livestock and expansion of 4.25 per
cent for fishing in the preceding
quarter. The decline in the agricultural
sector was, however, moderated by
the growth of 3.96 per cent in forestry,
compared with 2.94 and .3.89 per cent
in the preceding quarter and the
corresponding
period
in
2017,
respectively. Overall, the contribution
of the sector to real GDP in the second
quarter of 2018 stood at 22.86 per cent
per cent, which was higher than 21.65
per cent in the preceding quarter but
slightly lower than 22.93 per cent in the
corresponding quarter of 2017.

Figure 2.4
Agricultural Sector Contribution by Activity,
2016Q1-2018Q2

Source: NBS


2.2.1.2 Agricultural
Policies
and
Institutional Support
The agricultural sector continued to
benefit from a number of policies,
reforms and institutional support in the
first half of 2018, which are highlighted
in this section.

The Agricultural Credit and Guarantee
Scheme (ACGS)
In the first half of 2018, a total of 10,420
loans valued at ₦1.75 billion were
guaranteed
under
the
scheme
compared with 20,268 loans valued at
₦2.82 billion in the second half of 2017,
indicating decreases of 48.6 and 37.9
per cent, respectively, in the number
and value of loans guaranteed. In the
review period, 17,977 loans valued at
₦3.05 billion were repaid, compared
with 22,475 loans valued at ₦3.01billion
repaid in the second half of 2017. The
performance reflected an increase of
1.33 per cent in the number but a
decrease of 20.01 per cent in the value
of loans repaid.

N200 Billion Commercial Agriculture
Credit Scheme (CACS)
Under the scheme, the sum of ₦39.34
billion was disbursed to 8 banks for 16
projects in the first half of 2018
compared with ₦50.59 billion disbursed
to 11 banks for 34 projects in the
second half 2017. A total of ₦17.01
billion from 14 banks for 51 projects was
repaid in the review period, compared
with ₦28.825 billion from 18 banks for
191 projects repaid in the second half
of 2017.
CBN Monetary Policy Review

N220 Billion Micro, Small and Medium
Enterprises
Development
Fund
(MSMEDF)
In the first half of 2018, the sum of ₦4.77
billion
was
disbursed
to
14,492
beneficiaries through the Participating
Financial Institutions (PFIs) and State
Governments compared with N1.59
billion disbursed in the corresponding
period in 2017. Repayments during the
period
amounted
to
₦3.48
billion
compared with N15.52 billion repaid in
the corresponding period of 2017.

Anchor Borrowers’ Programme (ABP)
In the first half of 2018, the sum of
₦36.37 billion was disbursed to 155,732
farmers in 34 States for the cultivation of
cassava, cotton, groundnut, maize,
rice, soya beans, wheat and the
production of fish and poultry. This
represented an increase of 189.34 per
cent when compared with N12.57
billion disbursed in the corresponding
period of 2017.

Paddy Aggregation Scheme (PAS)
The Paddy Aggregation Scheme is a
short term bridging facility introduced
in 2017 to enable rice millers mop up
paddy during the harvesting period.
The sum of ₦4.25 billion was released to
3 banks for 3 projects in the first half of
2018, compared with ₦30.37 billion
released to 4 banks for 8 projects in the
second half of 2017. This brings the total
disbursement under the scheme to
₦34.62 billion as at end-June, 2018. The
sum of ₦13.37 billion was repaid in the
first half of 2018.

National Food Security Programme
(NFSP)
The programme provides financing for
large-scale agricultural enterprises to
support government’s Strategic Grains
Reserves by mopping up excess grains
to promote investments in modern
agriculture. The sum of ₦4.04 billion was
disbursed to 2 banks for 3 projects in
the
first
half
of
2018,
bringing
cumulative
disbursements
since
inception in 2017 to ₦43.99 billion for 11
projects. In the review period, the sum
of ₦2.19 billion was repaid, raising the
cumulative
repayments
under
the
scheme to ₦2.38 billion since inception.
Non-oil
Export
Stimulation
Facility
(NESF)
The NESF is aimed at improving access
of exporters to finance for expansion
and diversification of non-oil exports.
The Facility commenced in 2018. In the
first half of 2018, six (6) projects were
financed with ₦19.04 billion, while
repayments amounted to ₦5.04 billion.

Federal Government of Nigeria (FGN)
Special Presidential Fertilizer Initiative
(PFI)
The FGN Special Presidential Fertilizer
Initiative was introduced to increase
the production of fertilizer by local
blending plants with a view to making
the commodity more affordable to
Nigerian farmers. In the review period,
the sum of N20.0 billion was released,
bringing
the
cumulative
amount
released since its inception in 2017, to
N25.0 billion.

CBN Monetary Policy Review

2.2.2 Industry


2.2.2.1 Industrial Production
In the first quarter of 2018, industrial
sector output grew by 8.75 per cent, up
from 4.72 and -7.24 per cent in the
preceding and corresponding quarters
of 2017. The main drivers of growth in
the sector were: Solid minerals (26.29%),
crude
petroleum
&
natural
gas
(14.77%), and manufacturing (3.39%).
These were higher than their respective
growth rates of -9.18, 11.20 and 0.14
per cent in the preceding quarter of
2017. Also, they compare favourably
with their respective rates of 31.47, -
15.60
and
1.36
per
cent
in
the
corresponding
quarter
of
2017.
Consequently, the share of Industry in
overall GDP improved to 19.58 per cent
in the first quarter of 2018 from 16.35 per
cent in the preceding quarter.

In the second quarter of 2018, output of
the industrial sector contracted by 1.56
per cent in contrast to the growth of
8.75 and 2.04 per cent in the preceding
quarter and the corresponding period
of 2017, respectively. The main driver of
the contraction was crude petroleum (-
3.95%), compared with growth of 14.77
and 3.53 per cent in the preceding
quarter and the corresponding period
of 2017, respectively. The contraction in
the industrial sector was, however,
moderated by respective growth of
2.86 and 0.68 per cent in the solid
minerals
and
manufacturing
subsectors, compared with 26.29 and 3.39
per cent in the preceding quarter of
2018 and 2.28 and 0.64 per cent in the
corresponding
period
in
2017.
Consequently,
the
share
of
the
industrial sector in overall GDP declined
to 17.99 per cent from 19.58 and 18.55
per cent in the preceding quarter and
the corresponding period of 2017,
respectively.

Figure 2.5
Industrial Sector’s Contribution by Activity,
2016Q1-2018Q2

Source: NBS

2.2.2.2 Industrial Policy and Institutional
Support
In the first half of 2018, a number of
new
and
existing
reforms
and
incentives were sustained to support
the performance of the sector. These
are highlighted in this section.
N300
Billion
Power
and
Airline
Intervention Fund (PAIF)
During the review period, ₦18.74 billion
was disbursed to the following projects:
Kano Power Project (₦3.01 billion),
Ashaka Cement Limited Power Plant
(₦6.75 billion), Azura Power Project
(₦4.94 billion) and Paras Energy and
Natural Resources Development Ltd.
(₦4.05 billion). The sum of ₦12.35 billion
was repaid in the first half of 2018,
CBN Monetary Policy Review

bringing the cumulative repayment
since inception to ₦132.18 billion.
Nigerian
Electricity
Market
Stabilization Facility (N213 billion)
In the first half of 2018, ₦38.53 billion
was disbursed to one (1) distribution
company
(DisCo),
seventeen
(17)
generating companies (GenCos), six
(6) gas companies (GasCos) and five
(5) service providers. Also, ₦4.99 billion
was repaid in the review period,
bringing the cumulative repayments to
₦20.56 billion.
Real Sector Support Facility (RSSF)
In the first half of 2018, ₦23.91 billion
was released to five (5) projects. Also,
₦960.16 million was repaid in the review
period,
bringing
cumulative
repayments to ₦1.76 billion.
Textile Sector Intervention Facility
During the review period, ₦19.1 billion
was disbursed to two (2) projects
under the scheme. There were no
repayments in the period, leaving the
cumulative
repayments
since
inception at ₦1.01 billion.

Nigeria Bulk Electricity Trading Payment
Assurance Facility (NBET-PAF)
During the review period, ₦248.40
billion was disbursed to NBET Plc.
Cumulatively, the amount disbursed
under the programme stood at ₦358.09
at end-June, 2018.

Small
and
Medium
Enterprises
Restructuring and Refinancing Facility
(SMERRF)
Disbursement under the scheme was
discontinued
following
its
replacement with the Real Sector
Support Facility in December 2014.
However,
repayments
during
the
review period amounted to ₦12.60
billion,
bringing
the
cumulative
repayments to ₦113.261 billion.

2.2.3 Construction and Trade

2.2.3 1 Construction
In the first quarter of 2018, the
construction sector contracted by 1.54
per cent in contrast to the growth of
4.14 and 0.15 per cent in the preceding
and corresponding quarters of 2017,
respectively. The share of Construction
in total GDP, however, improved to
4.04 per cent from 3.49 per cent in the
fourth quarter of 2017.
In the second quarter of 2018, the
construction sector grew significantly
by 7.66 per cent up from -1.54 and 0.13
per cent in the preceding quarter and
the corresponding period of 2017,
respectively. Consequently, the share
of construction in overall GDP in the
second quarter of 2018 improved to
4.51 per cent from 4.04 in the first
quarter.

2.2.3.2 Trade
Trade sector real GDP contracted by
2.57 per cent in the first quarter of 2018
compared with the growth of 2.07 per
cent in the preceding quarter and a
contraction of 3.08 per cent in the
corresponding period of 2017. The
share of Trade in total GDP, however,
rose from 16.72 per cent in the fourth
quarter of 2017 to 17.06 per cent in the
CBN Monetary Policy Review

first quarter of 2018. In the second
quarter, the trade sector contracted by
2.14 per cent, thus continuing the
contractions of 2.57 and 1.62 per cent
witnessed in the preceding quarter and
the corresponding period of 2017,
respectively. Consequently, the share
of trade in total GDP declined from
17.06 in the first quarter to 16.45 per
cent in the second of 2018.

2.2.4 Services Sector
The Service sector returned to growth
following three successive quarters of
contraction. The sector grew by 0.59
per cent in the first quarter of 2018,
compared with a contraction of 0.44
per cent in the preceding quarter. The
sector grew by 0.98 per cent in the
corresponding quarter of 2017. Growth
in the sector was driven by transport
(14.45%), Finance & Insurance (13.30%),
utilities (8.01%), other services (2.24%),
Information & Communication (1.58%),
Education
(0.45%),
and
Arts,
Entertainment & Recreation (0.30%).
However,
the
sub-sectors
that
contracted during the period were:
Real
Estate
(9.40%),
Professional,
Scientific & Technical Services (2.35%),
Administrative
&
Support
Services
(0.52%), Public Admin (1.72%) and
Health & Social Services (0.37%).
In the second quarter of 2018, growth in
the services sector improved further to
4.19 per cent, compared with 0.59 and
-0.15 per cent in the preceding quarter
and the corresponding period of 2017,
respectively. Growth in the sector was
driven
by
Transport
(21.76%),
Information
&
Communication
(11.81%),
Utilities
(8.91%),
Arts,
Entertainment & Recreation (3.48%),
Accommodation and Food Services
(2.43%),
Professional,
Scientific
&
Technical
Services
(2.07%),
and
Finance & Insurance (1.28%). Some subsectors,
however,
contracted
including; Public Administration (5.21%),
Real Estate (3.88%), Administrative &
Support
Services
(3.41%),
and
Education (0.67). The share of the
services sector in overall GDP increased
from 37.67 per cent in the first quarter
to 38.19 per cent in the second quarter
of 2018.

Figure 2.6
Services Sub-Sector Contribution, 2016Q1-2018Q2

Source: NBS


2.2.5 Oil Sector

During the review period, the oil sector
sustained
its
improvement
which
began in mid-2017. This was driven by
continued
price
recovery
in
the
international crude oil market as well as
increased
production
largely
attributable to sustained peace in the
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Niger
Delta
region.
Consequently,
average daily crude oil production rose
to 2.0 million barrels per day (mbpd) in
the first quarter of 2018, which was 0.05
mbpd and 0.25mbpd higher than the
daily average production recorded in
the
preceding
and
corresponding
quarters of 2017, respectively. In the
second quarter of 2018, however,
average daily crude oil production
declined to 1.84 million barrels per day
(mbpd), which was 0.16 and 0.03
mbpd lower when compared with the
daily average production of 2.0 and
1.87 mbpd in the preceding quarter
and the corresponding period of 2017,
respectively.

In the review period, crude oil price
fluctuated upwards mainly due to the
pulling out of the US from the Iranian
nuclear
deal
and
the
continued
implementation of the agreement by
the Organization of the Petroleum
Exporting Countries (OPEC) and NonOPEC producers to freeze oil output. As
a result, the price of Nigeria’s reference
crude, the Bonny Light 370API which
was at US$69.68 per barrel (PB) in
January 2018, fell to US$66.94pb in
March and peaked at US77.64pb in
May. It, however, fell to US$75.38pb in
June, 2018. Overall, the average price
of Bonny Light of US$71.45pb in the first
half of 2018 was US$20.45pb above the
Federal Government of Nigeria’s 2018
budget benchmark of US$51.0pb.


Figure 2.7
Quarter Oil Production (2016Q1-2018Q2)

Source: Bloomberg

Figure 2.8
Monthly Bonny Light Price, January – June 2018

Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
US$
Source: Bloomberg


CBN Monetary Policy Review

Trade Tensions and Trade Wars
International trade refers the exchange of goods and services across national
boundaries. It is the most traditional form of business activity across national borders
and has played a major role in shaping world history and development.
International trade allows producers and distributors to seek out markets, products
and services available or produce in foreign countries. Be it products, services or
components, industries and households acquire them because of cost advantage
or in order to learn, in the case of firms, about advanced technical methods used
in other production climes. The advantage lies in the transfer of technology to help
reduce production cost, lower prices and in turn, induce more consumption, thus
increasing income, profitability and employment. Trade also enables the
acquisition of resources that are not available in the home country.

Growth and external trade are associated with increase in jobs as external markets
enable firms to invest in plant capacity that is beyond the domestic demand.
Several studies find strong positive correlations between export intensity and wages
as well as imports and improved consumption and standard of living. Thus, trade as
the traditional theory posits, generates mutual benefits of providing to consumers a
variety of goods and services, advanced technical methods of production for
firms, reduces cost of production and lower prices, increases profits and higher
employment. Given all these benefits, why then do countries sometimes resort to
imposing restrictions on trade, thus generating trade tensions which sometimes
degenerate into trade wars?. Trade between and among nations is shaped by a
number of factors which according to Seyoun (2009) include: the trade regime
(import tariffs and quotas), exchange rate regime, efficiency enhancing
government policy, presence of entrepreneurial class and secured access to
transport and marketing services, among others. Principal among these factors is
the trade regime, which when changed has the likelihood of eliciting retaliatory
response from trading partners because of its instant and disruptive effects.

Country participation in international trade is guided by its respective trade policy.
Trade policies exist to protect national or group interest in international trade. A
nation’s trade policy is often viewed as a component of its fiscal policy. In
designing trade policy, account is taken of the bilateral and multilateral trade
agreements that the country has entered into, and the policy is subject to revisions
to accommodate developments in the domestic and international economy.
Where a party assesses its position as disadvantageous in the trade relationship
because current outcomes are not mutually or fairly beneficial to the parties,
changes are bound to be introduced and most often in the trade regime.
Politicians often rationalize tariffs and other trade interventions by claiming that
they will help boost exports and reduce trade deficit. Their argument is that since
net exports are a core component of GDP, any policy that reduces the trade
CBN Monetary Policy Review

deficit should, other things equal, serve to boost economic growth. This is, however,
not always the case with an increase in tariffs. For a central bank that targets or
have an eye on inflation, the inevitable rise in domestic prices sparked off by tariff
increase would trigger the Bank to raise interest rates in order to contract money
supply, sending aggregate demand downward. Thus, a key challenge is in how
changes in the trade regime are introduced: would it be arbitrary, negotiated,
gradual or instant? Where the actions are taken arbitrarily or non-negotiated, they
are bound to generate tension and counter responses and, when not properly
handled, could result in a trade war.

Trade Tensions and Wars
A trade war is usually an outcome of protectionism which occurs when one
country raises tariffs on another country’s imports thus prompting a retaliation from
the second country by way of raising tariffs on the imports of the first country. It
usually starts when country 1 adjudges the trade practices of country 2 as unfair
and in order to correct the anomaly raise tariffs or introduce quotas. The counter
response and the continuing tit-for-tat degenerates into a trade war. A trade war
that begins in one sector can spread to other sector because countries produce
and trade goods and services they have comparative advantage. Similarly in a
globalized world, a trade war that begins between two countries can affect other
countries that were not initially involved in the dispute.

A more connected world implies a higher incidence of trade disputes and a
broadening of international economic tensions to include matters of national
security and intellectual property (IP). Until recently, incidences of high tariffs were
rare and transient following the framework of negotiation provided under the GATT
and later WTO. This was because of numerous forces that push against substantial
increase in tariff. These forces included: the welfare costs of protectionism, vertical
integration of global supply-chain, threat of reciprocity and development of
international trade institutions as umpires and custodians of commitments to trade
agreements. Following the global financial crisis of 2008/2009, there have, been
growing anti-globalization sentiments. Recent developments indicate that trade
issues will continue to generate attention given trade’s economic importance and
the increasing concerns expressed against the unevenness of the benefits of
globalization as well as the resultant shift in voter attitudes towards a more
nationalistic or protectionist agenda., especially in the advanced economies.

The Recent US-China Trade Tension
Tensions between the United States and China regarding bilateral trade intensified
in recent times. The United States announced in early March 2018 that it would
impose tariffs on import of steel and aluminum products. The tariffs were not
targeted exclusively at any particular country, but given China’s volume of exports
CBN Monetary Policy Review

of steel and aluminum to the United States, it was obvious that the country will
significantly be affected by the measures. In response, China announced its own
tariffs on about $3 billion worth of American goods. On April 3, the United States
announced that it would impose tariffs on the exports of about 1,300 Chinese
goods, worth about $50 billion, in “response to China’s unfair trade practices
related to the forced transfer of U.S. technology and intellectual property.”
Following this, China again promptly responded with tariffs on 106 American
products—mostly agricultural products, automobiles, aircraft and chemicals—
whose export value to China total about $50 billion.

All these developments remain at the level of trade tension because the proposed
tariffs from both sides have not yet gone into effect. The tariffs could completely be
rescinded if negotiations by both sides reach agreement on ways to settle the
trade tensions between them.

Economic consequences and Implications for Monetary policy
Higher tariffs hurt the economy most directly and quickly through higher prices of
imported goods. Tariffs act much like a tax increase, weakening the purchasing
power of consumers; if households need to spend more on imported goods, then
they have less income to spend on other things. Exports also suffer as the tit-for-tat
tariffs imposed by trading partners cause consumers and businesses to purchase
what they need domestically or from competing nations that can now provide the
goods more cheaply. Where the political authority has strong control over the
economy, they can recommend to the citizens not to buy goods from the
competing country. Higher tariffs always weigh on the profitability of multinationals
and their stock prices. These occurs via weaker overseas sales. It also creates a riskoff environment in global financial markets. In the longer run, the reduction in trade
affects productivity growth, as the benefits of comparative advantage are
diminished.

The tit-for-tat in tariffs between or among countries breeds uncertainty, with fallout
on business and investor confidence, which would surely be substantial as they
contemplate the broader geo-political implications of the trade war. Businesses are
less likely to make significant investment decisions. In other words, such situations
hold down investment growth with deleterious effect on output growth,
employment and citizens’ welfare.

