CENTRAL BANK OF NIGERIA
MONETARY
MONETARY
POLICY REVIEW
POLICY REVIEW
MONETARY
POLICY REVIEW
February 2014
February 2014
February 2014
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
©2012 Central Bank of Nigeria

CBN Monetary Policy Review

Mandate
Ensure monetary and price stability
Issue legal tender currency in Nigeria
Maintain external reserves to safeguard the international
value of the legal tender currency
Promote a sound financial system in Nigeria
Act as banker and provide economic and financial
advice to the Federal Government
Vision
“By 2015: Be the model Central Bank delivering Price and
Financial System Stability and promoting
Sustainable Economic Development"
Mission Statement
“To be proactive in providing a stable framework for the economic
development of Nigeria through effective, efficient and
transparent implementation of monetary and exchange
rate policy and management of the financial sector"
Core Values

Meritocracy
Leadership
Learning
Customer - Focus
Central Bank of Nigeria
iii

CBN Monetary Policy Review

ACRONYM

MEANING

QE3

Quantitative Easing 3

MPC

Monetary Policy Committee

DMB
Deposit Money Banks
CRR
Cash Reserve Ratio
rDAS
retail Dutch Auction System
MPR
Monetary Policy Rate
OMO
Open Market Operation
NOP
Net Open Position
GDP
Gross Domestic Product
TSA
Treasury Single Account
IMF
International Monetary Fund
NBS
National Bureau of Statistics
PIB
Petroleum Industry Bill
MSMEs
Small Scale Manufacturing Enterprises
DH
Discount Houses
SLF
Standing Lending Facility
MC
Market Capitalization
FED
US Federal Reserve Bank
OECD
Organization For Economic Cooperation and Development
ASI
All-Share Index
ECA
Excess Crude Account
SDF
Standing Deposit Facility
M2
Broad Money Stock
RM
Reserve Money
NDC
Net Domestic Credit
Cg
Credit to the Government
Cp
Credit to the Private sector
NFA
Net Foreign Assets
IFEM
Interbank Foreign Exchange Market
LCCI
Lagos State Chamber Of Commerce and Industry
MYTO
Multi Year Tariff Order
wDAS
Wholesale Dutch Auction System
OBB
Open Buy Back
NIBOR
Nigeria Interbank Offered Rate
BDC
Bureau de Change
OTC
over-the-counter
BoE
Bank of England
BoJ
Bank of Japan
ECB
European Central Bank

iv

CBN Monetary Policy Review

CONTENTS
Page
v
Table of Contents


Statement by the Governor

ix
Chapter 1
Overview


Chapter 2
Domestic Price Developments and the Real Economy

Chapter 3
Monetary Policy


Chapter 4
Domestic Financial Markets


Chapter 5
Economic Outlook


List of Tables
Table 2.1:
Real GDP Growth


Table 2.2:
Inflation Rate (December 2012 – December 2013)
..

Table 2.3:
Quarterly Consumer Price Developments


(November 2009=100) ..


Table 2.4:
Contribution of Selected CPI Components to Food Inflation


(Year-on-Year) July – December 2013
..
..

Table 2.5:
Contribution of Selected CPI Components to Core Inflation


(Year-on-Year) July – December 2013
..
..

Table 3.1:
MPC Decisions, July – December, 2013
..
..

Table 3.2:
OMO Bills Auction (N million)


January 2009 – December 2013
..
..
..

Table 3.3:
CBN Standing Lending Facility (N'billion)


(January 2009- December 2013)
..
..
..

Table 3.4:
CBN Standing Deposit Facility (N billion)


(January 2009- December 2013)
..
..
..

Table 3.5:
Foreign Exchange Supply by the CBN US$ million
..

Table 3.6:
Performance of Monetary Aggregates


(H2: 2012 and 2013)


Table 4.1:
Weighted Average Money Market Interest Rates (%)


(June 2012 – December 2013) ..
..
..
..

Table 4.2:
Average Monthly Spot Exchange Rates (N/US$)


(July 2012 – December 2013) ..
..
..
..

Table 4.3:
End-Month Exchange Rates Movements,


July 2012 – December 2013 (N/US$) ..
..
..

Table 4.4:
Nominal and Real Effective Exchange Rates Indices


(July 2012 – December 2013) ..
..
..
..

Table 4.5:
Foreign Exchange Demand and Supply


(US Dollar Million)


Table 4.6:
CBN Monthly Foreign Exchange Flows (US$ million)


(July 2012 – December 2013) ..
..
..
..

Table 4.7:
Monthly Foreign Exchange Flows through the Economy


(US$ million) (Jan 2012 – December 2013)
..
..

Table 4.8:
NSE All-Share Index (ASI) and Market Capitalisation (MC)


(December 2012 – December 2013) ..
..
..

Table 5.1:
Global Output and outlook (2011 – 2014)
..
..

CBN Monetary Policy Review
vi
Page
List of Figures
Figure 2.1:
Y-o-Y Headline, Core and Food Inflation Rates


December 2012 – December 2013) ..
..
..

Figure 2.2:
Y-o-Y Headline Inflation


(December 2012 – December 2013) ..
..
..

Figure 2.3:
Y-o-Y Headline (Jul 2013 - December 2013) ..
..

Figure 2.4:
Contribution of Selected CPI Components


to Core Inflation (Year-on-Year)


December 2012 – December 2013
..
..
..

Figure 2.5:
Actual and Seasonal - Adjusted Headline Inflation


(July 2013 – December 2013) ..
..
..
..

Figure 2.6:
Bonny Light Crude Oil Price


(December 2012 – December 2013) ..
..
..

Figure 3.1:
The Performance of M2, M1 and RM (H1: 2011 - 2013)

Figure 3.2:
The Performance of NDC, Cg and Cp


(H1: 2011 – 2013)


Figure 4.1:
Weighted Average Money Market Interest Rates (%)


(June 2013 – December 2013) ..
..
..
..

Figure 4.2:
Daily Interbank Call Rates (%)


(June 2013 – December 2013) ..
..
..
..

Figure 4.3:
Daily Open Buy Back (OBB) Rates (%)


(June 2013 – December 2013) ..
..
..
..

Figure 4.4:
Daily Exchange Rate (June 2013 – December 2013) ..

Figure 4.5:
End-Month Exchange Rate (July 2012 – Dec 2013)
..

Figure 4.6:
Nominal and Real Effective Exchange Rates Indices


(July 2012– December 2013) ..
..
..
..

Figure 4.7:
Demand and Supply of Foreign Exchange at wDAS


(July 2012 – December 2013) ..
..
..
..

Figure 4.8:
Foreign Exchange Flows Through the CBN


(July 2012 – December 2013) ..
..
..
..

Figure 4.9:
Foreign Exchange Flows through the Economy


(July 2012 – December 2013) ..
..
..
..

Figure 4.10:
NSE ASI and MC (December 2012 – December 2013)..

Figure 4.11:
NSE ASI and MC (June 2013 – December 2013)
..

Figure 4.12:
NSE Market Capitalisation by Sector as at End-June 2013

Figure 4.13:
Volume and Value of FGN Bonds Traded in


the OTC Market (H2:2011 – H2:2013) ..
..
..

Figure 4.14:
Yields on Nigeria's 10-Year U.S. Dollar-denominated


Bond (December 1, 2012 – December 31, 2013)
..

Figure 4.15:
FGN Bonds Yield Curves (End-June 2013 vs.


End-December 2012 vs. End-December 2013)
..

Figure 5.1:
Fan Chart for Headline Inflation (%)
..
..
..

List of Boxes
Box 1: The Effects of Climate Change on the Nigerian Economy
..

Box 2: Effects of US QE3 Tapering on Emerging Markets and Policy Levers

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Page
vii
Appendices
Communiqué No. 90, July 22 and 23, 2013


Communiqué No. 91, September 23 and 24, 2013
..
..
..

Communiqué No. 92, November 18 and 19, 2013
..
..
..