In today’s world where the manufacture of many goods involves multiple crossborder movements of components from different economic climes with the final
good only a product of assembly of these components, higher tariffs on final
products may only lead to a shift in the global supply chain. This is because since
the multinational companies have no idea on how long the tariffs will remain in
CBN Monetary Policy Review

place, and since there are many other places in the world not subject to higher
tariffs, production may shift to where it is cheaper to make most of these goods.
This, however, depends on how conducive is the business environment. Sentiment is
very fickle; it is fine, until it is not. There is no telling when sentiment will swing
significantly, but when it does, the economic pains intensify quickly.

Although Nigeria may not be directly involved in the trade dispute/war between
the U.S. and the E.U, China and member countries of NAFTA, the enforcement of
tariffs and counter tariffs by the parties may have spillover effects on other
economies, especially those with strong trading ties with these countries. In
addition, the U.S. being the leading economy in the world and the US dollar as the
world’s dominant trading currency, increase in tariff by the US would certainly lead
to higher US domestic prices. For this reason, the Fed would raise rates sharply to
head off inflationary pressures. The rise in interest rates would have two major
effects. First is the reversal of capital flow as returns to capital will now be higher in
the U.S, which is also considered a safer haven relative to the emerging markets
and developing economies. Second is the increase in foreign currency liabilities
arising from the re-pricing of foreign loans as interest rates rise.

In addition, while the effects of any tariffs on output and inflation may take time to
materialize, the falls in equity prices in response to the US announcement to impose
a tariff on steel and aluminum, and prevailing uncertainty on the scope of
retaliatory measures, have already contributed to tighter financial conditions. And
by fuelling uncertainty among market participants, fears of a “trade war” have
added to the volatility already witnessed earlier this year in equity markets. None of
this supports growth and employment. Therefore, given the dependence of
commodity exporting economies on improvements in commodity prices which is
directly related to global growth, any negative growth and employment effects of
higher tariffs would mean lower demand for commodities, lower prices and
resultant decline in foreign exchange earnings for such economies, increase in
exchange rate pressure, currency depreciation and the pass-through to domestic
inflation.

In conclusion, high tariffs may look politically expedient, especially when a country
is confronted with a high fiscal or trade deficits. However, the tendency of such
actions eliciting retaliatory measures from trading partners makes the policy of
unilateral increase in tariffs no-win game in the long-run. Moderate and negotiated
solutions remain the way out given the political economy of trade’s distributional
effects, supply-chain issues and the unanticipated spillover of retaliatory measures.


CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER THREE

3.0
PRICE DEVELOPMENTS
uring
the
review
period,
inflationary pressure receded,
largely on account of the
Bank’s sustained tight monetary policy
stance.
All
measures
of
inflation
namely, headline, core and food,
maintained a downward trajectory,
although, headline inflation continued
to trend above the upper limit of the
Bank’s target range of 6 - 9 per cent.
Domestic
price
developments
generally reflected the interplay of
both supply and demand-side forces.
On the supply side, the pressure in the
foreign exchange market abated, with
favourable impact on the domestic
price level in the review period. The
naira strengthened in all segments of
the market, reflecting the impact of
recent reforms and interventions by the
Bank, including the intensification of
measures to encourage capital inflow
and improve liquidity in the foreign
exchange market.

Primarily, the significant improvement in
accretion to external reserves on the
back of the price recovery in the
global crude oil market, helped to
support the appreciation of the naira.
In addition, the Bank sustained the
implementation of existing measures,
including the Investors’ & Exporters’
window, restriction of access to foreign
exchange for some 41 items, the use of
Bank Verification Number (BVN) in BDC
transactions, and the sale of foreign
exchange to BDCs by the Bank and
International Money Transfer Operators
(IMTOs). The Bank also intensified its
existing policy on repatriation of export
proceeds as well as the return to the
Bank of unutilized foreign exchange
sourced from CBN auctions.

On
the
demand-side,
price
developments were also influenced by
activities in the money market, where
rates fluctuated widely outside the
Standing Facilities corridor with no clear
direction, indicating a high degree of
uncertainty
in
the
market.
The
uncertainties primarily were as a result
of low fiscal activities as reflected in the
delayed Federal Government budget
for
2018,
government’s
recent
preference for borrowing from the
international
market,
delays
in
Federation
Account
Allocation
Committee (FAAC) disbursements and
implementation of additional measures
to manage demand pressure in the
foreign exchange market. The major
sources of liquidity during the period
included: continued implementation of
the 2017 capital budget, Joint Venture
Cash (JVC) call payments, CBN real
sector interventions and maturing CBN
bills and government securities. These
developments made the Monetary
Policy Committee (MPC) to sustain its
monetary
policy
tightening
stance
during the period, in order to moderate
inflationary pressures.

3.1
Trends in Inflation
Headline, core and food inflation
trended downwards in the period
D
CBN Monetary Policy Review

under review. These three measures of
the consumer price index (CPI) stood
at 248.4, 235.4 and 263.3 in January
2018 compared with 260.5, 246.1 and
278.3,
respectively,
in
June
2018.
Accordingly, food inflation (year-onyear) decreased by 5.94 percentage
points from 18.92 per cent in January to
12.98 per cent in June 2018. Also, core
inflation fell by 1.70 percentage points
from 12.09 per cent in January to 10.39
per cent in June 2018. Consequently,
headline inflation declined by 3.90
percentage points from 15.13 per cent
in January to 11.23 per cent in June
2018 (Figure 3.1 and Table 3.1). The
major driver of the overall moderation
in consumer prices during the period
was food inflation, even though the
core measure also moderated (Table
3.4).

Table 3.1:
Inflation Rates, January – June 2018
CPI
Y-on-Y 12MMA
CPI
Y-on-Y
12MMA
CPI
Y-on-Y
12MMA
Jan 2108 248.35 15.13 16.22 235.42 12.09
13.01 263.29 18.92
19.62
Feb 2108 250.32 14.33 15.93 237.20 11.71
12.67 265.52 17.59
19.52
Mar 2108 252.41 13.34 15.60 239.19 11.18
12.33 267.91 16.08
19.29
Apr 2108 254.52 12.48 15.20 241.26 10.92
12.02 270.35 14.80
18.89
May 2108 257.29 11.61 14.79 243.61 10.71
11.83 273.94 13.45
18.36
Jun 2108 260.47 11.23 14.37 246.12 10.39
11.65 278.25 12.98
17.75
Headline Inflation
Core Inflation
Food Inflation

Source: NBS


Figure 3.1:
Headline, Core and Food Inflation Rates (January
– June 2018)

Source: NBS

3.1.1 Headline Inflation
The major components of headline
inflation continued to decrease during
the first half of the year, as a result of
the
downward
trend
in
domestic
prices. The key components that drove
the decline were Food and NonAlcoholic Beverages, which decreased
from 9.99 per cent in January to 7.02
per cent in June, 2018. This was
followed by housing, water, electricity,
gas and other fuels, decreasing from
1.52 to 1.25 per cent during the period
(Table 3.2 and Figure 3.4).

The moderation in inflation was still
driven by the base effect which was
gradually wearing-off, coupled with
sustained
stability
in
the
foreign
exchange market following intensified
implementation
of
measures
to
manage the foreign exchange market
including the Investors’ and Exporters’
window. Other contributory factors
were the sustained tight monetary
policy stance of the Bank and weak
CBN Monetary Policy Review

aggregate demand as reflected in low
fiscal activity during the period.

Table 3.2
Major Components of Headline Inflation ((Y-onY), January - June 2018
Headline
Food &
NonAlcoholic
Bev.
Alcoholi
c Bev.
Tobacco
& Kola
Clothing
&
footwear
Housing,
Water,
Elect.Gas &
Other Fuel
Furnishing
s,
Household
Equip &HH
Maint.
Health Transport Education
Jan 2018

Feb 2018

Mar 2018

Apr 2018

May 2018

Jun 2018

Change btw
Jan & Jun.


Source: NBS

Figure 3.2
Major Components of Headline Inflation (Y-on-Y),
January – June 2018

Source: NBS

On a month-on-month basis, headline
inflation increased from 0.80 per cent in
January to 1.24 per cent in June, 2018.
The major components that drove the
month-on-month
headline
inflation
were the prices of food and nonalcoholic beverages, which rose from
0.48 per cent in January to 0.86 per
cent in June; and Housing, Water,
Elect. Gas & Other Fuel, from 0.10 per
cent in January to 0.13 per cent in
June, 2018 (Table 3.3 and Figure 3.5).
The phenomenon of moderating yearon-year
headline
inflation
being
experienced alongside rising month-onmonth inflation rate suggests that the
base effect driving the moderation was
gradually wearing-off. Consequently,
policies to address the likely threat of
inflation
resurgence
need to start
kicking in.

Table 3.3
Major Components of Headline Inflation (M-onM), January - June 2018
Headline
Food &
NonAlcoholic
Bev.
Alcoholi
c Bev.
Tobacco
& Kola
Clothing
&
footwear
Housing,
Water,
Elect.Gas &
Other Fuel
Furnishing
s,
Household
Equip &HH
Maint.
Health Transport Education
Jan 2018

Feb 2018

Mar 2018

Apr 2018

May 2018

Jun 2018

Change btw
Jan & Jun.


Source: NBS

Figure 3.3
Major Components of Headline Inflation (M-onM), January – June 2018

Source: NBS

3.1.2 Food Inflation
Food inflation (year-on-year) fell from
18.92 per cent in January to 12.98 per
cent in June 2018, a decrease of 5.94
percentage
points.
The
key
components that drove the decrease
were
processed
food
and
farm
produce. The price of processed food
CBN Monetary Policy Review

fell by 3.06 percentage points from 9.46
to 6.40 per cent and that of farm
produce by 2.89 percentage points
from 9.46 per cent in January to 6.57
per cent in June 2018. The decrease in
the price of processed food was
accounted for by the fall in the prices
of meat, fish & sea food, and oil & fat
by 0.62, 0.56 and 0.38 percentage
point, respectively. Also, the decrease
in the price of farm produce was
traceable to the fall in the prices of
yam,
potatoes
&
other
tubers,
vegetables and fruits by 0.76, 0.38 and
0.11 percentage point, respectively.
The policy drivers of this moderation are
traceable to the base effect, the
favourable
impact
of
CBN’s
interventions on food production and
improved access to foreign exchange
which help counteract the effect of
farmer-herdsmen
conflicts.
Other
complimentary
factors
were
the
improved accretion to foreign reserves,
and sustained tight monetary policy
stance of the Bank.

Table 3.4
Major Components of Food Inflation (Y-on-Y),
January - June 2018
FOOD Processed
Food
Meat
Fish
&
Sea
Food
Milk,
Cheese
& Eggs
Oil &
Fats
Sugar,
Jam,
Honey,
etc.
Farm
Produce Fruits Vegatables
Yam,
Potatoes
& other
tubers
Jan 2018

Feb 2018

Mar 2018

Apr 2018

May 2018 13.45

Jun 2018

Change
btw Jan &
Jun. 2018


Source: NBS


Figure 3.4
Major Components of Food Inflation
(Y-on-Y), January – June 2018


Contrary to the decreasing year-onyear trend, food inflation on a monthon-month
basis
rose
by
0.74
percentage point from 0.83 per cent in
January to 1.57 per cent in June 2018.
The price of processed food rose by
0.61 percentage point from 0.32 per
cent in January 2018 to 0.93 per cent in
June 2018. Similarly, the price of farm
produce rose by 0.13 percentage point
from 0.51 to 0.64 per cent in the same
period. Thus, the 0.74 percentage point
increase in food inflation was largely
due to the increase in the price of
processed food. The key driver of the
increase
in
the
processed
food
category was fish and sea food which
rose by 0.06 percentage point.


CBN Monetary Policy Review

Table 3.5
Major Components of Food Inflation (M-on-M),
January – June 2018
FOOD Processed
Food
Meat
Fish
&
Sea
Food
Milk,
Cheese
& Eggs
Oil &
Fats
Sugar,
Jam,
Honey,
etc.
Farm
Produce Fruits Vegatables
Yam,
Potatoes
& other
tubers
Jan 2018

Feb 2018

Mar 2018

Apr 2018

May 2018

Jun 2018

Change
btw Jan &
Jun. 2018


Source: NBS

Figure 3.5
Major Components of Food Inflation (M-on-M),
January – June 2018

Source: NBS

3.1.3 Core Inflation
Core inflation (year-on-year) fell from
12.09 per cent in January 2018 to 10.39
per cent in June 2018, a decrease of
1.70
percentage
points.
The
performance was driven by processed
food (1.67 percentage points), Clothing
& Footwear (0.42 percentage point),
Transportation (0.18 percentage point),
and
Education
(0.11
percentage
point). All other components of core
inflation increased in the reviewed
period (Table 3.6 and Figure 3.8). The
decline
in
Processed
Food
and
Clothing & Footwear prices was due to
the sustained stability in utility prices,
the base effect as well as the impact of
stability of the exchange rate on
account
of
the
Bank’s
foreign
exchange
management
measures,
particularly the establishment of the I&E
window and improved funding of
BDCs. In addition, the weakening of
aggregate demand reflected in the
accumulation of salary arrears and
contractor debts in some states also
contributed to lower prices.

Table 3.6
Major Components of Core Inflation
(Y-on-Y) January – June. 2018
Core
Process
ed Food
NonAlcoholic
Beverages
Alcoholic
Bev.
Tobacco &
Kola
Clothing
&
footwear
Housing,Wate
r, Elect.Gas &
Other Fuel
Furnishings,
Household
Equip &HH
Maint.
Health
Transport
Communication Recreation
& culture Education
Restaur
ant &
Hotels
Misc
Goods &
Services
Jan 2018 12.09 5.59

Feb 2018 11.71 5.34

Mar 2018 11.18 5.04

Apr 2018 10.92 4.85

May 2018 10.71 4.67

Jun 2018 10.39 3.92

Change
btw Jan &
Jun. 2018


Source: NBS

Figure 3.6
Major Components of Core Inflation
(Y-on-Y) January – June 2018

Jan

Feb

Mar

Apr

May

Jun

Core
Processed Food
Non-Alcoholic Beverages
Alcoholic Bev. Tobacco &
Kola
Clothing & footwear
Housing,Water, Elect.Gas
& Other Fuel
Furnishings, Household
Equip &HH Maint.
Health
Transport
Communication
Recreation & culture
Education
Restaurant & Hotels
Misc Goods & Services

On a month-on-month basis, core
inflation, however, increased by 0.35
percentage point from 0.68 per cent in
January to 1.03 per cent in June 2018.
Housing, Water, Elect. Gas & Other Fuel
component remained the major driver
of the rise in core inflation, increasing
from -1.17 per cent in January to 0.17
CBN Monetary Policy Review

per cent in June 2018. This was followed
by
Furnishing
and
Household
Equipment
&
maintenance
(0.14
percentage point) (Table 3.7 and
Figure 3.9).

Table 3.7
Major Components of Core Inflation
(M-on-M) January – June. 2018
Core
Processed
Food
NonAlcoholic
Beverages
Alcoholic
Bev.
Tobacco
& Kola
Clothing
&
footwear
Housing,
Water,
Elect.Gas
& Other
Fuel
Furnishings,
Household
Equip &HH
Maint.
Health Transport Communic
ation
Recreation
& culture
Education Restaurant
& Hotels
Misc
Goods &
Services
Jan 2018 0.68

Feb 2018 0.75

Mar 2018 0.84

Apr 2018 0.87

May 2018 0.98

Jun 2018 1.03

Change
btw Jan &
Jun. 2018


Source: NBS

Figure 3.7
Major Components of Core Inflation (M-on-M)
January – June 2018

Jan

Feb

Mar

Apr

May

Jun

Core
Processed Food
Non-Alcoholic Beverages
Alcoholic Bev. Tobacco &
Kola
Clothing & footwear
Housing,Water, Elect.Gas
& Other Fuel
Furnishings, Household
Equip &HH Maint.
Health
Transport
Communication
Recreation & culture
Education
Restaurant & Hotels

3.1.4 Seasonally-Adjusted Inflation
The actual and seasonally-adjusted
measures of headline inflation both
trended downwards in the review
period, continuing the trend of decline
witnessed towards the end of the
second half of 2017 (Table 3.8 and
Figure 3.10). Actual headline inflation
continued to reflect the declining
general price level in the economy,
trending below the seasonally-adjusted
measure throughout the first half of
2018. The overall downward trend in
both measures could be attributed to
the weakening of aggregate demand
reflected in the accumulation of salary
arrears and non-payment of contractor
debt in some states. The incidence of
weakening
aggregate
demand
engendered
a
weak
elasticity
of
inflation to seasonal factors such as the
usual
increase
in
expenditure
associated with festive periods.

Table 3.8
Actual and Seasonally Adjusted Headline
Inflation January – June 2018
Date
Inflation
SA Inflation
Jan-18
15.13
16.22
Feb-18
14.33
15.93
Mar-18
13.34
15.60
Apr-18
12.48
15.20
May-18
11.61
14.79
Jun-18
11.23
14.37

Source: NBS

Figure 3.8
Actual and Seasonally Adjusted Headline
Inflation January – June 2018

Inflation
SA Inflation

Source: NBS

3.2
Key
Factors
that
Influenced
Domestic Prices
Inflation
developments
during
the
review period were primarily influenced
CBN Monetary Policy Review

by
cost-push,
demand-pull
and
moderating factors. The key highlights
of these factors include: exchange rate
stability, the sustained tight monetary
policy stance of the Bank, continued
intervention
by
the
Bank
in
the
agricultural sector, and relative stability
in energy prices. Others included: the
liquidity effects of the monetisation of
improved
export
earnings,
the
payment
of
some
outstanding
obiligations by the Government; and
herdsmen-farmer crisis in some parts of
the country as well as production and
distribution challenges associated with
insurgency in the north east region of
the country.

3.2.1 Demand-side Factors
The downward trajectory in headline
inflation was driven amongst others by
the tight monetary policy stance of the
Bank, coupled with a number of
reforms adopted in managing the
foreign exchange market. These factors
helped
curb
exchange
rate
depreciation and rein-in inflationary
pressures. Also, stable energy prices
contributed to reducing inflationary
pressures. During the review period,
agregate demand remained weak
owing to oustanding contractor debt,
workers’
salaries
and
pension
abligations, particularly at the subnational levels of government. Overall,
the net effect of these factors was the
significant and steady reduction in
inflationary pressures.


3.2.2. Supply-Side Factors
There were basically three groups of
factors that led to the observed
moderation in inflation during the
period. These were factors related to:
(i)
improved
supply
of
foreign
exchange; (ii) improved productivity in
the economy; and (iii) stability in
administered or utilities prices. The
factors related to the improved supply
of foreign exchange included: the
significant improvement in accretion to
external reserves due to the recovery in
crude oil prices; activities at the
Investors’ & Exporters’ window; and
sustained
restriction
of
access
to
foreign exchange for 41 items, amongst
others. The production related factors
included: the continued intervention by
the CBN in the real sector; the Federal
Government of Nigeria (FGN) Special
Presidential
Fertilizer
Initiative;
and
activities of the National Food Security
Council. On administered prices, the
factors included: improved availability
of petroleum products and stable
energy prices. All these supply side
forces helped to moderate inflationary
pressure during the first half of 2018.

3.2.3 Moderating Factors
The moderating factors were those
that
stoked
inflationary
pressures,
thereby slowing the downward trend
experienced during the review period.
These included: continued herdsmenfarmer crisis, the waning base effect,
and
increased
FAAC
distribution
following improvements in oil receipts.

CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER FOUR

4.0
MONETARY
POLICY
AND
LIQUIDITY MANAGEMENT

he monetary policy environment in
the first half of 2018 was clouded
by developments in the global and
domestic economies. On the global
front, the key developments were:
increased monetary policy divergence
amongst the advanced economies;
continued
uncertainties
surrounding
the
BREXIT
negotiations;
emerging
trade war between the US and other
major
world
economies;
sustained
monetary policy normalization in the US
with implications for capital reversals
from
the
emerging
markets
and
developing economies; pull-out of the
US from the Iranian nuclear deal; as
well as pockets of geopolitical tensions.
The moderating developments include
the apparent return of peace on the
Korean peninsula following the meeting
between the US and North Korean
leaders, and the commencement of
trade talks between China and the US
to avert the looming trade war. On the
domestic scene, the major challenges
to
monetary
policy
were:
the
continuing
liquidity
surfeit
in
the
banking
system;
fragile
economic
recovery;
high
but
moderating
inflationary
pressures;
as
well
as
pressures in the foreign exchange
market.
In
the
face
of
these
challenges, the need to achieve price
stability
conducive
to
economic
growth was the key consideration that
shaped monetary policy decisions in
the review period.
4.1
DECISIONS OF THE MONETARY
POLICY COMMITTEE (MPC)

In the first half of 2018, decisions of the
Monetary Policy Committee (MPC)
were shaped by a variety of global
and domestic economic and financial
developments. Principal amongst these
were: the continued adjustments in the
global
financial
markets
following
monetary policy normalization in the
US, growing trade tensions between
major economies and continued geopolitical tensions.

The key developments in the domestic
economy were: slow output recovery;
high but moderating inflation rate
which remained above the Bank’s
target range; continuing liquidity surfeit
in the banking system; weak macroprudential
indicators;
growing
sovereign debt and low fiscal buffers.
These issues and the need to achieve
the Bank’s mandate of price and
exchange rate stability provided the
background
for
monetary
policy
decisions in the review period.

4.1.1 July 2017 MPC Meeting
The 3rd and 4th April, 2018 Monetary
Policy
Committee
(MPC)
meeting
assessed developments in the global
and domestic economic environments
during the first quarter of 2018, as well
as the risks to price stability, financial
stability, and output growth in the short
to medium term.

At the global scene, output growth was
projected at 3.9 per cent for 2018 up
T
CBN Monetary Policy Review

from 3.7 per cent in 2017 on the heels
of
rebound
in
investments.
The
development was underpinned by
improvements in investor confidence,
strengthening commodity prices, rising
aggregate
demand
and
accommodative monetary policy in
some
advanced
economies.
The
Committee,
however,
noted
the
downside risks to the global output
growth to include: new U.S. trade
policy;
continuing
normalization
of
monetary policy in some advanced
economies; uncertainties associated
with the BREXIT negotiations; and rising
geo-political tensions in the Middle-East
and the Korean Peninsula.

On the domestic front, the Committee
observed
that
the
economy
was
gradually
returning to
a
path
of
sustainable
growth
as
real
Gross
Domestic Product (GDP) grew by 1.92
per cent in the fourth quarter of 2017
up from 1.40 and 0.72 per cent in the
third and second quarters, respectively.
Overall, the economy grew by 0.83 per
cent in 2017. The main drivers of real
GDP growth were agriculture (1.08%),
industry (0.56%) and trade (0.35%). Nonoil real GDP grew by 1.45 per cent in
the fourth quarter of 2017 compared
with a contraction of 0.76 per cent in
the third quarter. The Committee also
took cognizance of the continued
positive growth outlook indicated by
the twelfth and eleventh consecutive
months of expansions of 56.7 and 57.2
index points in the Manufacturing and
Non-manufacturing
Purchasing
Managers’
indices,
respectively,
in
March 2018.
In
addition,
the
MPC
examined
available
forecasts
of
key
macroeconomic
indicators
which
pointed to a positive outlook for the
economy in 2018. The Committee, thus
called for the quick passage and
effective implementation of the 2018
budget and improvement of security
situation
in
the
country
to
help
actualize the growth projections. It also
called for sustained implementation of
the Economic Recovery and Growth
Plan (ERGP) in order to support the
fragile recovery. The downside risks to
the outlook, according to the MPC,
included:
the
liquidity
impact
of
spending towards the 2019 general
elections; continuing herdsmen related
violence;
and rising yields in the
advanced economies, which could
trigger capital outflows and renew
pressure on the exchange rate.

The MPC also noted the continued
deceleration in inflation, with headline
inflation (year-on-year) falling for the
thirteenth consecutive month to 14.33
per cent in February 2018 from 18.72
per
cent
in
January
2017.
The
Committee
attributed
the
development to the relative stability in
the foreign exchange market.

The
Committee
observed
the
improvements in the equities segment
of the capital market being buoyed by
increase in the level of reserves. As a
result, the All-Share Index (ASI) rose by
8.5
per
cent
from
38,243.19
on
December 29, 2017, to 41,504.51 on
March 29, 2018. Market Capitalization
(MC) also improved by 10.2 per cent
CBN Monetary Policy Review

from N13.61 trillion to N14.99 trillion
during the same period, owing to
growing investor confidence.

In its considerations, the MPC noted the
fragile output recovery, moderation in
price development and the relative
stability of the banking system. The
Committee
noted
that
economic
recovery, even though still weak, was
strengthening, in view of the return to
growth of the Services Sector. It called
for a quick passage of the 2018
Appropriation
Bill
by
the
National
Assembly, to keep fiscal policy on track
and deliver the urgently needed reliefs
in terms of employment and growth.
The
MPC
was
satisfied
with
the
continued moderation in all measures
of inflation as well as sustained stability
in
the
naira
exchange
rate.
The
Committee applauded the relatively
strong balance sheets and stable
outlook of deposit money banks in spite
of the concentration of non-performing
loans in a few sectors, which it
observed
was
satisfactorily
being
addressed by adequate mechanisms
established by the Bank.

In reaching its decision, the MPC
appraised potential policy options with
a consideration for the balance of risks.
The Committee also took note of the
gains made so far as a result of its
earlier decisions, including the stability
of the foreign exchange market, the
moderation in price developments as
well as the restoration of output growth,
and lauded the launch of the Food
Security
Council
by
the
Federal
Government to ensure food security.
The Committee was of the view that
further tightening would strengthen the
impact of monetary policy on inflation
with complementary positive effects on
capital
flows
and
exchange
rate
stability.
Nevertheless,
it
could
potentially
dampen
the
positive
outlook for output growth and financial
stability. On the other hand, the
Committee was of the view that
loosening may strengthen the outlook
for growth by stimulating domestic
aggregate demand through reduced
cost of borrowing. This, the MPC noted,
may lead to a rise in consumer price
levels,
generating
exchange
rate
pressures in the process. It could also
worsen the current account balance
through
increased
importation
of
consumer
goods
and
outflow
of
capital. On the argument to hold, the
Committee was of the view that key
macroeconomic
variables
have
continued to evolve in a positive
direction
and
should
be
allowed
adequate time to fully manifest.

In consideration of the foregoing, the
Committee decided unanimously to
retain the Monetary Policy Rate (MPR)
at 14.0 per cent; CRR at 22.5 per cent;
Liquidity Ratio at 30.0 per cent; and the
asymmetric corridor of +200 and -500
basis points around the MPR.

4.1.2 September 2017 MPC Meeting
At the 21st and 22nd May, 2018 MPC
meeting, the Committee noted the
sustained
momentum
of
global
economic activities, driven by: easing
geo-political tensions on the Korean
CBN Monetary Policy Review

Peninsula;
reduced
trade
tensions
between China and the United States;
and easy financing conditions in the
Euro
Area,
the
UK
and
Japan.
Accordingly,
global
output
was
projected to grow at 3.9 per cent in
2018, up from 3.8 per cent in 2017. The
Committee noted that in spite of these
optimistic developments, the downside
risks
to
global
growth
remained:
lingering geo-political tensions in the
Middle-East; continued uncertainties
around
the
BREXIT
negotiations;
withdrawal of the United States from
the 2015 Iranian Nuclear Deal; and
growing
trend
towards
trade
protectionism.

On
the
domestic
scene,
the
Committee noted improvements in the
economy, attributable to the steady
decline in inflation, rebound in oil prices
and increase in production level, as
well as the continued stability in the
foreign exchange market. Accordingly,
data from the National Bureau of
Statistics (NBS) showed that real Gross
Domestic Product (GDP) for Q4 2017
was revised upwards from 1.92 to 2.11
per cent, while a growth of 1.95 per
cent was recorded in the first quarter of
2018, up from a contraction of 0.91 per
cent in the corresponding period of
2017. The Committee also noted the
sustained positive outlook based on the
Manufacturing,
and
Nonmanufacturing Purchasing Managers’
Indices (PMI), which rose for the
thirteenth
and
twelfth
consecutive
months to 56.9 and 57.5 index points,
respectively, in April 2018. While the
Committee
welcomed
this
development, it remained of the view
that growth was still largely fragile and
could benefit from further reforms and
stimulus. In this regard, it urged the
various
levels
of
government
to
accelerate
the
settlement
of
contractor debt and salary arrears as
well
as
facilitate
the
quick
implementation of the 2018 Federal
Government budget.

The MPC also noted that inflationary
pressures continued to moderate, with
headline
inflation
(year-on-year)
declining for the fifteenth consecutive
month to 12.48 per cent in April 2018
from 13.34 per cent in March 2018,
driven by a decline in food prices and
continued stability in the exchange
rate.

On developments in the financial
markets, the Committee observed with
concern, the declining performance in
the equities market, as the All-Share
Index (ASI) decreased by 6.6 per cent
from 43,330.54 on February 28, 2018 to
40,472.45 on May 18, 2018. Similarly,
Market Capitalization (MC) fell by 5.7
per cent from N15.55 trillion on February
28, 2018 to N14.66 trillion on May 18,
2018. The decline was due largely to
profit taking activities by investors, as
well
as
capital
flow
reversals
in
response
to
monetary
policy
normalization in the United States. The
MPC thus, noted the need to maintain
remunerative domestic rates to stem
the
trend
towards
huge
capital
outflows.

CBN Monetary Policy Review

In its considerations, the Committee
expressed satisfaction on the positive
outlook in the domestic economy as
real
GDP
grew
for
the
fourth
consecutive quarter by the first quarter
of 2018. The Committee also welcomed
the continued deceleration in headline
inflation as well as stability in the foreign
exchange
market
and
therefore,
called on the Bank to sustain the
momentum in order to further subdue
inflation and ensure continued growth.
The MPC, however, noted the potential
effects
of
the
expansionary

budget, the buildup in election-related
spending towards the 2019 general
elections and the liquidity impact of
rising FAAC distributions following the
increase
in
crude
oil
prices.
The
Committee took note of the improved
performance of deposit money banks
and observed that the relatively high
level of non-performing loans in the
industry was moderating and urged the
Federal Government to promptly settle
outstanding contractor arrears to help
improve aggregate demand.

The MPC critically assessed the impact
of developments in the international
and domestic environments on key
macroeconomic
variables
such
as
output growth, inflation, the exchange
rate and accretion to external reserves
and evaluated the policy options. In its
evaluation, the Committee considered
the forecast of high liquidity injection in
the second half of 2018 and its likely
upward pressure on prices. Tightening,
it argued would ensure the mop-up of
excess liquidity, noting that inflation still
remained in double digits and above
the ceiling of the Bank’s inflation
corridor
in
spite
of
its
continued
moderation. Raising the policy rate,
however, may depress investment and
consumer spending and impact the
fragile recovery adversely. Loosening,
the Committee considered, would help
stimulate aggregate demand through
lower cost of credit. Nevertheless, it
deliberated on the effectiveness of the
choice at a time when high liquidity
injections had been forecast in the
second half of the year as likely to
exacerbate
inflationary
pressures,
increase capital outflow and pressure
on the exchange rate. It further noted
that
loosening
would
worsen
the
current
account
balance
through
increased
importation
of
cheaper
foreign
goods,
margin
lending,
lowering of risk evaluation in accessing
loans which may result in increased
NPLs
with
potential
negative
consequences on the stability of the
banking industry. In the Committee’s
opinion, the prevailing downside risk to
growth and upside risk to inflation
appeared
relatively
balanced
as
growth continued to strengthen even
though moderately, while the pace of
price development continued to taper.
Maintaining the current policy stance, it
argued,
would
sustain
gradual
improvements in both indices.

In
summary,
the
predominant
argument for a hold at this time was to
await
the
passage
and
implementation of the 2018 budget
and to monitor its impact on price
development and output growth. In
consideration of the foregoing, the
CBN Monetary Policy Review

Committee decided by a vote of 8
members to retain the Monetary Policy
Rate (MPR) at 14.0 per cent alongside
all other policy parameters. One (1)
member, however, voted to increase
the MPR by 50 basis points. Thus, the
MPC voted to retain the: MPR at 14.0
per cent; CRR at 22.5 per cent; Liquidity
Ratio at 30.0 per cent; and the
asymmetric corridor of +200 and -500
basis points around the MPR.

4.2
Instruments
of
Liquidity
Management
In
pursuance
of
its
price
and
macroeconomic stability mandate, the
Bank continued to deploy various
monetary policy instruments in the first
half of 2018. The following instruments
were deployed: the Monetary Policy
Rate (MPR), the Cash Reserve Ratio
(CRR), Liquidity Ratio (LR), Open Market
Operations
(OMO)
and
Discount
Window Operations. In addition to the
use of these instruments, the Bank
maintained active intervention in the
foreign exchange market.

4.2.1 Monetary Policy Rate (MPR)
The MPR remained the key instrument
for
monetary
policy
management
during the review period, remaining
unchanged
at
14.0
per
cent
throughout the period as conditions in
the economy did not necessitate an
adjustment. The asymmetric corridor
around
the
MPR
was
also
left
unchanged at +200 and -500 basis
points. The retention of MPR and the
asymmetric
corridor,
showed
the
Bank’s commitment to a tight policy
stance.

4.2.2 Open Market Operations (OMO)
Liquidity management in the first half
of

was
conducted
primarily
through
Open
Market
Operations
(OMO).
OMO
sales
increased
to
N9,743.76 billion in the review period
from N7,472.21 billion and N3,874.27
billion, representing an increase of
30.40 per cent and 151.50 per cent
above the levels in the preceding and
corresponding
periods
of
2017,
respectively (Table 4.1). The high level
of operations was attributed to the
incidence of Deposit Money Banks
(DMBs) discounting OMO bills before
maturity in the secondary market, thus
expanding the monetary base and
leading to a rise in the growth rate of
money supply.

Table 4.1
OMO Bills Auction (January 2017 – June 2018)
(N’billion)
Date

%
Change
Jan
700.52
2,132.61
204.43
Feb
619.14
845.28
36.52
Mar
391.16
1,561.38
299.17
Apr
316.09
2,084.46
559.45
May
580.08
2,033.42
250.54
Jun
1,267.28
1,086.61
-14.26
1st Half
3,874.27
9,743.76 151.50%
Jul
1,517.53
Aug
1,104.57
Sep
741.85
Oct
1,179.20
Nov
1,461.13
Dec
1,467.93
2nd Half
7,472.21
30.40%
Source: Financial Market Department, CBN

CBN Monetary Policy Review

Figure 4.1
OMO Bills Auction (January – June 2018)

Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
N'Billions

Source: CBN

4.2.3 Reserve Requirements
The Cash Reserve Ratio (CRR) was
used to complement the MPR and
OMO
as
instruments
of
liquidity
management in the first half of 2018.
The Monetary Policy Committee (MPC)
maintained the CRR at 22.5 per cent
during the review period, the same
level as it was at end-December 2017,
as liquidity in the banking system
remained relatively high. The liquidity
ratio also remained unchanged at 30.0
per cent during the review period.

4.2.4 Standing Facilities
The Standing Facilities windows were
active during the review period to
enable Deposit Money Banks (DMBs)
and the Discount House (DH) meet their
daily liquidity requirements. The Bank
maintained
the
standing
facilities
corridor
of
+200/-500
basis
points
around the MPR.

The
request
for
Standing
Lending
Facility (SLF), decreased significantly by
72.62 per cent from N25,664.35 billion in
the second half of 2017 to N7,027.46
billion in the first half of 2018. The
volume also declined by 74.41 per cent
when compared with N27,466.58 billion
in the corresponding period of 2017
(Table 4.2).

In contrast, total deposits at the
Standing Deposit Facility (SDF) window
increased significantly by 149.93 per
cent to N10,684.38 billion in the first half
of 2018 from N4,275.00 billion in the
second half of 2017. This represented
an increase of 93.88 per cent relative
to N5,510.75 billion recorded in the
corresponding period of 2017 (Table
4.3). Transactions at the two windows
resulted in a net deposit of N3,656.92
billion in the first half of 2018. The
increased level of deposits was due to
sustained monetary policy tightening
stance which helped to rein-in excess
liquidity from the money market.

Table 4.2
CBN Standing Lending Facility (January 2017 –
June 2018) (N’billion)
Date

%
Change
Jan
3,380.57
833.09
-75.36
Feb
4,478.50
1,020.15
-77.22
Mar
5,052.56
952.23
-81.15
Apr
5,746.68
1,145.52
-80.07
May
4,596.99
1,847.69
-59.81
Jun
4,211.28
1,228.78
-70.82
1st Half
27,466.58
7,027.46
-74.41%
Jul
3,855.13
Aug
5,585.51
Sep
4,377.89
Oct
5,605.30
Nov
3,909.09
Dec
2,331.43
2nd Half
25,664.35
-72.62%
Total
53,130.93
371.07

Source: CBN
CBN Monetary Policy Review

Figure 4.2
Standing Lending Facility (January 2017 – June

Jan
Feb
Mar
Apr
May
Jun
N'Billions

Source: CBN

Table 4.3
CBN Standing Deposit Facility (January 2017 –
June 2018) (N’billion)
Date

% Change
Jan
1,855.98
1,919.78
3.44
Feb
804.07
1,144.10
42.29
Mar
889.35
1,508.75
69.65
Apr
593.79
2,952.20
397.18
May
665.28
1,527.04
129.53
Jun
702.28
1,632.51
132.46
1st Half
5,510.75
10,684.38
93.88%
Jul
825.1
Aug
315.24
Sep
411.43
Oct
405.21
Nov
691.97
Dec
1,626.05
2nd Half
4,275.00
149.93%
Total
9,785.75


Source: CBN


Figure 4.3
Standing Deposit Facility (January 2017 – June

Jan
Feb
Mar
Apr
May
Jun
N'Billion

Source: CBN


4.2.5
Foreign Exchange Intervention
During the first half of 2018, activities in
the Investors and Exporters foreign
exchange
window
intensified
and
provided
stability
in
the
foreign
exchange
market.
However,
new
challenges
emerged
following
the
sustained normalization of monetary
policy
in
some
major
advanced
economies, thereby intensifying capital
reversals
from
emerging
market
economies,
including
Nigeria.
The
development renewed pressure in the
foreign
exchange
market.
Consequently, the Bank had to intensify
its heterodox approach to foreign
exchange policy, by implementing
additional measures to stem these new
sources of pressure in the market. These
measures included: increased foreign
exchange sales to BDCs from twice to
thrice weekly as well as the conclusion
and implementation of the bilateral
currency swap between the Central
Bank of Nigeria and the People’s Bank
of China. The currency swap was
intended to facilitate the settlement of
transactions
between
economic
CBN Monetary Policy Review

agents
in
both
countries
without
recourse to a third currency (notably
the
US
dollar),
thereby
reducing
pressure on the exchange rate.