CBN Monetary Policy Review
ix
STATEMENT BY THE GOVERNOR
The monetary Policy environment in the review period was benign with the
continued moderation in consumer price inflation to single digit, indicating the
effectiveness of the sustained tight monetary policy stance of the Bank. This was
against the background of several key challenges including the planned tapering
of QE3 announcement by the US Federal Reserve Bank; anticipated increase in
government spending in preparation for the 2015 general elections; and the
depletion of fiscal buffers required to sustain exchange rate stability. Domestic
output growth remained resilient in the face of a weakening global economy;
although some of Nigeria's major trading partners including the US, Europe and
China were gradually returning to a long-run growth path. Accordingly, the thrust of
monetary policy in the second half of 2013 remained the sustenance of the relative
price stability achieved in the first half of 2013.
The conclusion of the banking sector reforms afforded the MPC a clearer view of
financial stability to detect a creeping perverse incentive problem reflected in the
build-up in excess liquidity in the banking system, alongside sluggish growth in
private sector credit and rising cost of liquidity management; all traced to DMB's
appetite for cheap public sector funds and purchase of government securities. The
CRR on private sector deposits was retained at 12.0 per cent, while CRR on public
sector deposit was raised to 50.0 per cent to address the effects of the buildup in
excess liquidity on the banking system as well as stem the pressure on the exchange
rate.
The performance of the monetary aggregates was largely below the indicative
benchmarks for the period. The naira exchange rate continued to enjoy relative
stability. The strategic intervention of the Bank in the foreign exchange market
including the re-introduction of the retail Dutch Auction System (rDAS) helped in
stabilizing the market. Market real interest rates remained positive, against the
backdrop of moderating inflationary pressures which sustained the flow of
investment into the economy.
Forecasts of both the international and domestic environments suggest a clouded
fiscal and external sector outlook in the near to medium term. However, the
monetary authorities would continue to respond to the various challenges with a
view to fostering a stable and robust macroeconomic environment.
DR. (MRS.) Sarah O. Alade
Ag. Governor,
Central Bank of Nigeria
February 2014


CBN Monetary Policy Review

CHAPTER 1
OVERVIEW

Monetary policy in the second half of 2013 aimed primarily at sustaining the
already moderated rate of inflation which was achieved in the first half of 2013.
The benign headline inflation rate of 8.0 per cent at end-December 2013, from 8.4
per cent at end-June 2013, is evidence of the effectiveness of the policy. Besides,
monetary policy also aimed at limiting pressure on the exchange rate, boosting
the external reserves position, sustaining stability in the money market and
reducing the spread between lending and deposit rates. These goals were largely
achieved through a mixed-grill of a number of instruments, which helped to
strengthen investor confidence in the economy.

The Monetary Policy Rate (MPR) was the principal instrument used to control the
direction of interest rates and anchor inflation expectations in the economy. The
other intervention instruments included Open Market Operations (OMO), Discount
Window Operations, Cash Reserve Ratio (CRR) and foreign exchange Net Open
Position (NOP).

Open Market Operations (OMO) was the other major tool for liquidity
management in the second half of 2013; achieved through the issuance of CBN
bills. The sale of CBN bills declined by 52.8 per cent in the second half compared
with the first half. In the second half, the volume of transactions of the standing
lending facility window rose by 30.66 per cent, while that of standing deposit
facility window rose by 53.6 per cent, compared with the first half.

The Monetary Policy Committee (MPC) held three regular meetings during the
review period, and the MPR was successively maintained at 12.0 per cent with a
symmetric corridor of +/- 200 basis points. The MPC introduced a higher Cash
Reserve Ratio (CRR) for public sector deposits with the Deposit Money Banks
(DMBs), in order to further tighten money supply.

Beside the change in the CRR on public sector deposits, other existing policies
were retained, and complemented with administrative measures. The Net Open
Position (NOP) limit was sustained at 1.0 per cent, Liquidity Ratio (LR) at 30.0 per
cent and the mid-point of the exchange rate at N155/US$ +/-3.0 per cent. The
decision of the MPC to retain most of the existing measures was to assure the
market of the continuity of the tight monetary policy regime.


CBN Monetary Policy Review

Monetary policy continued to contribute significantly to the robust performance of
the economy after the shock of the global financial crisis in 2008 (on the one hand
and the domestic banking crisis of 2009 on the other). In spite of these
developments, output remained relatively high while inflation decelerated in 2013.
Most measures of inflation moderated throughout the period in response to the
policy measures implemented by the Bank. Year-on-year headline inflation
decreased to 8.0 per cent in December 2013, from 8.4 per cent in June 2013 and
12.0 per cent in December 2012. Food inflation also declined marginally to 9.3 per
cent from 9.6 per cent over the same period. However, core inflation rose from 5.5
per cent to 7.9 per cent between June and December 2013.