The
Bank
also
sustained
the
implementation
of
the
existing
measures including: intensification of
the policy on repatriation of export
proceeds as well as return of unutilized
foreign exchange sourced from CBN
auctions; the restriction of foreign
exchange access of some 41 items; the
use of Bank Verification Number (BVN)
in BDC transactions; resumption of sale
of foreign exchange by the Bank and
International Money Transfer Operators
(IMTOs) to BDCs; as well as special
foreign exchange auctions to targeted
sectors and foreign exchange sales for
small scale importers. As a result, the
total
supply
of
foreign
exchange
increased
by
23.21
per
cent
to
US$9,499.92 million in the first half of
2018, from US$7,710.49 million in the
second half of 2017. It also increased
by 17.21 per cent when compared with
US$8,104.95 million in the corresponding
period
of

(Table
4.4).
The
increased supply of foreign exchange
was largely due to improved accretion
to foreign reserves from higher oil prices
as well as modest capital inflow from
the sustained tight monetary policy
stance of the Bank.


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

%
Change
Total FX
Supply
(including
Forward
Sales)
Total FX
Supply
(including
Forward
Sales)
Jan
768.76
1,343.12
74.71
Feb
876.48
1,237.26
41.16
Mar
1,309.44
1,300.93
-0.65
Apr
1,919.30
1,422.35
-25.89
May
2,109.93
2,039.51
-3.34
Jun
1,121.04
2,156.75
92.39
1st Half
8,104.95
9,499.92
17.21%
Jul
1,207.00
Aug
1,449.49
Sep
1,220.33
Oct
1,315.99
Nov
1,210.99
Dec
1,306.69
2nd Half
7,710.49


Source: CBN

Figure 4.4
Foreign Exchange Supply by the CBN (January –
June 2018)

Jan
Feb
Mar
Apr
May
Jun
US$'Million

Source: CBN

4.3.
Developments in the Monetary
Aggregates
In the first half of 2018, most of the
monetary
aggregates
performed
below their indicative targets. The
development was as a result of the
CBN Monetary Policy Review

contraction in Net Domestic Asset
(NDA) which was, however, unable to
overwhelm the substantial growth in
Net Foreign Assets (NFA) of the banking
system. The contraction of NDA was
traceable
to
the
substantial
contraction in credit to government,
due to increased government receipts
from crude oil sales, which reduced
recourse
to
borrowing
from
the
domestic financial market. The huge
growth in NFA, however, was due to
the sustained rise in global crude oil
prices, which improved accretion to
external reserves.

4.3.1
Broad Money (M2)
Broad Money (M2) grew by 2.79 per
cent to N24,814.00 billion at end-June
2018, from N24,140.63 billion at endDecember 2017. Compared with the
end-June 2017 level of N21,980.58
billion, M2 increased by 12.89 per cent.
The year-on-year growth in M2 of 12.89
per cent was above the 2018 indicative
growth target of 10.48 per cent.

Figure 4.5
Money Supply (M1) and (M2) (January – June,
2018)

Source: CBN

Figure 4.6
Growth in Money Supply (M1) and (M2) (January
- June, 2018)

Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
M2 Growth
M1 Growth

Source: CBN

4.3.2
Narrow Money (M1)
Narrow Money (M1) contracted by
4.25 per cent to N10,701.11 billion at
end-June 2018 from N11,175.11 billion
at
end-December
2017.
However,
compared with end-June 2017 figure of
N10,190.19 billion, M1 grew by 5.01 per
cent which was, however, below the
indicative growth target of 8.04 per
cent
indicating
that
M1
underperformed during the review period
(Figures 4.4 and 4.5).

4.3.3 Net Foreign Assets (NFA)
Net Foreign Assets (NFA) increased by
18.15 per cent to N 18,337.53 billion at
end-June 2018 from N15,520.76 billion
at end-December 2017. Compared
with the end - June 2017 figure of
N8,468.08 billion, NFA grew by 116.55
per cent which was well above the
indicative growth target of 18.15 per
cent. The substantial growth in NFA was
due to the continued rise in global
crude
oil
prices,
which
improved
accretion to external reserves. Average
crude oil prices (Bonny Ligth) rose to
CBN Monetary Policy Review

US$71.45 in the first half of 2018 from
US$54.09 in the second half of 2017.

4.3.4
Net Domestic Assets (NDA)
Net
Domestic
Assets
(NDA)
contracted
by
3.51
per
cent
to
N15,088.68 billion at end-June 2018
from
N15,636.80
at
end-December
2017. Compared with the end-June
2017 figure of N19,851.20 billion, NDA
also contracted by 31.56 per cent,
which was significantly below the
indicative growth target of 1.97 per
cent, largely on account of huge
contraction
in
credit
to
the
government.

Figure 4.7
Net Domestic Asset (NDA) (January - June 2018)
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Net Domestic Asset

N'Billion

Source: CBN

Figure 4.8
NDA, NDC and Other Assets (net) (January –
June, 2018)
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Net Domestic Assets 15,887.39 17,429.77 16,830.28 17,321.58 15,475.47 15,088.68
Net Domestic Credit 28,033.38 26,821.45 26,985.31 27,174.81 26,349.07 25,863.28
Other Assets (Net)

N'Billion

Source: CBN
4.3.5
Credit to the Government (Cg)
Credit to Government (Cg) in the first
half of 2018 contracted by 9.74 per
cent to N3,286.34 billion at end-June
2018 from N3,640.93 billion at endDecember 2017. When compared with
the end-June 2017 figure of N5,250.49
billion, it also contracted by 37.41 per
cent, in contrast to the indicative
growth benchmark of 54.25 per cent.
The development was attributed to
increased government receipts from
crude
oil
sales
which
reduced
Government’s recourse to borrowing
from the domestic financial market.

4.3.6
Credit to the Private Sector (Cp)
Credit to the private sector (Cp)
declined marginally by 0.04 per cent to
N22,281.87 billion at end-June 2018
from
N22,290.66
billion
at
endDecember 2017. Compared with the
end-June 2017 figure of N21,985.95
billion, Cp, however, grew by 1.35 per
cent, which was still below the 2018
indicative growth target of 5.75 per
cent. The decline in credit to the
private sector in the review period can
be attributed to the continued risk
aversion by banks in lending to the real
sector.


CBN Monetary Policy Review

Figure 4.9
Domestic Credit to Private Sector (January –
June, 2018)
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Credit to Private Sector

N'Billion

Source: CBN

4.3.7
Reserve Money (RM)
Reserve
Money
(RM)
contracted
marginally
by
1.91
per
cent
to
N6,360.47 billion at end-June 2018
compared with N6,484.30 billion at
end-December
2017.
It,
however,
increased by 16.06 per cent when
compared with its end-June 2017 level
of N5,480.21 billion, but was below the
2018 indicative growth benchmark of
21.50 per cent.


CBN Monetary Policy Review

Table 4.5
Monetary Aggregates Outcomes (Growth in % except otherwise stated)
Actual
Actual
Actual
Benchmark
June
December
June

M2 (N'b)

M2 (%)

M1 (N'b)

M1 (%)

RM (N'b)

RM (%)

NDC (N'b)

NDC (%)

Cg (N'b)

Cg (%)

Cp (N'b)

Cp (%)

NFA (N'b)

NFA (%)

Change in H1
2018 over H1,

Variables
Deviation
(N'b)
Source: CBN


Electoral Cycles and Monetary Policy in Nigeria
Democracy has become the dominant form of government around the world.
Indeed the wave of democratization became so forceful during the turn of the 20th
century, when the proportion of democratic states grew from 27.0 to 61.0 per cent.
Democratic governance in modern states is underpinned by periodic elections, the
process by which representatives are selected to conduct the affairs of
government on behalf of the citizenry.

An empirical regularity had been severally established between the growth rate of
M1 and the periods leading up to and during major election cycles in both
advanced and developing democracies. Prior literature had linked electoral
cycles to monetary policy through two main hypotheses. The first, which has
become popularly known as the political business cycles hypothesis is consistent
with the thinking that the monetary authorities, who are to some degree
subservient to the government, are somewhat compelled to deliberately
manipulate instruments in the monetary policy toolkit to expand money supply,
CBN Monetary Policy Review

thus reducing interest rates in periods leading up to elections. The aim is to signal
good performance by the political authorities, with the motive being to curry the
favour of electorates and secure the re-election of the incumbent or the ruling
political ideology.

The alternative explanation for monetary growth during electoral cycles lies in the
government deliberately “cultivating” the electorate during election years in order
to influence voting behavior and sentiments. This deliberate show of concern for
the electorate is manifested in several ways including increased budgetary
spending in election years, election-related spending, and systematic vote buying -
the processes through which election outcomes are swayed in a given direction by
means of gifts or cash inducements. Vote buying requires high level of liquidity
which may entail converting illiquid assets into cash, thus substituting broad money
for cash or bank deposits. Also because vote buying is an illicit activity, the
financing most often comes from the underground economy. Funds from such
shadow economy eventually find their way into formal bank deposits, thereby
increasing the money stock.

Prior empirical tests of the money-election cycle theory have produced rather
weak and inconclusive evidence, particularly for democracies with weak
institutions in developing countries. Thus the alternative of increased budgetary
provisions and vote buying perspective seems to come handy in explaining the
money-election nexus. Preliminary observations on the evolution of narrow money
stock (M1) during Nigeria’s election years of 1999, 2003, 2007, 2011, and 2015
indicate a pattern of increase in MI during the election periods. The data showed a
clear increase in money stock (M1) as from the months of February and March,
when political and electoral activities were at their peak in the respective election
years; with money stock peaking in periods around and immediately after
inauguration in May. Subsequently, money stock returned to trend. These
observations were, however, not empirically tested.

These issues are particularly relevant as the preparation towards Nigeria’s
upcoming elections in early 2019 portend liquidity management challenges. The
common believe is that due to the late passage of the 2018 budget, the year
would experience liquidity flows arising from the implementation of the 2018 and
2017 FGN budgets, as well as other spending associated with increased political
and electoral activities. With the country’s fledgling democracy since 1999, the
increasing monetization of the electoral process raises the concern of stakeholders
particularly the Central Bank which rely on achieving targets for the growth rates of
monetary aggregates to support its price stability mandate.

CBN Monetary Policy Review

CHAPTER FIVE

5.0
DEVELOPMENTS
IN
THE
FINANCIAL MARKETS
n the review period, the Nigerian
financial markets were moderately
stable,
although
performance
continued to reflect developments in
the global and domestic economic
and financial environments. The key
forces on the global front were: rising
trade tensions between the US and its
major trading partners; the withdrawal
of the US from the Iranian nuclear deal;
and
the
continued
uncertainties
around the BREXIT negotiations. Other
factors included: sustained monetary
policy divergence in the advanced
economies;
and
heightened
geopolitical tensions in the Middle East and
Korean Peninsula. On balance, the
effect
of
these
factors
were
considerably
muted
by
the
commencement of peace talks on the
Korean
Peninsula
and
sustained
recovery in oil and other commodity
prices,
leading
to
a
rebound
in
investment and manufacturing output.
Accordingly,
global
economic
recovery
strengthened,
with
more
central banks in advanced economies
gearing up to join the US and the UK in
normalizing monetary policy. The US
Fed raised its rate twice in 2018, with
markets largely anticipating one more
before year end. The Bank of England
(BOE) indicated that a gradual hike in
the policy rate would be required in
order to address inflation concerns and
manage
investment
outflow
from
uncertainties surrounding BREXIT. The
European Central Bank (ECB) provided
guidance that it would review its asset
purchase
programme
in
2018.
Nonetheless,
the
monetary
environment during the review period
remained
broadly
accommodative
relative to historical trends.

At the domestic scene, the money
market remained active in the review
period, with market rates reflecting
liquidity conditions in the banking
system. The rates fluctuated widely
outside the Standing Facilities window,
indicating a high degree of uncertainty
in the market. The stability in the foreign
exchange market was threatened by
intensified capital reversals, following
sustained normalization of US monetary
policy. In response, the Bank sustained
implementation of existing and new
measures including: increased foreign
exchange sales to BDCs as well as the
conclusion and implementation of the
bilateral currency swap between the
Central Bank of Nigeria and the
People’s Bank of China, which helped
rein-in
speculative
practices
and
arbitrage opportunities in the market.
The Nigerian stock market witnessed a
lull in activity as the All-Share Index (ASI)
remained almost flat at 0.09 per cent
year-to-June 2018, on the back of
fragile
economic
recovery,
weak
corporate environment and low fiscal
activities which fuelled adverse investor
sentiments.

5.1
The Money Market
During the review period, the money
market remained active, with market
rates reflecting liquidity conditions in
the
banking
system.
The
rates
I
CBN Monetary Policy Review

fluctuated widely outside the Standing
Facilities
corridor
with
no
clear
direction, indicating a high degree of
uncertainty
in
the
market.
The
uncertainties primarily were traceable
to low fiscal activities as reflected in the
delayed Federal Government budget
for
2018,
government’s
recent
preference for borrowing from the
international
market,
delays
in
Federation
Account
Allocation
Committee (FAAC) disbursements and
implementation of additional measures
to manage demand pressure in the
foreign exchange market. Accordingly,
the Bank increased its OMO auctions
and
interventions
in
the
foreign
exchange market in response to the
observed volatility in the market. The
major sources of liquidity during the
period
included:
continued
implementation of the 2017 capital
budget, Joint Venture Cash (JVC) call
payments,
CBN
real
sector
interventions, and maturing CBN bills
and government securities. Rates at
the uncollateralized segment of the
market (interbank call rates) were
higher
compared
with
the
collateralized OBB rates reflecting the
heightened risks and uncertainties in
the market.

These
developments
made
the
Monetary Policy Committee (MPC) to
sustain its monetary policy tightening
stance
during
the
period
by
maintaining the Monetary Policy Rate
(MPR) at 14.0 per cent and the
asymmetric corridor of +200/-500 basis
points as well as the Cash Reserve Ratio
(CRR) and Liquidity Ratio (LR) of 22.5
and 30.0 per cent, respectively.

5.1.1
Short-term
Interest
Rate
Developments
Market interest rates largely reflected
liquidity levels in the banking system.
Liquidity in the money market was
mainly influenced by statutory FAAC
disbursements,
OMO
and
NTB
transactions,
maturing
government
securities and CBN bills, Joint Venture
(JVC)
cash
call
payments
and
continued implementation of the 2017
FGN budget. CBN’s foreign exchange
interventions
to
moderate
FOREX
demand
pressures
also
affected
liquidity in the money market. During
the review period, both segments of
the money market remained active
and
experienced
periods
of
high
volatility. The interbank call rate ranged
between 3.34 per cent and 26.19 per
cent, averaging 15.12 per cent in the
entire period, while the OBB rate had a
narrower range of between 2.96 per
cent and 19.99 per cent, averaging
lower at 12.58 per cent in the period.
The average interbank call rate was
generally higher than the OBB rates
mirroring heightened risks in the market.


CBN Monetary Policy Review

Table 5.1
Weighted Average Monthly Money Market
Interest Rates (January – June 2017)
MONTHS Interbank
OBB
SDF
MPR
SLF
NIBOR -
30DAYS
Jan-18

Feb-18

Mar-18

Apr-18

May-18

Jun-18

Average


Source: (Statistics, CBN)

Figure 5.1
Weighted Average Monthly Money Market
Interest Rates (Jan.–Jun. 2018)

Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Per cent
Interbank
OBB
SDF
MPR
SLF
NIBOR - 30DAYS

(i)
The Interbank Call Rate
During
the
review
period,
the
interbank call segment experienced a
lull in activities, as evidenced by several
non-trading days. The high frequency
of
non-trading
days
in
the
uncollateralized segment was due to
heightened
risk
aversion
amongst
deposit
money
banks
(DMBs).
Consequently,
interbank
call
rates
increased from 15.19 per cent in
January to 26.19 per cent in February,
before declining significantly to 3.34
per cent in April, 2018. The rate further
spiked to 25.43 per cent in May before
closing lower at 5.00 per cent in June,
2018. The flat rate of 5.00 per cent
recorded in June was based on only
one transaction for the entire month.
The peak in the review period affirms
the sustained tight monetary policy
stance of the Bank, which led to
occasional
liquidity
crunch
in
the
money market. The interbank call rate
ranged between 3.34 per cent and
26.19 per cent, averaging 15.12 per
cent in the review period, compared
with 19.78 per cent in the preceding
half year. Analysis of the daily rates
showed that the call rate ranged from
1.00 to 140.00 per cent between
January and June 2018. The rate spike
of 140.00 per cent recorded in May,
2018 was due to the withdrawal of
liquidity
from
the
banking
system
through OMO auctions, Naira deposit
made by commercial banks for the
purchase of foreign currency and
revenue
remittances
by
Nigerian
National
Petroleum
Corporation
(NNPC), Nigeria Customs Service (NCS)
and Federal Inland Revenue Service
(FIRS) and other government agencies
during the period of FAAC distributions.
The rate however, declined to 5.00 per
cent
in
June
following
improved
liquidity conditions.


CBN Monetary Policy Review

Figure 5.2
Daily Interbank Call Rate (January – June 2018)


(ii)
The Open Buy Back Rate
During the review period, non-trading
days were not observed in the OBB
segment, which remained active in
comparison
with
activities
at
the
interbank call segment. The improved
activities at the OBB segment were
largely traceable to the security of
transactions of the segment. The OBB
rate rose from 10.62 per cent in January
to 19.99 per cent in February, before
declining significantly to 2.96 per cent
in April, 2018. The rate, however, spiked
to 18.37 per cent in May before closing
lower at 10.84 per cent in June, 2018.
As in the interbank call segment, the
spikes in the OBB rate in February and
May were largely as a result of low
levels of liquidity in the banking system,
arising from the sale of NTBs and CBN
Bills. The OBB rate had a narrower
range of between 2.96 per cent and
19.99 per cent, averaging lower at
12.58 per cent in the period compared
with 22.57 per cent in the preceding
half year. Analysis of the daily rates
showed that the OBB rate ranged from
1.85 to 131.04 per cent between
January and June 2018. The rate spike
of 131.04 per cent recorded in May,
2018 was as a result of withdrawal of
liquidity
from
the
banking
system
through OMO auctions, Naira deposit
made by commercial banks for the
purchase of foreign currency and
revenue remittances by NNPC, NCS
and
FIRS
and
other
government
agencies during the period of FAAC
distributions. The rate however, closed
at 13.30 per cent in June following
improved liquidity conditions.

Figure 5.3
Daily Open Buy Back Rate (January-June 2018)


(iii)
The Nigeria Interbank Offered
Rate (NIBOR)
The reference rate in the Nigerian
money
market,
the
NIBOR,
was
relatively stable across all tenors in the
review
period.
The
rate
generally
fluctuated downwards as opposed to
movements in the interbank call and
OBB rates that did not show a clear
direction. The weighted average 30day NIBOR, rose from 15.09 per cent in
January to 15.38 per cent in March
2015. It, however, moderated to 13.15
per cent in May, and subsequently
closed at 13.88 per cent in June 2018.
CBN Monetary Policy Review

The average NIBOR rate for the review
period was 14.25 per cent, down from
27.83 per cent in the preceding half
year, indicating that liquidity conditions
were easing (Table 5.1).

5.2
Foreign Exchange Market
During the first half of 2018, the key
challenge to foreign exchange stability
was the sustained normalization of
monetary policy in the US, which led to
intensified
capital
reversal
from
emerging market economies, including
Nigeria. The development was in spite
of increased activities at the Investors
and Exporters window, targeted at
providing
stability
to
the
market.
Consequently, the Bank sustained the
implementation of existing measures
including: the continuation of the
policy
on
repatriation
of
export
proceeds as well as return of unutilized
foreign exchange sourced from CBN
auctions; the restriction of access to
foreign exchange for some 41 items;
the use of Bank Verification Number
(BVN) in BDC transactions; resumption
of sale of foreign exchange by the
Bank and International Money Transfer
Operators (IMTOs) to BDCs; as well as
special foreign exchange auctions to
targeted sectors and foreign exchange
sales for small scale importers. In
addition to these policies, the Bank
introduced
new
measures
which
included: increased foreign exchange
sales to BDCs from twice to thrice
weekly, as well as the conclusion and
implementation
of
the
bilateral
currency swap between the Central
Bank of Nigeria and the People’s Bank
of China. These measures were able to
rein-in
speculative
practices
and
arbitrage opportunities in the market.
Figure 5.4
Daily Naira/US Dollar Exchange Rate (January -
June 2017)


5.2.1
Average Exchange Rates
The
foreign
exchange
rate
appreciated by 0.03 per cent to an
average of N305.79/US$ in the first half
of 2018 from N305.88/US$ in the second
half of 2017. During the same period,
the BDC rate also appreciated by 0.48
per
cent,
from
an
average
of
N363.99/US$ to N362.25/US$ (Table 5.2).
CBN Monetary Policy Review

Table 5.2
Average Monthly Spot Exchange Rates (July 2017
– June 2018) (N/US$)
Month / Year
Interbank Rate
BDC Rate
2017: Jul
305.86
365.38
Aug
305.67
365.57
Sep
305.89
365.55
Oct
305.62
362.21
Nov
305.9
362.41
Dec
306.31
362.83
Average
305.88
363.99
2018: Jan
305.78
363.2
Feb
305.9
362.48
Mar
305.74
362.07
Apr
305.61
362.25
May
305.83
362.86
Jun
305.87
360.66
Average
305.79
362.25

Source: CBN

5.2.2
End-Period (Month) Exchange
Rates
The
naira
appreciated
at
the
interbank and the BDC segments of the
foreign exchange market at the end of
the first half of 2018. At the interbank
foreign exchange market, the naira
appreciated by 0.02 per cent to
N305.78/US$ at end-June, 2018 from
N305.85/US$ at end-December 2017. At
the BDC segment, it, also, appreciated
by 0.30 per cent to N362.00/US$ at endJune, 2018 from N363.08/US$ at endDecember, 2017. The development
indicated
a
trend
towards
convergence of the rates in the market
in
response
to
the
Bank’s
policy
measures (Figure 5.5 and Table 5.3).


Table 5.3
End-Month Exchange Rates (July 2017 – June
2018) (N/US$)
Month / Year
Interbank Rate
BDC 'B' Rate
2017: Jul
305.70
362.00
Aug
305.85
364.00
Sep
305.75
364.50
Oct
305.80
362.00
Nov
306.00
363.00
Dec
306.00
363.00
Average
305.85
363.08
2018: Jan
305.70
363.00
Feb
305.90
362.00
Mar
305.65
362.00
Apr
305.70
362.00
May
305.95
362.50
Jun
305.75
360.50
Average
305.78
362.00

Source: CBN


5.2.3
Nominal
and
Real
Effective
Exchange Rates
The Nominal Effective Exchange Rate
(NEER) depreciated by 1.27 per cent to
an average of 162.87 in the first half of
2018 from an average of 160.83 in the
second half of 2017. It also depreciated
significantly by 4.87 per cent when
compared
with
155.31
in
the
corresponding
period
of
2017.
In
contrast, the Real Effective Exchange
Rate (REER) appreciated by 2.02 per
cent from an average of 84.44 in the
second half of 2017 to an average of
82.77 in the first half of 2018. When
compared
with
86.80
in
the
corresponding period of 2017, the
average REER appreciated by 4.87 per
cent
(Table
5.4).
Thus,
the
naira
appreciated in real terms relative to
the
currencies
of
Nigeria’s
major
CBN Monetary Policy Review

trading partners in the review period,
indicating the effectiveness of efforts
by the Bank to manage inflation which
sustained its downward trend in the
review period (Table 5.4 and figure 5.6).

Table 5.4
Nominal and Real Effective Exchange Rates
Indices (Jan 2017 – Jun 2018)
DATE
NEER
REER
2017: Jan
153.29
88.75
Feb
153.33
87.71
Mar
154.54
87.03
Apr
155.84
86.62
May
156.95
85.71
Jun
157.92
84.95
2017:H1 Average
155.31
86.8
2017: Jul
160.61
85.56
Aug
161.37
85.42
Sep
160.32
84.33
Oct
159.05
83.23
Nov
160.9
83.73
Dec
162.74
84.39
2017:H2 Average
160.83
84.44
2018: Jan
167.13
86.12
Feb
165.02
85.31
Mar
165.35
84.12
Apr
162.03
81.93
May
158.85
79.56
Jun
158.86
79.56
2018:H1 Average
162.87
82.77

Source: CBN

Figure: 5.5
Nominal and Real Effective Exchange Rates
Indices (January 2017 – June 2018)

Source: CBN

5.2.4 Foreign Exchange Flows through
the CBN
Foreign exchange inflows through the
CBN increased by 13.23 per cent to
US$30,414.98 million in the first half of
2018, from US$26,861.61 million in the
preceding period. It also increased by
90.89
per
cent
compared
with
US$15,933.36
million
in
the
corresponding period of 2017. Foreign
exchange outflows also rose by 29.44
per cent to US$22,942.33 million in the
first half from US$17,724.26 million in the
preceding period. On a year-on-year
basis,
foreign
exchange
outflows
represented an increase of 79.86 per
cent
compared
with
US$12,755.62
million in the corresponding period of
2017. The development resulted in a
lower net inflow of US$7,472.65 million in
the first half of 2018 compared with
US$9,137.35 million in the preceding
half year. The inflow was, however,
higher
when
compared
with
US$3,177.74 million in the corresponding
half of 2017 (Table 5.5 and Figure 5.7).
The modest inflows were traceable to
higher
oil
receipts
and
the
effectiveness of the Bank’s measures in
managing capital outflows.

CBN Monetary Policy Review

Table 5.5
Monthly Foreign Exchange Flows through the CBN
(July 2015 – June 2017)
Dates
Inflow (CBN)
Total Outflow
(CBN)
Net Flow (CBN)
Jan-17
2,605.50
1,055.84
1,549.66
Feb-17
2,374.48
978.56
1,395.92
Mar-18
1,693.40
1,672.59
20.81
Apr-18
2,874.86
2,164.40
710.46
May-18
2,712.38
3,676.12
-963.74
Jun-18
3,672.74
3,208.11
464.63
2017 H1 Total
15,933.36
12,755.62
3,177.74
Jul-17
3,867.04
3,358.32
508.72
Aug-17
3,943.45
3,594.32
349.13
Sep-17
4,425.53
2,390.41
2,035.12
Oct-17
4,132.80
2,839.15
1,293.65
Nov-17
6,811.96
2,957.60
3,854.36
Dec-17
3,680.83
2,584.46
1,096.37
2017 H2 Total
26,861.61
17,724.26
9,137.35
Jan-18
4,212.56
2,734.38
1,478.18
Feb-18
7,303.15
3,163.29
4,139.86
Mar-18
5,076.48
3,754.12
1,322.36
Apr-18
4,238.05
3,437.72
800.33
May-18
4,373.01
4,821.91
-448.90
Jun-18
5,211.73
5,030.91
180.82
2018 H1 Total
30,414.98
22,942.33
7,472.65


Figure 5.6
Monthly Foreign Exchange Flows through the CBN
(Jul 2016 – Jun 2018)


5.2.5 Foreign Exchange Flow through
the Economy
In the review period, gross foreign
exchange inflow to the economy
increased
by
18.16
per
cent
to
US$66,931.28 million, from US$56,646.51
million in the second half of 2017. It
significantly increased by 100.64 per
cent
when
compared
with
US$33,358.96
million
in
the
corresponding period of 2017. Similarly,
gross
foreign
exchange
outflow
increased
by
26.24
per
cent
to
US$24,928.57 million in the first half of
2018, from US$19,746.94 million in the
second half of 2017. When compared
with
US$13,859.55
million
in
the
corresponding period of 2017, it surged
by 79.87 per cent.


CBN Monetary Policy Review

Table 5.6
Monthly Foreign Exchange Flows through the Economy
(Jan. 2017 – June 2018) (Million)
PERIOD
Inflow
(CBN)
Inflow
(Autonomous)
Total
Inflows
Outflows
(CBN)
Outflows
(Autonomous)
Total
Outflow
Net
Flow
Net Flow
(CBN)
Net Flow
(Autonomous)
Jan-17

Feb-17

Mar-18

Apr-18

May-18

Jun-18

2017 H1 Total 15,933.36

Jul-17

Aug-17

Sep-17

Oct-17

Nov-17

Dec-17

2017 H2 Total 26,861.61

Jan-18

Feb-18

Mar-18

Apr-18

May-18

Jun-18

2018 H1 Total 30,414.98


CBN Monetary Policy Review

Figure 5.7
Monthly Foreign Exchange Flows through the
Economy(Jul 2016 – Jun 2018) (US$ Million)


5.3
Capital Market
In the first half of 2018, the Nigerian
capital market opened on a bullish
note
reflecting
improved
growth
sentiments
as
the
economy
was
recovering from recession, and also
partly due to increased activities at the
Investors
and
Exporters
window.
Towards
the
end
of
the
period,
however, the market witnessed some
lull in activities, following sustained
spate of capital reversals arising from
the
continued
monetary
policy
normalization
in
some
advanced
economies,
low
fiscal
activities
following
the
delayed

FGN
budget
and
fragile
economic
recovery, all culminating in a weak
corporate
environment.
Many
corporate entities were unable to
declare dividends, while some had to
capitalize their earnings due to weak
profitability. Nonetheless, the Nigerian
capital market remained substantially
under-valued
and
still
presents
promising investment opportunities for
both local and foreign investors.

5.3.1
Equities Market
The All-Share Index (ASI) increased by
0.09 per cent to 38,278.55 at end-June
2018 from 38,243.19 at end- December
2017. It also increased by 15.58 per
cent compared with 33,117.48 at endJune 2017. In the same vein, Market
Capitalization (MC) increased by 1.91
per cent to N13.87 trillion at end-June
2018, from N13.61 trillion at endDecember
2017.
The
MC
when
compared with N11.45 trillion at endJune 2017, increased by 21.14 per
cent. Although, ASI experienced a
year-on-year increase of 15.58 per
cent, the lull in the market during the
review period was traceable to the
decline in some key sectors including
Banking, Breweries, Building Materials
and Oil & Gas which decreased to
14.66, 11.35, 29.85 and 2.28 per cent
from their respective shares of 19.10,
13.52, 32.36 and 5.14 per cent in the
preceding half year.

Table 5.7
NSE All-Share Index (ASI) and Market
Capitalization (MC) (June 2017 – June 2018)
Jun-17
33,117.48
11.45
Jul-17
35,847.75
12.35
Aug-18
35,504.62
12.24
Sep-18
35,429.31
12.21
Oct-18
36,680.29
12.69
Nov-18
37,944.60
13.21
Dec-18
38,243.19
13.61
Jan-18
44,343.65
15.9
Feb-18
43,330.54
15.55
Mar-18
41,504.51
14.99
Apr-18
41,268.01
14.95
May-18
38,104.54
13.8
Jun-18
38,278.55
13.87
Date
ASI
MC(Equities)
N’Trillion)

Source: NSE


CBN Monetary Policy Review

Figure 5.8
NSE ASI and MC (June 2017– June 2018)

Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
(N' Trillion)
All-Share Index
Equities Market Capitalisation (N' Trillion)

Source: NSE

Figure 5.9
NSE ASI and MC (December 2017 – June 2018)

Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
(N' Trillion)
All-Share Index
Equities Market Capitalisation (N' Trillion)

Source: NSE

5.3.2 Market Turnover
Aggregate stock market turnover in
the first half of 2018 increased by 13.52
per cent to 67.42 billion shares, valued
at N805.52 billion in 649,551 deals
compared with 59.39 billion shares,
valued at N803.82 billion in 491,300
deals in the second half of 2017. On a
year-on-year basis, market turnover
also increased by 52.67 per cent from
44.16 billion shares, valued at N467.67
billion in 448,950 deals. Foreign portfolio
investment outflow exceeded inflow
by N68.94 billion in the first half of 2018,
largely
attributable
to
sustained
monetary policy normalization in some
advanced economies coupled with
political uncertainties which affected
investor confidence in the Nigerian
economy.

Figure 5.10
Portfolio Inflows (May 2017 – May 2018)
Source: NSE

5.3.3 Sectoral Contribution to Equity
Market Capitalization
Despite the lull in market activity, the
construction
sector
still
dominated
overall market capitalization, driven
primarily by activities in the building
materials sub-sector. The contribution
of the building materials sub-sector
declined to 29.85 per cent at end-June
2018 from 32.36 per cent at endDecember 2017. Other major subsectors
were
banking,
food
&
beverages and breweries, with market
shares of 14.66, 13.80 and 11.35 per
cent, respectively, at end-June 2018
(Figure 5.12).

CBN Monetary Policy Review

Figure 5.11
NSE Market Capitalisation by Sector as at EndDecember 2017
Food and
Beverages
13.65%
Banking
19.10%
Insurance
1.13%
Breweries
13.52%
Conglomerat
es
0.75%
Oil and Gas
5.14%
Building
Materials
32.36%
Other Sectors
11.40%

Source: NSE

Figure 5.12
NSE Market Capitalisation by Sector as at EndJune 2018
Food and Beverages
13.80%
Banking
14.66%
Insurance
1.06%
Breweries
11.35%
Conglomerates
0.78%
Oil and Gas
2.28%
Building Materials
29.85%
Other Sectors
26.22%

Source: NSE

5.3.4 The Warren Buffett Valuation
Metric and Nigeria’s Equities
Market
The Warren Buffett valuation metric
which measures the market value of
securities as a ratio of GDP showed
that the Nigerian equities market was
fairly-valued in the review period. At
92.29 and 84.29 per cent in the first and
second quarters of 2018, the metric
was within the threshold of 75.0 - 115.0
per
cent.
The
development
was
attributable to a number of factors,
including
improving
economic
conditions, reflected in the modest
output recovery of 1.95 per cent in the
first quarter of 2018, increased investor
activity in the capital market during
the early part of the review period, as
well as sustained yields on domestic
assets. In addition, the continuous
downward
trend
in
inflation
and
relatively
stable
foreign
exchange
market, supported improved stock
market valuation. The improved stock
market
valuations
along
with
encouraging
macroeconomic
outcomes are expected to continue to
attract foreign investment into the
economy.

Figure 5.13
Warren Buffett Valuation of Nigerian Equities
Market

Q1-2014
Q2-2014
Q3-2014
Q4-2014
Q1-2015
Q2-2015
Q3-2015
Q4-2015
Q1-2016
Q2-2016
Q3-2016
Q4-2016
Q1-2017
Q2-2017
Q3-2017
Q4-2017
Q1-2018
Q2-2018
Per cent
WARREN BUFFET INDICATOR
Source: NSE


CBN Monetary Policy Review

5.3.5 Bond Market
In the first half of 2018, the bond
market was dominated by transactions
in debt instruments of the Federal
Government of Nigeria (FGN). The Subnational government and corporate
bonds segments also witnessed some
activity, with the latter recording the
least share by market volume.

5.3.5.1 FGN Eurobond
At 5.90 per cent, the 10-year dollardenominated bond yield for Nigeria
increased by 143 basis points at endJune 2018, from 4.47 per cent at endDecember 2017. When compared with
end-June 2017 yield of 4.80 per cent, it
increased by 33 basis points (Figure
5.14).
The
development
was
attributable to perception of rising
sovereign risk by investors.

Figure 5.14
10-Year U.S. Dollar-denominated Bond Yield for
Nigeria (June 30, 2017 – June 29, 2018)

Nigeria

Source: NSE

At 13.19 per cent, the yield on FGN
Bonds for June 2018 decreased by an
average of 355 basis points and 107
basis points when compared with 16.74
and 14.26 percent on June 30, 2017
and December 31, 2017, respectively.
The yield curve for June 2018 had a
concave
shape,
suggesting
an
optimistic
macroeconomic
outlook.
This can be attributed to the sustained
recovery in oil and other commodity
prices, improved oil production, as well
as stability in the foreign exchange
market (Figure 5.15).

Figure 5.15
FGN Bonds Yield Curves: end-June. 2017 vs. endDec. 2017 vs. end-June. 2018

yield
Time to Maturity
FGN Bond Yield Curves: June 30, 2017 vs. Dec. 31,
2017 vs. June 29, 2018
June 2018
Dec. 2017
June 2017

Source: NSE

5.3.5.2 State/Local Government Bonds
In the review period, activity at the
sub-national bonds market improved
moderately. Total value of outstanding
state/local
government
bonds,
increased by 2.97 per cent to N565.82
billion at end-June 2018, from N562.81
billion
at
end-Dec
2017.
When
compared with N563.58 billion at endJune 2017, it also increased by 0.14 per
cent.


CBN Monetary Policy Review

5.3.5.3 Corporate Bonds
Activity
in
the
corporate
bonds
segment declined during the review
period. At N267.72 billion, the value of
outstanding corporate bonds at endJune 2018 declined by 1.41 and 7.04
per cent from N276.50 billion and
N297.44 billion in the preceding half
year and the corresponding period of
2017, respectively. The development
could be attributed to the continued
presence of inherent fragilities in the
macroeconomy,
continued
lull
in
economic activities stemming from low
fiscal operations of Government, as
well
as
increasing
investor
risk
perception
associated
with
the
forthcoming general elections.

5.3.5.4 Overall Analysis of the Nigerian
Capital Market
The value of FGN bonds increased
significantly by 9.85 per cent to N9.26
trillion at end-June 2018 from N8.43
trillion at end-Dec 2017, and by 38.83
per cent when compared with N6.67
trillion at end-June 2017. FGN bonds
accounted for 48.69 per cent of
aggregate market capitalization as at
end-June
2018.
The
value
of
state/municipal
bonds,
corporate
bonds and supranational bonds were
N565.82 billion, N267.72 billion and
N12.95 billion, accounting for 2.97, 1.41
and 0.07 per cent of aggregate
market
capitalization,
respectively,
during the same period. The equities
market contributed 46.9 per cent of
aggregate market capitalization at
end-June 2018, while FGN bonds,
state/municipal
bonds,
corporate
bonds
and
supranational
bonds
accounted for the balance of 53.10
per cent (Figure 5.16).