Domestic output growth remained resilient despite the weaknesses in the global
economy. Data from the National Bureau of Statistics (NBS) showed that GDP
grew by 6.81 per cent in the third quarter of 2013 compared with 6.18 per cent
attained in the previous quarter of that year and to 6.48 per cent in the
corresponding quarter of 2012. The non-oil sector, particularly agriculture,
wholesale and retail trade and services were the major drivers of growth.

In the second half of 2013, the financial market remained stable and active. In the
money market, government securities and CBN OMO bills were actively traded. In
the foreign exchange market, the CBN continued its intervention in order to
maintain the exchange rate within the policy corridor. The capital market
improved in performance compared with the first half of the year and the
corresponding period in 2012. Foreign portfolio investment and improved
corporate earnings helped fuel growth in the sector.

The outlook for domestic inflation suggests that the threshold of 6 – 9 per cent
could be realized in the near-to-medium term. Inflation dynamics are expected to
be driven by growth in output and fiscal policy and by the existing monetary
policy regime. In its forecast, the International Monetary Fund (IMF) expects an
average inflation rate of 7.8 per cent for Nigeria in 2014 to be supported by fiscal
deficits that would remain below 3.0 per cent of GDP. The growth outlook for the
domestic economy is strong given improvements in recovery in the advanced
economies which could lead to higher demand for Nigeria’s crude oil. Both the
IMF and the Lagos Chamber of Commerce and Industry (LCCI) have projected
growth above 6.0 per cent (IMF projects 7.4 per cent). Domestic output growth is
expected to be driven by high crude oil price, robust domestic demand and
increasing trade and investments from the emerging economies. However, the
underlying risks to the outlook include potential increases in fiscal spending in 2014
and 2015 for election-related activities. Also, the US$10 billion a month tapering of
the Fed bond buying programme could weaken the financial sector and limit


CBN Monetary Policy Review

foreign credit availability. The tight monetary policy regime is expected to remain
in place in the near-to-medium term to address the potential impact of the
identified risks.


CBN Monetary Policy Review

Ó


CBN Monetary Policy Review

CHAPTER 2
DOMESTIC PRICES AND THE REAL ECONOMY

Inflationary pressures moderated in 2013, due in part to the sustained deflationary
monetary policy. Moderation in inflationary pressures was augmented by the
relative stability in the exchange rate of the naira. During the review period, the
domestic output growth gained momentum compared with the preceding period
of 2013 and the corresponding period of 2012.

2.1
Domestic Economic Activity
Domestic output growth improved, driven largely by the performance of
agriculture and the building and construction sectors. Overall, growth in 2013 was
estimated at 6.87 per cent, up from 6.58 per cent in 2012, signalling a steady
growth in the economy. Real GDP estimate at the end of the period stood at 7.67
per cent, up from 6.18 and 6.99 per cent at end of the preceding period of 2013
and corresponding period of 2012. The 8.73 per cent growth in non-oil real GDP in
Q4 2013 was higher than the 8.22 per cent in the corresponding period of 2012. In
contrast, the oil sector in Q4 2013 grew marginally by 0.04 per cent.

The oil sector contributed approximately 11.73 per cent to real GDP growth in Q4
of 2013, lower than the 12.90 per cent in Q2. The decline was due to disruptions in
crude oil production, caused by oil bunkering and illegal refining as well as
declines in prospecting; because of the uncertainties surrounding the fiscal regime
in the Petroleum Industry Bill (PIB).

Of the major components of the non-oil sector in Q4, agriculture, wholesale and
retail trade, and services contributed 1.64, 2.34, and 2.66 per cent respectively to
GDP growth (Table 2.1). The robust domestic growth given the sluggish global
economic recovery was a consequence of favourable domestic conditions for
agricultural production, complemented by strong macroeconomic management.


CBN Monetary Policy Review

Table 2.1


2.2
Trends in Inflation
Inflationary pressures remained benign, helped largely by consumer price
moderation, which started in Q4 of 2012. This was attributed largely to the tight
monetary policy of the Bank.