Figure 5.16
Structure of the Nigerian Capital Market (June,
2018)

Source: NSE

5.4
Global
Financial
Market
Developments
In review period, the global financial
market
experienced
significant
volatility
due
to
several
factors
including: the earlier threat of military
action against North Korea by the US;
rising trade tensions between the US
and its major trading partners; and the
withdrawal of the US from the Iranian
nuclear deal. Also, the continued
uncertainties
around
the
BREXIT
negotiations;
progressing
monetary
policy divergence in the advanced
economies;
and
sustained
geopolitical tensions in the Middle East
further
heightened
market
nervousness. The effect of these factors
were,
however,
significantly
moderated by the commencement of
peace talks on the Korean Peninsula,
sustained recovery in oil and other
commodity
prices,
rebound
in
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investment and manufacturing output
as well as improving asset prices and
long term yields in major financial
markets.
Consequently,
the
performance of major global stock
markets was mixed on account of
intensified monetary policy divergence
in the advanced economies and
further strengthening of the US dollar
against key currencies. The European
Central Bank (ECB) and the Bank of
Japan (BOJ) continued with a broad
stance of monetary accommodation
as
inflation
remained
considerably
below their targets, while the US Fed
raised policy rates on two occasions in
the review period. As a consequence,
the US dollar appreciated against most
currencies.
Thus,
on
account
of
improving macroeconomic conditions
in
the
advanced
economies,
commodity
prices
sustained
their
recovery in the review period.

5.4.1 Money
Market
and Central
Bank Policy Rates
With
improvements
in
global
macroeconomic
conditions
and
continued monetary accommodation
across
the
major
advanced
economies,
asset
prices
in
major
financial
markets
continued
their
upward
trend.
In
the
advanced
economies,
price
development
showed a mixed trend with rising prices
in the US and the UK, pushing inflation
beyond central banks’ targets, while in
the EU and Japan, inflation remained
relatively subdued. In most emerging
market and developing economies,
relatively
stable
currencies
and
moderating inflation rates, resulting
from
improved
oil
and
other
commodity
prices,
provided
extra
policy space for monetary adjustment.
Key
concerns
to
global
macroeconomic stability confronting
central
bank
policy
makers
with
tendency to influence the direction of
capital flow in the review period
included: the earlier threat of military
action against North Korea by the US;
rising trade tensions between the US
and
its
major
trading
partners;
withdrawal of the US from the Iranian
nuclear deal; continued uncertainties
around
the
BREXIT
negotiations;
continued
monetary
policy
divergence between the US and the
UK on one hand and the euro area
and Japan, on the other hand; the
strengthening US dollar; and geopolitical tensions in the Middle East.
In the light of these developments, the
US Federal Reserve Bank continued its
monetary
policy
normalization
programme, as indicators suggested
the likelihood of further rise in inflation
in the medium term, while the Bank of
England (BOE) gave strong indications
of progressing with its normalization
programme in the second half of 2018.
The European Central Bank (ECB) and
the Bank of Japan (BOJ), however,
continued with a broad stance of
monetary accommodation as inflation
remained considerably below their
targets. Accordingly, the US Fed raised
its policy rate on two occasions, while
the BoE, ECB and BOJ held their rates
steady.

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Amongst the emerging market and
developing economies, Brazil, Russia,
Ghana, Kenya and South Africa all
lowered
their
policy
rates,
as
exchange rates stabilized and inflation
moderated. In China, however, the
policy rate was maintained to support
its
rebalancing
programme,
while
Nigeria maintained rates to attract
foreign inflows and moderate price
development.

Table 5.8:
Policy Rates of Selected Countries January –
June 2018
Country
Jan 18
Feb.

Mar.

Apr.

May.

Jun

Kenya

S. Africa

Ghana

Nigeria

Brazil

USA

Japan

Euro
Area

India

Russia

China

UK

Indonesia


5.4.2 Capital Market
The performance of major global
stock markets was mixed during the
review period mainly on account of
intensified monetary policy divergence
in the advanced economies and
further strengthening of the US dollar
against key currencies. The effect of
these factors was further amplified by
US-propelled trade tensions arising from
the implementation of aggressive tariff
regimes
against
her
key
trading
partners,
notably
China
and
the
European Union. As a consequence, in
Europe, the French CAC 40 increased
by 0.21 per cent, while the UK FTSE 100
and German DAX indices decreased
by 0.66 and 4.73 per cent, respectively.
In North America, the United States S&P
500 and Canadian S&P/TSX Composite
indices increased by 1.67 and 0.42 per
cent, respectively, while the Mexican
Bolsa decreased by 3.43 per cent. In
South America, the Columbia COLCAP
index increased by 4.9 per cent, while
the Brazilian Bovespa and Argentine
Merval indices decreased by 4.76 and
13.40 per cent, respectively. In Asia,
the Indian BSE Sensex index increased
by 4.01 per cent, while the Japanese
Nikkei 225 and Chinese Shanghai SE
indices decreased by 2.02 and 13.90
per cent, respectively. The African
stock markets experienced the effect
of capital reversals, as the Nigerian NSE
All-Share, South African JSE All-Share
and Kenyan Nairobi NSE 20, indices
decreased by 1.61, 3.68 and 11.48 per
cent, respectively, while the Egyptian
EGX CASE 30 and Ghanaian GSE All
Share indices increased by 8.85 and
11.59 per cent, respectively, as these
countries
were
under
International
Monetary
Fund
(IMF)
monitored
programmes which helped to restore
investor confidence.


CBN Monetary Policy Review

Table 5.9
Selected International Stock Market Indices as at June, 2018
Country
Index
End-Dec

29-Mar-18
29-Jun-18
December 29, 201729 June, 2018 %
Change
29 March-29
June, 2018
% Change
AFRICA
Nigeria
ASI

South Africa
JSE African AS

Kenya
Nairobi NSE 20

Egypt
EGX CSE 30

Ghana
GSE All Share

NORTH AMERICA
US
S&P 500

Canada
S&P/TSX Composite

Mexico
Mexico Bolsa (IPC)

SOUTH AMERICA
Brazil
Bovespa Stock

Argentina
Merval

Colombia
COLCAP

EUROPE
UK
FTSE 100

France
CAC 40

Germany
DAX

ASIA
Japan
NIKKEI 225

China
Shanghai SE A

India
BSE Sensex

Source: Bloomberg

5.4.3 Commodities
Global commodity prices sustained
their
recovery
during
the
review
period,
largely
on
account
of
improving macroeconomic conditions
in
the
advanced
and
emerging
market and developing economies. In
particular,
crude
oil
prices
were
buoyed by geopolitical tensions in the
Middle East, sustained compliance by
OPEC and Non-OPEC members on
production
adjustments,
large
drawdown of US crude inventories and
prospects of higher oil demand. As a
result, the OPEC reference basket rose
by 17.40 per cent to US$75.69 at endJune 2018 from US$64.47 at endDecember 2017. With crude oil being a
major component of the global energy
mix, the Energy Price Index also rose by
17.65 per cent to 91.57 points in June
2018 from 77.83 points in December
2017.
The non-fuel commodity price index
(including aluminum and tin) also rose
by 6.27 per cent to 89.83 points in June
2018 from 84.53 points in December
2017, reflecting the strengthening of
global demand. The price per metric
tonne of metals for aluminum and tin
rose to US$2,299.67 and US$20,858.83 in
May

from
US$2,080.47
and
US$19,476.37
in
December
2017,
respectively.

The prices of food commodities equally
rose during the review period. The
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Food and Agriculture Organization
(FAO) Food Price Index rose by 3.67
per
cent
from
169.1
points
in
December 2017 to 175.3 points in June
2018. The sub-indices of meat, dairy
and cereals drove the increase, while
vegetable oil and sugar fell.

5.4.4 Foreign Exchange Market
In the first half of 2018, most currencies
depreciated against the US dollar. This
was
largely
on
account
of
the
implementation of the ‘America First’
policy of the Trump Administration in
the United States through bullish trade
instruments which helped to increase
the flow of foreign investments into the
US. Other factors were: the significantly
improved economic conditions in the
US; and rising treasury yields, following
sustained
monetary
policy
normalization by the US Fed. As a
result, in North America, the Canadian
dollar
and
the
Mexican
peso
depreciated against the US dollar by
4.28 and 1.25 per cent, respectively. In
South America, the Brazilian real and
the
Argentine
peso
depreciated
against the U.S. dollar by 14.65 and
35.62 per cent, respectively, while the
Colombian peso appreciated by 1.92
per cent in the period under review.
In Europe, the British pound, the Euro
and the Russian ruble all depreciated
against the U.S dollar by 2.25, 2.66 and
8.15 per cent, respectively. In Asia, the
Chinese yuan and the Indian rupee
both depreciated by 1.61 and 6.72 per
cent, respectively, while the Japanese
yen appreciated against the U.S dollar
by 1.74 per cent.

In Africa, the South African rand,
Egyptian pound and the Ghanaian
cedi depreciated against the U.S.
dollar by 9.78, 0.59 and 4.76 per cent,
respectively, while the Nigerian naira
and
Kenyan
shilling
appreciated
against the U.S dollar by 0.08 and 2.15
per cent, respectively.


CBN Monetary Policy Review

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


Currency
29-Dec-17
29-Jun-18
Dec. 17 - Jun 18
(% App/Dep)
AFRICA
Nigeria
Naira
306.00
305.75
0.08
South Africa
Rand
12.38
13.73
-9.78
Kenya
Shilling
103.18
101.01
2.15
Egypt
Pound
17.81
17.92
-0.59
Ghana
Cedi
4.51
4.73
-4.76
NORTH
AMERICA
Canada
Dollar
1.26
1.31
-4.28
Mexico
Peso
19.66
19.91
-1.25
SOUTH
AMERICA
Brazil
Real
3.31
3.88
-14.65
Argentina
Peso
18.62
28.93
-35.62
Colombia
Peso
2986.84
2930.50
1.92
EUROPE
UK
Pound
0.74
0.76
-2.25
Euro Area
Euro
0.83
0.86
-2.66
Russia
Ruble
57.63
62.74
-8.15
ASIA
Japan
Yen
112.69
110.76
1.74
China
Yuan
6.51
6.62
-1.61
India
Rupee
63.87
68.47
-6.72
Source: bloomberg
Exchange Rates of Selected Countries (Value in currency units to US$)
CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER SIX
ECONOMIC OUTLOOK

6.1
OVERVIEW
lobal output growth for 2018
was projected to rise to 3.9 per
cent, up from 3.7 per cent in

(WEO
July,
2018).
The
development was expected to be
driven,
among
others,
by
the
strengthening of domestic investment
demand, relatively easier financing
conditions
in
the
advanced
economies and sustained recovery in
oil and other commodity prices, amid
limited spillovers of trade tensions to
other
markets,
particularly
in
the
advanced economies. The downside
risks to growth would include: growing
protectionist measures; the weakening
of the global cooperation mechanism;
potential buildup of financial sector
vulnerabilities, which could weaken
market
sentiments
and
undermine
growth; and insufficient fiscal buffers to
support recovery.

The
growth
outcomes,
however,
differed across regions and markets. In
the advanced economies, growth was
projected at 2.4 per cent in 2018, same
as
in
2017,
largely
reflecting
moderations in the euro area and
Japan. Output growth in the US was
estimated to increase to 2.9 per cent in
2018 from 2.3 per cent in 2017, in
response
to
fiscal
stimulus
and
increased private final demand which
propped
output
further
above
potential,
thereby
lowering
unemployment. On the other hand,
growth in the euro area was projected
to decline to 2.2 per cent in 2018 from
2.4 per cent in 2017, owing to widening
sovereign spreads in the wake of
heightened political uncertainties that
weighed down domestic demand. In
the United Kingdom, growth was also
projected to slow down to 1.4 per cent
in 2018 from 1.7 per cent in 2017, as
sentiments from BREXIT continued to
weigh on investments. Owing to weak
private consumption and investment,
the Japanese economy was also
estimated to grow lower by 1.0 per
cent in 2018, compared with 1.7 per
cent in 2017.

In
the
emerging
market
and
developing
economies
(EMDEs),
growth was uneven, reflecting the
combined influences of rising oil prices,
higher yields in the United States,
spillover
effects
of
trade
tensions
coupled with political uncertainties in
the
domestic
environment.
Accordingly, growth in the EMDEs was
estimated at 4.9 per cent in 2018 up
from 4.7 per cent in 2017. Growth in
India was projected to rise to 7.3 per
cent in 2018 from 6.7 per cent in 2017,
as the effects of the goods and
services
tax
and
currency
demonetization
exercise
waned.
Output growth in Brazil was estimated
to expand to 1.8 per cent in 2018 from
1.0 per cent in 2017. Similarly, output
growth in Russia was projected to rise
by 1.7 per cent in 2018 up from 1.5 per
cent in 2017, owing to stabilizing oil
prices,
improved
confidence,
and
recovering
domestic
and
external
demand.
China’s
growth
was
estimated at 6.6 per cent in 2018 down
G
CBN Monetary Policy Review

from 6.9 per cent in 2017, as the
tightening of the financial sector was
sustained along with weaker external
demand.

In Sub-Saharan Africa (SSA), growth
was estimated to increase to 3.4 per
cent in 2018 from 2.8 per cent in 2017,
due to improved performance in
Nigeria and South Africa, the region’s
largest
economies.
The
Nigerian
economy was estimated to grow by
2.1 per cent in 2018 up from 0.8 per
cent in 2017, sustained by improved
prospects for oil prices and production.
Growth of the South African economy
was also projected to rise by 1.5 per
cent in 2018 up from 1.3 per cent in
2017, as the change in the country’s
leadership ushered in a climate of
improved
confidence,
thus
strengthening private investment.

6.2
Outlook for Global Output
Global
output
is
expected
to
strengthen to 3.9 per cent apiece in
2018 and 2019 from 3.7 per cent in
2017. The projection is premised on
growth recovery in the emerging
market and developing economies
(EMDEs) and still strong growth in the
advanced economies. The factors
expected to drive the global growth
projection would include: the broadly
accommodative financial conditions in
the advanced economies; the global
spillovers
of
the
current
US
expansionary fiscal policy; sustained
recovery in commodity prices; and
favorable market sentiment despite
the looming trade war between the US
and
some
of
her
major
trading
partners.

Growth in the advanced economies is
expected to remain unchanged at 2.4
per cent in 2017 and 2018, easing
slowly to 2.2 per cent in 2019, largely
reflecting moderations in the euro area
and Japan. In the United States,
growth is projected to strengthen to 2.9
and 2.7 per cent in 2018 and 2019,
respectively, from 2.3 per cent in 2017,
due largely to the ongoing fiscal
stimulus that is expected to further
strengthen private final demand and
lower unemployment. The euro area
economy is, however, projected to
slow gradually from 2.4 per cent in
2017 to 2.2 and 1.9 per cent in 2018
and 2019, respectively. Similarly, Japan
is forecast to slow down by 1.0 and 0.9
per
cent
in

and
2019,
respectively, from 1.7 per cent in 2017,
following a contraction traceable to
weaker
private
consumption
and
investment in the first quarter of 2018.
The
economy
would,
however,
strengthen over the remainder of 2018
and further in 2019, supported by
stronger private consumption, external
demand, and investment.

In
the
emerging
market
and
developing
economies,
growth
is
forecast to expand to 4.9 and 5.1 per
cent in 2018 and 2019, respectively,
from
4.7
per
cent
in
2017.
The
expansion would be supported by
several factors including: rising crude
oil prices; and an appreciating US
dollar, making goods from emerging
market economies more competitive.
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China is forecast to further slowdown
to 6.6 and 6.4 per cent in 2018 and
2019, respectively, from 6.9 per cent in
2017, due to the ongoing economic
rebalancing
programme.
Growth
forecast for India is expected to
improve to 7.3 and 7.5 per cent in 2018
and 2019, respectively, from 6.7 per
cent in 2017, due to improved private
and government consumption as well
as fixed investment. In Brazil, growth is
projected to rise to 1.8 and 2.5 per
cent in 2018 and 2019, respectively,
from 1.0 per cent in 2017, following the
recovery of crude oil prices as well as
political stability.

In Sub-Saharan Africa, the prospects
for output recovery is likely to continue,
supported by rising commodity prices.
Growth in the region is expected to
expand to 3.4 and 3.8 per cent in 2018
and 2019, respectively, from 2.8 per
cent in 2017. The improved growth
forecast reflects favourable prospects
for the Nigerian and South African
economies. Nigeria’s growth is forecast
to expand to 2.1 and 2.3 per cent in
2018 and 2019, respectively, from 0.8
per cent in 2017. The improved outlook
is largely attributable to favourable oil
prices and restoration of stability in
economic management. Despite the
perennial labour and energy crises, the
South African economy is expected to
recover from the weak performance in
the first quarter into stronger growth
over the rest of 2018 and into 2019,
largely
on
account
of
improved
confidence associated with the new
political leadership. Consequently, the
South African economy is forecast to
expand by 1.5 and 1.7 per cent in 2018
and 2019, respectively, from 1.3 per
cent in 2017.

Growth in the Middle East and North
Africa (MENA) region is projected to
strengthen to 3.5 and 3.9 per cent in
2018 and 2019, respectively, from 2.2
per cent in 2017. The growth outlook is
premised on the expectation that
many countries in the region will
benefit from the improved outlook for
oil prices, although, the outlook for oil
importing countries remains fragile.
Several economies in the region would
need to implement fiscal consolidation
programmes, even as the threat of
heightened
geopolitical
conflict
remains a key drag on growth in the
region.

6.3
Downside
Risks
to
Global
Outlook
The
growth
projections,
although
promising, are laden with significant
risks, the balance of which is tilted to
the downside in the medium term.
These include: the possibility of tighter
financial conditions in some vulnerable
economies; the possibility of escalating
and
sustained
trade
actions;
the
growing trend towards protectionism;
and weakening of global cooperation
frameworks. The recently announced
tariff increases by the United States
and retaliatory measures by trading
partners have increased the likelihood
of escalating trade tensions, which
could undermine economic recovery
and growth prospects.

CBN Monetary Policy Review

In the advanced economies, financial
market
conditions
remain
accommodative with low volatility,
resulting in narrowing spreads, which is
prone to sharp changes under adverse
market
conditions.
The
factors
expected
to
trigger
this
adverse
market
conditions
would
include:
heightened trade tensions; conflicts,
and
geopolitical
instability;
and
growing political uncertainty as well as
lingering disagreements over migration
policies and BREXIT negotiations in
Europe. These will likely hurt investment
activity, capital flows and growth in the
short –to- medium term.

In emerging markets and developing
economies, the ongoing normalization
of monetary policy in the US could
result in sharp capital outflows, leading
to shortage of capital in the domestic
economies. The response of this group
of countries would be to raise policy
rates to stem capital reversals, resulting
in tighter financial conditions, which
may potentially lead to disruptive
portfolio
adjustments
and
sharp
movements in the exchange rate. This
would
likely
be
pronounced
in
countries with heightened political risks
and weak economic fundamentals.
The net effect of these adjustments
would undermine growth.
The key risks to the outlook in the
Middle East and sub-Saharan Africa
regions include: domestic political risks;
insurgency and armed conflicts; as
well as extreme weather and other
natural
disasters,
which
could
potentially undermine growth.


Table 6.1
Global Output and Inflation Outlook


Year on Year
Projections

A. World Output
World Output

Advanced
Economies

USA

Euro Area

Japan

UK

Canada

Other
Advanced
Economies

Emerging &
Developing
Economies

Commonwea
lth of
Independent
States

Latin America
and the
Caribbean

Middle East
and North
Africa

Sub-Saharan
Africa

B. Commodity
Prices (US'
Dollars)


Oil

Non-fuel

C. Consumer
Prices


Advanced
Economies

Emerging &
Developing
Economies

Source: IMF WEO Update, July 2018


CBN Monetary Policy Review

6.4
Global Inflation Outlook
Globally,
consumer
prices
are
projected to rise modestly in 2018,
partly reflecting increase in crude oil
and other commodity prices. Global
inflation is projected to rise to 3.5 and
3.4 per cent in 2018 and 2019,
respectively, from 3.0 per cent in 2017.
In the advanced economies, the
expected increase in headline inflation
would largely be on account of firming
growth, thereby gradually closing the
negative output gap. The outlook for
inflation in the emerging market and
developing economies is to maintain
an upward trend. Among the EMDEs,
oil exporting countries may witness
moderation in prices of goods and
services, while oil importing countries
are likely to experience rising inflation
from the recovery of oil and other
commodity prices.