Dec
Jan
Feb Mar Apr May Jun
Jul
Aug Sep
Oct Nov Dec
Fig 2.1
Headline, Core and Food Inflation Rate
(Dec 2012-Dec 2013)
Headline Y-Y
Core Y-Y
Food Y-Y


Headline inflation (year-on-year) at end-December 2013 dropped slightly to 8.0
per cent from 8.4 and 12.0 per cent at end-June 2013 and end-December 2012,
respectively (Fig 2.2 and Fig 2.3). The main drivers of headline inflation were food
and non-alcoholic beverages, housing, water, electricity, and transport.

Food inflation (year-on-year) continued to moderate at 9.3 per cent endDecember 2013, down from 9.6 and 10.2 per cent in end-June 2013 and end-


CBN Monetary Policy Review

December 2012, respectively. The declines in transportation and processing costs
due to improved fuel and electricity supply accounted for the improvements in
food inflation during the period.

Core inflation (year-on-year) increased to 7.9 per cent at end-December 2013
from 5.5 per cent at end-June 2013, but down from 13.7 per cent at endDecember 2012. The rise could be attributed to increase spending during the endyear festive periods.


Dec
Jan
Feb Mar Apr May Jun
Jul
Aug
Sep
Oct
Nov Dec
Fig 2.2
Headline Inflation
(Dec 2012 - Dec 2013)
Headline Inflation

Source: NBS


Jul
Aug
Sep
Oct
Nov
Dec
Fig 2.3
Headline Inflation
(Jul - Dec 2013)
Headline Inflation

Source: NBS

The core and food components of the consumer price index rose to 153.0 and
154.3 end-December 2013 from 145.5 and 147.5 at end-June 2013 (Table 2.2). Thus
the index of food increased by 6.8 percentage points, that of core inflation by 7.5


CBN Monetary Policy Review

percentage points. This suggests that the core component of inflation exerted
greater pressure on headline inflation than the other components. Quarterly trend
during the review period revealed a similar pattern (Table 2.3).

Table 2.2
Inflation Rate
(Dec 2012 – Dec 2013)


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

March
June
September
December

Y-on-Y
12MMA
Y-on-Y
12MMA
Y-on-Y
12MMA
Y-on-Y
12MMA
Headline

Core

Food

Source: NBS

In the second half of 2013, the major components of food inflation contributed to
its moderation. The contribution of processed food decreased from 4.5 per cent at
end-July, 2013 to 4.1 per cent at end-December 2013. Also, meat, fruits, and
tubers declined from 0.94, 0.45 and 1.25 per cent to 0.84, 0.38 and 1.18 per cent,
respectively (Table 2.4).


Headline Inflation
Core Inflation
Food Inflation

CPI
Y -on-Y

MMA
CPI
Y-on-Y
12MMA
CPI
Y-on-Y
12MMA
Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Source: NBS


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Table 2.4
Contribution of Selected Components of CPI to
Food Inflation (Year-on-Year)
(Jul – Dec 2013)
Date
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Food

Processed Food

Meat

Fruits

Yams, Potatoes
& Other Tuber

Source: NBS

The composition of the core inflation index shows that the combined sub-indices
for housing, water, electricity, gas and other fuels fell from 1.89 to 1.40 per cent
between July and December 2013. Transport; furnishings, household equipment &
household maintenance; and education all increased from 0.53, 0.35 and 0.20 to
0.54, 0.42 and 0.29 per cent, respectively (fig 2.4). Therefore the increase in core
inflation witnessed during the period can only be attributed to the other major
components of core inflation.

Table 2.5
Contribution of Selected Components of CPI to Core Inflation
(Year-on-Year)
(Jul – Dec 2013
Date
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Core

Housing, Water,
Electricity, Gas & Other
fuel

Transport

Furnishings, Household
Equip. & HH Maint.

Education

Source: NBS


CBN Monetary Policy Review

Source: NBS

2.3
Actual and Season-Adjusted Headline Inflation
In the second half of 2013, the MPC maintained the tight monetary policy regime
which began in 2011. With the exception of July, season-adjusted inflation was
higher than the actual inflation rate (Fig 2.6). Both actual and season-adjusted
inflation had downward trends between July and October 2013, reflecting the
effectiveness of monetary policy at the time. However, the actual inflation began
an upward trend in October, overtaking the season-adjusted inflation in
December 2013. The actual inflation was favourable between July and October
because of better-than-expected domestic food harvest, stable exchange rate,
declines in global food prices and reduction in processing costs. In the period
October – December 2013, the sequence of religious festivals coupled with
pressure on the exchange rate arising from increased demand, resulted in an
upward trend in actual inflation.