In the Advanced Economies, headline
inflation is projected at 2.0 and 1.9 per
cent in 2018 and 2019 respectively,
from 1.7 per cent in 2017, due to the
modest recovery of oil and other
commodity prices and the ongoing
quantitative easing programme in the
Euro area, the United Kingdom and
Japan.
In
Germany,
inflation
is
projected to moderate to 1.6 per cent
in 2018 from 1.7 per cent in 2017, but
rise to 1.7 per cent in 2019.

In the United States, inflation is forecast
to rise to 2.5 and 2.4 per cent in 2018
and 2019, respectively, up from 2.1 per
cent in 2017. This rise is expected on
the back of the government’s ongoing
expansionary fiscal policy. In the Euro
area, headline inflation is expected to
stabilize at 1.5 per cent in 2018 the
same as in 2017, and rise to 1.6 per
cent 2019. Headline inflation in Japan
is projected at 1.1 per cent apiece in
2018 and 2019 from 0.5 per cent in
2017,
as
the
BOJ
maintains
its
quantitative easing programme.

In
the
emerging
market
and
developing
economies,
inflation
is
expected to rise to 4.6 and 4.3 per
cent in 2018 and 2019, respectively,
from 4.0 per cent in 2017, due to the
impact of rising commodity prices on
some
large
emerging
market
economies such as China and India. In
China, inflation is forecast to increase
to 2.5 and 2.6 per cent in 2018 and
2019, respectively, from 1.6 per cent in
2017. In India, inflation is projected at
5.0 per cent apiece in 2018 and 2019,
from 3.6 per cent in 2017. In Brazil,
inflation is estimated to rise to 3.5 and
4.2 per cent in 2018 and 2019,
respectively, from 3.4 per cent in 2017.
On the other hand, inflation in Russia is
forecast to decline to 2.8 per cent in
2018 from 3.7 per cent in 2017, but rise
to 3.8 per cent in 2019. Similarly,
inflation in Nigeria is expected to fall
from 16.5 per cent in 2017 to 14.0 per
cent in 2018, and marginally rise to 14.8
per cent 2019, driven by relative
exchange rate stability.

In South Africa, inflation is projected at
5.3 per cent apiece in 2018 and 2019,
same as in 2017. Similarly, in SubSaharan Africa, inflation is expected to
fall to 9.5 and 8.9 per cent in 2018 and
2019, respectively, from 11.0 per cent in
CBN Monetary Policy Review

2017. In the MENA region, including
Afghanistan and Pakistan, headline
inflation is expected to rise to 8.2 and
6.8 per cent in 2018 and 2019,
respectively, from 6.3 per cent in 2017.

6.5
Outlook
for
Domestic
Output
Growth
The domestic economy is expected to
continue on the path of recovery. Real
GDP grew by 1.95 per cent (year-onyear) in the first quarter of 2018. This
represents a stronger growth of 2.87
percentage points compared with -
0.91 per cent in Q1 2017. The outcome
was, however, a decline of 0.16
percentage point compared with 2.11
per cent recorded in the preceding
quarter. During the second quarter,
real output declined to 1.50 per cent
from the 1.95 per cent recorded in the
first quarter. The development was,
however,
an
expansion
by
0.78
percentage point when compared
with the growth of 0.72 per cent in the
corresponding
period
of
2017.
Nonetheless, the outlook for 2018 and
beyond is positive, as the economy is
projected to grow by 2.1 per cent in
2018 and 1.9 per cent in 2019 (IMF,
2018). Similarly, the World Bank projects
a growth of 2.5 per cent in 2018 and
2.8 per cent in 2019. The outlook is
anchored on higher crude oil prices
and production, improved electricity
supply,
prospects
for
improved
agricultural
performance
and
continuing
reforms
in
the
foreign
exchange
market,
among
others.
Nevertheless, the unemployment rate
remained high at 18.8 per cent,
requiring targeted fiscal spending to
further strengthen output and create
jobs.

As a key driver of the outlook for
output, oil prices which rebounded to
an average of US$52 per barrel in 2017
are projected to rise to over US$71 per
barrel in 2018 and beyond (US Energy
Information
Administration).
Oil
production also increased from 1.81
million barrels per day in 2016 to 1.89
million barrels per day in 2017 and 2.0
by Q1, 2018 following sustained peace
in the Niger Delta region. The trend is
expected to continue in 2018 and
2019, in tandem with the production
agreement between OPEC and some
non-OPEC members.

In
addition,
the
renewed
anticorruption campaign, reduction of
leakages in government revenues, and
fiscal consolidation, among other ongoing
reforms,
present
improved
prospects for targeted government
spending.
Nigeria’s
increased
leadership and visibility in the regional
economy
would,
among
others,
reduce trade barriers, cut down costs,
improve manufacturing, and expand
opportunities for employment.

Furthermore,
the
activities
of
the
Presidential
Enabling
Business
Environment
Council
(PEBEC)
are
expected to continue to improve
Nigeria's ranking in the World Bank
Ease of Doing Business Report, thereby
attracting Foreign Direct Investments.
Also,
the
sustained
collaboration
between
the
CBN
and
State
Governments
for
expansion
of
CBN Monetary Policy Review

agricultural output as reflected in the
Anchor Borrowers Programme (ABP) is
expected
to
continue
to
boost
agricultural production.

The downside risks to the outlook are:
ongoing security challenges; loss of
market share for Nigeria’s crude oil
export; increased political uncertainty
due to electioneering activities which
may trigger capital outflows; and weak
private sector credit growth.

6.6 Outlook for Domestic Inflation
Staff estimates suggest that year-onyear headline inflation is projected to
moderate to 10.94, 10.66, 10.41, 10.26
and 10.01 per cent in July, August,
September, October and November
2018, respectively. Thereafter, inflation
is forecast to inch up slightly to 10.36
per cent in December 2018. Upside
risks
to
inflation
include
the
implementation of the 2018 budget
and increased spending towards the
2019 general elections. Others are:
poor power supply; increased cost of
transportation; and persistent clashes
between
herdsmen
and
farmers,
leading to disruptions in the food
supply and distribution chain. As the
Bank continues to manage liquidity
conditions in the domestic economy,
inflationary
developments
will
also
continue to be monitored to ensure
that the risks to inflation and growth
are minimized.
Status
Month
Headline Food
Core
Status
Month
Headline Food
Core
Jan-18
15.13
18.92
12.09
Jan-18
16.22
19.62
13.01
Feb-18
14.33
17.59
11.71
Feb-18
15.93
19.52
12.67
Mar-18
13.34
16.08
11.18
Mar-18
15.60
19.29
12.33
Apr-18
12.48
14.80
10.92
Apr-18
15.20
18.89
12.02
May-18
11.61
13.45
10.71
May-18
14.79
18.36
11.83
Jun-18
11.23
12.98
10.39
Jun-18
14.37
17.75
11.65
Jul-18
10.94
12.73
9.84
Jul-18
13.93
17.09
11.45
Aug-18
10.66
12.24
9.74
Aug-18
13.48
16.41
11.23
Sep-18
10.41
12.00
9.38
Sep-18
13.01
15.71
11.00
Oct-18
10.26
12.17
8.56
Oct-18
12.54
15.05
10.69
Nov-18
10.01
12.06
7.78
Nov-18
12.06
14.39
10.32
Dec-18
10.36
12.44
8.22
Dec-18
11.66
13.84
10.00
YEAR-ON-YEAR INFLATION RATE
12-MMA INFLATION RATE
Actual
Actual
Forecast
Forecast


6.7 Outlook for Monetary Policy in 2018
Monetary Policy will continue to be
anchored
on
the
Medium-Term
Framework. This will enable the Bank
consistently anchor expectations and
prevent market agents from overly
engaging in speculative activities, in
response to temporary shocks. While
the primary objective of monetary
policy remains the maintenance of
price stability, the Bank will sustain its
focus on the reduction of inflationary
pressures through effective liquidity
management, thereby creating an
environment conducive to inclusive
and sustainable growth.

CBN Monetary Policy Review

The Bank will continue to monitor
developments in the global economy
which
influences
the
direction
of
monetary policy in the near to medium
term. The U.S. Fed raised its rate by
0.5% in June 2018 to a target range of
1.75 – 2.00% following strengthening
labour
market
conditions.

The
renewed certainty around the steady
pace of normalization of US monetary
policy
has
implications
for
the
appreciation of the U.S. dollar and
thus, depreciation of the naira. Other
challenges to monetary policy include:
exchange rate movements, financial
market volatility and constrained credit
growth. Furthermore, headline, food
and core inflation are likely to trend
slightly upwards in the near term, due
to the election spending towards 2019
general elections and the end of the
base effect in July 2018. These issues
will
continue
to
demand
close
attention and monitoring in monetary
policy implementation.

The thrust of monetary policy in the
near term would be supported by the
expectations of moderate rise in crude
oil price and accretion to reserves,
renewed peace in the Niger-Delta and
improved
agricultural
production.
Moreover,
sustained
stability
in
exchange
rate
supported
by
increased foreign portfolio inflow is
expected to bolster the Bank’s efforts
at controlling inflation during the rest of

CBN Monetary Policy Review

Appendices
CENTRAL
BANK
OF
NIGERIA
COMMUNIQUÉ
NO

OF
THE
MONETARY
POLICY
COMMITTEE
MEETING
OF
TUESDAY
3RD
AND
WEDNESDAY 4TH APRIL, 2018

1.0
Background
The re-constituted Monetary Policy
Committee (MPC) held its maiden
meeting, the 260th meeting of the
Committee, its first in 2018, on 3rd and
4th of April, 2018 against the backdrop
of strengthening global growth and
improving
domestic
economic
conditions. The Committee assessed
the developments in the global and
domestic
economic
environments
during
the
first
quarter
of
2018,
including the risks to price stability,
financial
stability,
and
economic
growth in the short-to-medium term.
Nine members of the Committee
attended the meeting.

Global Economic Developments
The
strong
headwinds
which
confronted the global economy in
2017 showed signs of moderation,
giving way to prospects for stronger
growth in 2018. Consequently, global
output is projected to grow by 3.9 per
cent in 2018 from 3.7 per cent in 2017
on the heels of rebound in investment
as a result of improvements in investor
confidence, strengthening commodity
prices, rising aggregate demand and
accommodative
monetary
policy,
especially
in
some
advanced
economies.
With
the
sustained
recovery
in
oil
prices,
aggregate
demand is expected to continue to
firm up. Growth in the advanced
economies is projected at 2.3 per cent
in 2018, and 4.9 per cent for emerging
markets and developing economies
(EMDEs).
The
Monetary
Policy
Committee noted some downside risks
to the outlook for global growth to
include: continuing normalization of
monetary policy in the advanced
economies; new U.S. trade policy;
uncertainties
associated
with
the
BREXIT negotiations; and rising geopolitical tensions in the Middle-East and
on the Korean Peninsula.

In
the
advanced
and
emerging
market
economies,
inflation
is
projected at 1.9 and 4.5 per cent in
2018, respectively. However, the broad
indication from the IMF is that over the
medium to long term, inflation may rise
at
a
modest
pace
as
general
economic conditions remain subdued.
Asset prices and long-term yields in
major financial markets are also on the
increase, confirming the possibility of a
future rise in the price level.

Domestic Output Developments
Data from the National Bureau of
Statistics (NBS) indicate that real Gross
Domestic Product (GDP) grew by 1.92
per cent in the fourth quarter of 2017,
up from 1.40 and 0.72 per cent in the
third
and
second
quarters,
respectively.
The
economy
grew
overall by 0.83 per cent in 2017. The
main drivers of real GDP growth were
agriculture (1.08%), industry (0.56%)
and trade (0.35%). Non-oil real GDP
grew by 1.45 per cent in the fourth
CBN Monetary Policy Review

quarter of 2017 compared with a
contraction of 0.76 per cent in third
quarter of 2017, indicating that the
economy is gradually returning to a
path of sustainable positive growth.
The
Committee
also
noted
the
continuous positive outlook based on
the
Manufacturing,
and
Nonmanufacturing Purchasing Managers’
Index (PMI), which stood at 56.7 and
57.2
index
points,
respectively,
in
March 2018, indicating expansion for
the twelfth and eleventh consecutive
months. The Committee believes that
effective
implementation
of
the
Economic Recovery and Growth Plan
(ERGP) by the Federal Government
and quick passage of the 2018 budget
will continue to enhance aggregate
demand
and
confidence
in
the
Nigerian economy.

Developments in Money and Prices
The Committee noted that money
supply (M2) grew marginally by 0.07
per cent in February 2018 (annualised
to 0.42%), in contrast to the provisional
growth benchmark of 10.29 per cent
for 2018. The development in M2
largely
reflected
growth
in
net
domestic credit (NDC) of 4.05 per cent
(annualised to 24.30%), emanating
majorly from net credit to government,
which
grew
by
19.99
per
cent
(annualised to 119.94%) against the
provisional benchmark of 33.12 per
cent. Credit to the private sector also
grew by 1.49 per cent (annualised to
8.94%) in February 2018, compared
with the provisional annual benchmark
of 14.88 per cent. Net foreign assets
(NFA), contracted by 2.82 per cent,
annualized
to
16.92
per
cent,
compared
with
the
provisional
benchmark of -29.31 per cent. Narrow
money (M1), also contracted by 2.77
per cent (annualised to 16.62%). The
Committee
urged
the
Federal
Government
to
strongly
exercise
restraint on domestic borrowing in
order to lower the cost of credit to the
private sector.

The
Committee
noted
that
the
continued low level of lending by
banks remains a constraint to growth
of the real sector of the economy. The
Committee advised the Management
of the CBN to continue to provide the
required policy impetus to engender
improved credit delivery by the deposit
money banks to the economy.

Inflationary pressures in the economy
continued to moderate with headline
inflation (year-on-year) receding for
the thirteenth consecutive month to
14.33 per cent in February 2018 from
18.72 per cent in January 2017. Monthon-month food inflation fell by 133
basis points to 17.59 per cent in
February 2018, and core inflation also
declined marginally by 38 basis points
to 11.71 per cent during the same
period.

Money market interest rates reflected
liquidity conditions in the banking
system as the average inter-bank call
rate increased to averagely 12.42 per
cent in February 2018 from 9.49 per
cent in December 2017. The Open buy
back (OBB) rate also increased to
13.19 per cent in February 2018 from
CBN Monetary Policy Review

8.46 per cent in December 2017. The
movement in the net liquidity position
and
interest
rates
reflected
the
combined effects of OMO auctions,
foreign exchange interventions and
statutory allocation to state and local
governments.

The
Committee
also
noted
the
continuous improvement in the level of
external
reserves,
which
stood
at
US$46.699 billion as at March 29, 2018.
Similarly, the All-Share Index (ASI) rose
by 8.5 per cent from 38,243.19 on
December 29, 2017, to 41,504.51 on
March 29, 2018. Market Capitalization
(MC) improved by 10.2 per cent from
N13.61 trillion on December 29, 2017, to
N14.99 trillion during the same period.
The Committee observed that, while
this development may be a reflection
of improved investor confidence in the
economy,
it
cautioned
that
the
Management of the Bank should
carefully monitor the developments
and
to
establish
mechanisms
for
safeguarding the stability of the foreign
exchange market in the event of a
sudden
capital
reversal.
The
Committee observed the continued
rise in oil prices, but acknowledged the
inherent volatility in commodity prices
and urged the Bank not to relent in
building
external
reserves
buffers
against any future price downturns
and as a means of sustaining investor
confidence in the economy.

The Committee noted the relative
stability
in
the
foreign
exchange
market, with declining premia across
all segments of the market. It observed
with satisfaction, the sustained high
level of activity at the Investors’ and
Exporters’ (I&E) window of the foreign
exchange
market.
The
window
continues to attract more investors,
thus boosting foreign exchange supply.
Consequently, total foreign exchange
inflow
through
the
central
bank
increased
by
73.00
per
cent
in
February 2018, compared with the
previous month. This was attributed to
the increase in receipt of proceeds
from
Petroleum
Profit
Tax
(PPT),
royalties and crude oil & gas. Total
outflow also increased in February 2018
by 15.69 per cent, as a result of higher
payments
for
invisibles,
interbank
transactions as well as JVC cash call
payments.

2.0.
Overall Outlook and Risks
Forecasts
of
key
macroeconomic
indicators give a positive outlook for
the Nigerian economy in 2018. This is
predicated on the quick passage and
effective implementation of the 2018
budget, improved security, foreign
exchange market stability as well as
favourable crude oil prices. On the
downside, the Committee noted the
potential impact of the 2019 electionrelated spending, against the weak
backdrop
of
tax
revenue
efforts,
herdsmen related violence and rising
yields in the advanced economies.
Indications in the US and the UK point
to higher interest rates in the short to
medium term.

3.0.
The
Considerations
of
the
Committee
CBN Monetary Policy Review

The Committee noted with satisfaction
the gradual return to macroeconomic
stability
as
reflected
in
the
third
consecutive quarterly growth in real
GDP in the fourth quarter of 2017. It
also noted the continued moderation
in all measures of inflation as well as
sustained
stability
in
the
naira
exchange rate and urged the Bank to
sustain the stability to avoid a mission
drift. In particular, the Committee
welcomed
the
narrowing
of
the
exchange rate premium between the
BDC segment and the Investors’ and
Exporters’ (I&E) window of the foreign
exchange
market.
Overall,
the
Committee noted that the recovery of
the economy was strengthening, in
view of the return to growth of the
Services Sector. As the fiscal sector
continues to settle its outstanding
liabilities, it reduces its domestic debt
profile, thus increasing the liquidity of
the banking system. However, the
Monetary Policy Committee observed
increasing monetization of oil proceeds
as evident in the growing FAAC
distribution, relative to the 2017 level of
disbursements. The Committee urged
the Government to initiate strong
stabilization programmes and to freeze
the
growth
in
its
aggregate
expenditure and FAAC distributions in
order to create savings; needed to
stabilize the economy against future oil
price related shocks.

Notwithstanding
the
general
improvement
in
macroeconomic
conditions, the Committee noted the
rather slow pace of moderation in
food inflation. It also took note of the
potential risk of a pass-through from
rising global inflation to domestic
prices. Members, however, expressed
confidence that the tight stance of
monetary policy would continue to
complement
other
policies
of
government in addressing some of the
structural
issues
underlying
the
stickiness
of
food
prices.
The
Committee noted that at 14 per cent,
the policy rate was tight enough to
rein-in current inflationary pressures.
The Committee, therefore, reaffirmed
its
commitment
to
price
stability
conducive to sustainable and inclusive
growth.

The Committee noted with satisfaction
the gradual implementation of the
Economic Recovery and Growth Plan,
in an effort to stimulate economic
recovery.
In
the
same
vein,
the
Committee urged quick passage of
the 2018 Appropriation Bill by the
National Assembly, so as to keep fiscal
policy on track and deliver the urgently
needed reliefs in terms of employment
and growth for the citizenry.

The Committee noted the relatively
strong balance sheets of the deposit
money banks’ and the stable outlook.
This is in spite of the concentration of
non-performing loans in a few sectors,
which the Committee observed was
satisfactorily
being
addressed
by
adequate mechanisms established by
the Bank to address the phenomenon.
The Committee also noted that as
Government
pays
off
its
huge
contractor debts, a sizeable portion of
these non-performing loans will be
CBN Monetary Policy Review

addressed. The Committee urged the
Bank
to strengthen
its
supervisory
oversight and early warning systems to
promptly identify, monitor compliance
with
extant
prudential
regulations,
sustain macro-prudential policy and
manage emerging vulnerabilities in the
banking system.

The Committee reiterated the Bank’s
commitment to delivery of low interest
credit as evidenced in its bold steps to
adopt
unconventional
monetary
policy to aid credit flow to vulnerable
and growth enhancing sectors of the
Nigerian economy. The Committee,
therefore,
enjoined
the
Bank
to
continue to support and encourage
credit delivery at single digit interest
rate through other mechanisms in the
interim, while encouraging the banking
system to establish frameworks to
increase
credit
delivery
to
the
employment generating sectors of the
economy. In consideration of available
data and evolving macroeconomic
indicators,
the
Monetary
Policy
Committee is committed to revisiting its
decisions in the short to medium term
as the fundamentals evolve.

4.0.
The Committee’s Decisions
In reaching its decision, the Committee
appraised potential policy options in
terms of the balance of risks. The
Committee also took note of the gains
made so far as a result of its earlier
decisions; including the stability of the
foreign
exchange
market,
the
moderation in inflation rate as well as
the restoration of economic growth.
The launching of the Food Security
Council by the Federal Government to
improve food sustainability is a step in
the right direction. The Committee was
concerned about the fiscal distortions
associated with absence of buoyancy
between
GDP
growth
and
tax
revenue,
and
urged
the
fiscal
authorities
to
deploy
appropriate
corrective measures to address this
phenomenon.

The Committee was of the view that
further tightening would strengthen the
impact of monetary policy on inflation
with complementary positive effects
on capital flows and exchange rate
stability.
Nevertheless,
it
could
potentially
dampen
the
positive
outlook
for
growth
and
financial
stability. However, the Committee is of
the
view
that
loosening
would
strengthen the outlook for growth by
stimulating
domestic
aggregate
demand through reduced cost of
borrowing. This may, however, lead to
a rise in consumer prices, generating
exchange
rate
pressures
on
the
currency
in
the
process.
The
Committee
also
believes
that
loosening could worsen the current
account balance through increased
importation. On the argument to hold,
the Committee believes that key
macroeconomic
variables
have
continued to evolve in a positive
direction in line with the current stance
of macroeconomic policy and should
be allowed more time to fully manifest.
In consideration of the foregoing, the
Committee decided unanimously by a
vote of all members present to retain
the Monetary Policy Rate (MPR) at 14.0
CBN Monetary Policy Review

per cent alongside all other policy
parameters.
Consequently,
the
MPC
voted
unanimously to retain the
(i) MPR at 14.0 per cent;
(ii) CRR at 22.5 per cent;
(iii) Liquidity Ratio at 30.0 per cent; and
(iv) Asymmetric corridor at +200 and -
500 basis points around the MPR.

Thank you for listening.

Godwin I. Emefiele
Governor, Central Bank of Nigeria
4th April, 2018


CBN Monetary Policy Review

CENTRAL
BANK
OF
NIGERIA
COMMUNIQUÉ
NO

OF
THE
MONETARY
POLICY
COMMITTEE
MEETING
OF
MONDAY
21ST
AND
TUESDAY 22ND MAY, 2018

1.0
Background
The Monetary Policy Committee (MPC)
met on the 21st and 22nd of May, 2018
against the backdrop of optimistic
global growth outlook and sustained
recovery in the domestic economy.
The
Committee
examined
the
performance, risks, vulnerabilities in the
global and domestic economies up to
May 2018, and the outlook for the rest
of the year. In attendance were nine
members of the Committee.

Global Economic Developments
The momentum of global economic
activities remained broadly sustained,
with outcomes likely to be shaped by
emerging geo-political issues including:
easing geo-political tensions on the
Korean
Peninsula;
reduced
trade
tensions
between China and the
United States; United States withdrawal
from the 2015 Iranian Nuclear Deal;
easy financing conditions in the Euro
Area, the UK and Japan; as well as
difficulties associated with the BREXIT
negotiations.
Accordingly,
global
output is projected to grow at 3.9 per
cent in 2018, up from 3.8 per cent in
2017.
Growth
in
the
advanced
economies is projected to strengthen
to 2.5 per cent in 2018 from 2.3 per
cent in 2017 premised on improved
investments
and
consumption
spending. Similarly, output growth in
the emerging markets and developing
economies (EMDEs) is projected to rise
marginally at 4.9 per cent in 2018
reflecting improvements from 4.8 per
cent in 2017, led by oil exporters, such
as Russia, Brazil, and Nigeria. The
Committee noted that despite these
optimistic developments, the downside
risks to global growth include: the geopolitical tensions in the Middle-East;
lingering
uncertainties
from
BREXIT
negotiations;
and
growing
trend
towards trade protectionism.

Inflation in the advanced economies is
projected to rise by 2.0 per cent and
would remain subdued relative to the
long term trend. In the emerging
markets and developing economies,
price developments could surge by 4.6
per cent in 2018. The International
Monetary Fund (IMF) forecasts that
inflation may rise modestly over the
medium to long-term, due to rising
asset prices and long-term yields in the
major financial markets.

Domestic Output Developments
The Committee noted improvements in
the domestic economy, attributable to
the steady decline in inflation, rebound
in oil prices and increase in production
level, as well as the continued stability
in
the
foreign
exchange
market.
According to data from the National
Bureau of Statistics (NBS), real Gross
Domestic Product (GDP) for Q4 2017
was revised upwards from 1.92 per
cent to 2.11 per cent, while a growth
of 1.95 per cent was recorded in the
first quarter of 2018, up from a
contraction of 0.91 per cent in the
corresponding period of 2017. The
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development was due to growth in the
oil and non-oil sectors by 14.77 and
0.76
per
cent,
respectively.
The
Monetary Policy Committee also noted
the sustained positive outlook based
on
the
Manufacturing,
and
Nonmanufacturing Purchasing Managers’
Indices (PMI), which rose for thirteenth
and twelfth consecutive months to 56.9
and 57.5 index points, respectively, in
April 2018. The Committee welcomed
this development but believes that
growth remains largely fragile and
could benefit from further reforms and
stimulus. In this regard, the MPC urged
the various levels of government to
accelerate
the
settlement
of
contractor debt and salary arrears as
well
as
facilitate
the
quick
implementation of the 2018 Federal
Government budget.

Developments in Money and Prices
The Committee noted that broad
money supply (M2) grew by 2.16 per
cent in April 2018 from 1.26 per cent in
March 2018, annualised to 6.48 per
cent. This was in contrast to the
provisional growth benchmark of 10.48
per cent for 2018. The performance of
M2 was mainly driven by the growth in
Net Domestic Credit (NDC) of 6.24 per
cent (annualised to 18.72%), owing
largely to net credit to government,
which
grew
by
46.13
per
cent
(annualised to 138.39%) against the
provisional benchmark of 54.97 per
cent. Credit to the private sector,
however, contracted by 0.16 per cent
(annualised to -0.47%) in April 2018, in
contrast to the provisional annual
benchmark of 5.64 per cent. Net
Foreign Assets (NFA) grew by 7.38 per
cent in April 2018, annualized to 22.13
per
cent,
compared
with
the
provisional benchmark of 18.15 per
cent. Narrow money (M1), however,
contracted
by
3.31
per
cent
(annualised to -9.94%), compared with
the provisional benchmark of 8.04 per
cent.

Inflationary
pressures
continued
to
moderate with headline inflation (yearon-year) declining for the fifteenth
consecutive month to 12.48 per cent in
April 2018 from 13.34 per cent in March
2018. Food and Core inflation also
decelerated to 14.80 and 10.92 per
cent from 16.08 and 11.18 per cent,
respectively, during the same period.
The
average
inter-bank
call
rate
decreased to 3.34 per cent in April
2018 from 9.49 per cent in December
2017. Similarly, the average Open Buy
Back (OBB) rate fell to 2.96 per cent in
April 2018 from 8.46 per cent in
December 2017. The movement in the
net liquidity position and interest rates
reflected the combined effects of
Open
Market
Operations
(OMO)
auctions,
foreign
exchange
interventions and statutory allocation
to state and local governments.

The
Committee
welcomed
the
sustained improvement in the level of
external
reserves,
which
stood
at
US$47.79 billion on May 18, 2018,
compared with US$46.73 billion at the
end of March 2018. The Committee
urged
the
Bank
to
sustain
this
momentum and continue to boost
investor confidence in the economy.
CBN Monetary Policy Review

The Committee also welcomed the
continued rise in the price of crude
and
called
on
the
Federal
Government to seize the opportunity to
build fiscal buffers against future oil
price shocks.

The All-Share Index (ASI) decreased by
6.6
per
cent
from
43,330.54
on
February 28, 2018 to 40,472.45 on May
18, 2018, owing largely to profit taking
activities of investors, and capital
reversals in response to monetary
policy
normalization
in
some
advanced economies particularly, the
United
States.
Similarly,
Market
Capitalization (MC) fell by 5.7 per cent
from N15.55 trillion on February 28, 2018
to N14.66 trillion on May 18, 2018. The
Committee
noted
the
need
to
maintain remunerative domestic rates
to stem the trend towards huge capital
outflow.

The MPC welcomed the continued
stability
in
the
foreign
exchange
market, promoted by improved dollar
liquidity in the market due to the high
level of activity at the Investors’ and
Exporters’ (I&E) window, that is equally
driving rates towards convergence at
all segments of the market. Total
foreign exchange inflow through the
economy from January to March 2018
stood at US$24.719 billion, of which
funding from the CBN was US$8.81
billion
or
28.5
per
cent,
while
autonomous sources accounted for
the larger balance of US$15.91 billion
or 71.5 per cent of the total. In
addition, the Committee welcomed
the US$2.5 billion or RMB 15 billion
Currency Swap between the Central
Bank of Nigeria (CBN) and the People’s
Bank of China (PBoC). This swap, the
Committee noted, will ease pressure in
the foreign exchange market by the
reduction
in
reliance
on
a
third
currency for trade settlement between
Nigeria and China. They further noted
that this swap arrangement could be
the
basis
for
an
expanded
and
mutually
beneficial
economic
relationship
between
Nigeria
and
China.

2.0.
Overall Outlook and Risks
The macroeconomic environment that
propelled the economy’s exit from
recession has remained positive and is
likely to continue in the near-term. The
expectation was premised on speedy
implementation of the 2018 budget,
improved security, continued stability
in the foreign exchange market as well
as increase in crude oil production and
prices. The Committee noted the
downside
risks to the outlook to
include:
the
late
approval
and
implementation of the 2018 budget;
farmers-herdsmen
conflict;
weak
demand
and
consumer
spending
associated with outstanding salaries
and contractor debt; and the growing
level of sovereign debt.

The outlook for inflation indicates
continued moderation in the price
level, even though the risks include
huge
liquidity
injections
that
is
expected
to
arise
from
the
implementation of the proposed N9.12
trillion 2018 FGN budget; expenditure
towards the 2019 elections; monthly
CBN Monetary Policy Review

FAAC
injections,
approval
and
implementation of the proposed new
national
minimum
wage,
possibly
finance by a supplementary budget.
These
could
impact
aggregate
demand and put pressure on domestic
prices in the remaining months of 2018
and may dampen the gains already
made by the Bank in stabilizing prices.
Staff forecasts, given the anticipated
liquidity injections into the economy,
indicates upward trending pressure on
domestic prices from the second half
of
fiscal
2018.
Consequently,
the
Committee
advocates
an
orderly
injection of the anticipated liquidity by
the fiscal authorities to prevent a
negative shock to prices that would
derail the positive but fragile recovery
so far achieved.

Given the CBN’s interventions, the
current
level
of
oil
prices
and
developments in the global economy,
we expect rates to remain stable in the
foreign exchange market in the nearterm. However, the bearish signs in the
capital market associated with profit
taking activities of investors, call for a
careful calibration of policy so as to
moderate the trend of capital outflows
in
an
era
of
monetary
policy
normalization in the United States. This
is
given
that
there
are
already
indications of severe attacks on the
foreign exchange markets of some
emerging economies.

Nevertheless, there is significant high
level of uncertainties that could arise
from
the
fiscal
operations
of
government in the near term. Amongst
these are: when the implementation of
the 2017 budget will end; dwindling
revenue projections; as well as the
possibilities of full implementation of
the

Federal
budget.
Consequently, we expect a likely
bunching of government spending in
view of the late passage of the budget
and government’s commitment to
honour prior obligations. This could
pose a serious challenge to the Bank’s
price stability mandate.

Revenue is expected to increase in
view of the favourable prices of crude
oil
and
improvements
in
non-oil
revenue, particularly taxes. In addition,
production levels have also increased
in recent times and this is expected to
be
maintained.
However,
the
implications of a China-US trade deal
on China’s oil imports from Nigeria
remain unclear, especially as the US
has included energy imports on the list
of items for negotiation with China.

3.0.
The
Considerations
of
the
Committee
The Committee expressed satisfaction
on the positive outlook in the domestic
economic environment as the real
GDP grew for the fourth consecutive
quarter by the first quarter of 2018 and
the positive trend in the Manufacturing
and
Non-manufacturing
Purchasing
Managers’ Indices in the first quarter of
2018.
It
noted
the
continued
deceleration in headline inflation as
well as stability in the foreign exchange
market and therefore, called on the
Bank to sustain the momentum in order
to further subdue inflation and ensure
CBN Monetary Policy Review

growth.
The
Committee
expressed
satisfaction with the level of activities in
the Investors’ and Exporters’ (I&E)
window of the foreign exchange
market.

The Committee further noted the
overall upward growth momentum of
the economy with key activity sectors
returning positive growth. Despite the
improving
macroeconomic
environment, the Committee noted
that disruptions to the supply chains in
major food producing states of the
country remains a concern as food
prices remained sticky downwards. It
also noted the potential adverse effect
of
the
rising
global
inflation
on
domestic prices and therefore, urged
the Government not to relent on
curtailing the security challenges to
advance controlling inflation to its
historical path.

Members of the Committee were
satisfied with the progress made with
the implementation of the Economic
Recovery and Growth Plan, but were
concerned on the effect of delay in
the passage of the 2018 Appropriation
could derail the programme and
urged the Federal Government to
sustain its implementation to further
accelerate the economic recovery
thus far achieved. The Committee
urged the Government to set the
machinery
for
the
effective
implementation of the 2018 budget to
further stimulate the economy. It also
encouraged
the
Government
to
sustain current efforts at boosting tax
revenue generation notwithstanding
the increase in crude oil and other
commodity prices. The MPC, however,
noted
the
potential
effects
of
expansionary fiscal budget of 2018
and the liquidity impact of rising FAAC
distribution, following increase in the
prices of crude oil as well as the build
up
in
election
related
spending
towards the 2019 general elections.

The Committee took note of the
improved
performance
of
deposit
money banks and observed that the
relatively high levels of non-performing
loans in the industry was moderating
and urged Government to promptly
settle outstanding contractor arrears as
earlier
promised.
The
Committee
commended the effort of the Bank in
achieving the positive outlook for the
industry and advice the Bank to
intensify efforts to further improve
banking sector soundness. It called on
the Bank to sustain its monitoring
apparatus to ensure compliance with
existing
prudential
regulations
and
early detection and management of
emerging vulnerabilities. Also, it similarly
encouraged the Bank not to relent in
ensuring that liquidity continues to flow
from the banking sector to the real
sector to further strengthen economic
recovery and employment generation.

4.0.
The Committee’s Decisions
The Committee critically evaluated the
policy
options
in
terms
of
developments in the international and
domestic
environments,
noting
in
particular progress made in stimulating
output growth, including stability in the
foreign exchange market increase in
CBN Monetary Policy Review

the level of foreign exchange reserves,
and sustained deceleration in the rate
of inflation.

The
Committee
considered
the
forecast of high liquidity injection in the
second half of 2018, upward pressure
on prices, driven largely by substantial
expansionary fiscal policy, which will
arise from the late passage of the 2018
appropriation bill, outstanding balance
from the 2017 budget and the preelection expenditures. Thus, tightening
would ensure the mop-up of excess
liquidity.
Mindful
that
despite
the
moderation in inflation, the current
inflation rate is still above targeted
single digit and that real interest rate
only turned positive in the review
period. The objective of the policy
stance
therefore,
would
be
to
accelerate a reduction in the inflation
rate
to
single
digit
to
promote
economic
stability,
boost
investor
confidence,
and
promote
foreign
capital
flows
with
complementary
impact on exchange rate stability.
Conversely, the Committee believes
that
raising
interest
rate
would,
however, depress consumption and
increase the cost of borrowing to the
real sector. Moreover, such policy
would make deposit money banks to
re-price their assets.

In reviewing the choice of loosening,
the
Committee
evaluated
the
potential
impact
of
stimulating
aggregate demand through lower
cost
of
credit.
Nevertheless,
the
Committee
deliberated
on
the
effectiveness of the choice at a time
when liquidity injection had been
forecast to rise tangentially in the
second half of the year. The outcome
therefore,
would
most
likely
exacerbate
inflationary
pressure,
cause
higher
pressure
on
the
exchange rate as demand for forex
increases and return real rate into
negative territory as nominal interest
rate fall lower than the inflation rate.
Owing
to
the
poor
transmission
mechanism as a result of structural
rigidities, the reduction in the MPR may
not necessarily transmit to lowering
market lending rate on account of the
high cost of doing business. The
Committee
further
noted
that
loosening could worsen the current
account balance through increase in
importation, margin lending, lowering
of risk evaluation in accessing loans
which will drive up loans and likely
increase
in
NPLs
with
potential
negative consequence on the stability
of the banking industry. The cost of
liquidity management would also rise
considerably.

The Committee, while arguing for a
hold, observed that the downside risk
to growth and upside risk to inflation
appears
balanced
as
growth
is
improving while inflation is moderating.
Maintaining the current policy stance
would sustain gradual improvements in
both indices. It was noted that there is
need to see how all the components
of GDP would evolve in the second
quarter of 2018 in order to gain greater
clarity on the direction of monetary
policy. In summary, the predominant
argument for a hold at this time is to
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await more clarity on the evolution of
key indicators i.e. the passage and
implementation
of
the
budget,
economic activities, and traction in
fiscal policy in 2018.

Overall,
the
Committee
was
convinced that the economy needed
a new impetus of increased lending by
the banking system and would work
with the Bank to adopt innovative
ways to encourage the deposit money
banks (DMBs) to adopt innovative
ways to accelerate credit growth,
including a reduction in the policy rate
when conditions for such a decision
arise. The MPC noted that at single
digit inflation and higher reserve levels,
the risks associated with a policy rate
reduction
under
conditions
of
wavering foreign capital inflows and
an unstable oil market, including other
severe uncertainties, could be better
managed to deliver macroeconomic
stability in Nigeria. In consideration of
the
foregoing,
therefore,
the
Committee decided by a vote of 8
members to retain the Monetary Policy
Rate (MPR) at 14.0 per cent alongside
all other policy parameters. One (1)
member, however, voted to increase
the MPR by 50 basis points.

Consequently, the MPC voted to retain
the:
(i) MPR at 14.0 per cent;
(ii) CRR at 22.5 per cent;
(iii) Liquidity Ratio at 30.0 per cent; and
(iv) Asymmetric corridor at +200 and -
500 basis points around the MPR.

Thank you for listening.
Godwin I. Emefiele
Governor, Central Bank of Nigeria
22nd May, 2018
CBN Monetary Policy Review