Jul
Aug
Sept
Oct
Nov
Dec
Fig 2.5
Actual and Season-Adjusted Inflation
(Jul - Dec 2013)
Actual
Season-Adjusted


CBN Monetary Policy Review

2.4
Key Factors of Domestic Price
During the last quarter of 2013, the year-on-year headline and food inflation was
moderate, complemented by an upward trend in core inflation compared with
the previous period. These developments can be attributed to both domestic and
global conditions. Furthermore, there were unfavourable dynamics in both
demand and cost factors in the domestic sector.

2.4.1 Demand Factors
The tight monetary policy helped to moderate inflationary pressures. In addition to
retaining the MPR at 12 per cent, the Bank undertook aggressive liquidity mop up
operations and raised CRR on public sector deposits by 38 percentage points to
50 per cent in order to mitigate inherent inflationary pressures arising from cheap
public sector deposits in the deposit money banks (DMB’s).

On the fiscal side, although overall government spending in 2013 was marginally
higher than 2012, capital budget releases were restrained during the period,
culminating in system liquidity and inflationary pressures.

2.4.2. Cost Factors
Government and banking sector reforms were designed to stimulate real sector
activities such as in agriculture, oil and gas, aviation and medium and small scale
manufacturing enterprises (MSMEs); helped to lower industrial costs. The
rehabilitation and construction of new roads as well as improvement in the
nationwide supply of fuel tempered energy costs. The power sector reforms, as
well as increased water supply at the hydro-power stations boosted power supply
in the second half of 2013, leading to lower production costs. Developments in the
naira exchange rate stabilized the cost of imported intermediate and final goods,
resulting in a moderating effect on the general price level.

2.4.3. Other Factors
Low global inflation and the relatively stable exchange rate of the naira checkedmated the potential impact of imported inflation on domestic prices. In a number
of our major trading partner countries such as the USA, the UK, Japan and China
inflation remained generally low. Also, favourable international oil prices (Figure
2.7) helped the buildup in foreign exchange reserves, which provided the
necessary import cover to sustain exchange rate stability and sustained
moderation in domestic prices.

The government’s commitment to reducing fiscal deficit was sustained. It was a
net financier of the banking system during much of the review period, culminating
in slower rate of expansion in money supply. This orientation in fiscal policy


CBN Monetary Policy Review

complemented the sustained tight monetary policy to rein-in inflation
expectations.


Price (US$ per barrel
Fig 2.6
Bonny Light Crude Oil Price
(Dec 2012 – Dec 2013)


Source: Bloomberg


CBN Monetary Policy Review

Box 1
The Effects of Climate Change on the Nigerian Economy

Climate change refers to changes in the local, regional, and global climatic patterns and weather
conditions including temperatures, precipitation, extreme heat and wind, caused by the
greenhouse effect (International Energy Agency, ). Excessive buildup of greenhouse gases, over
time, induces change to the earth's climate and damages natural ecosystems with dangerous
effects on human health and welfare. The majority of atmospheric greenhouse gases are emitted
from the burning of fossil fuels to produce energy, although smaller amounts also come from
deforestation, industrial processes, and agricultural practices. The primary effect of climate change
is observed in global warming.

The United States Environmental Protection Agency (USEPA) warned that the earth's average
temperature is rising. The small changes in the average temperature of the planet result in large
and potentially harmful shifts in climate and weather patterns over time. Shifting weather patterns
and climatic conditions threaten food production through increased unpredictability of
precipitation, rising sea levels that contaminate coastal freshwater reserves and increase the risk of
devastating flooding, and warming of the atmosphere

Most parts of Nigeria have been subjected to occurrences of unusual climatic events including
floods and droughts, which have resulted in crop failures, loss of livestock, wide spread shortage of
food products and displacement of population. The floods in the second half of 2012 considerably
reduced food output in the country. Other effects include:

1.
Impact on Population: Loss of arable lands, forests, water and fishery resources have resulted
in Increased human migration and social conflict. Changing rainfall patterns would force
livestock farmers into extended periods of nomadism. Other consequences include scarcity
of water and firewood due to increased loss of surface water and forests.
2.
Impact on Agriculture: Agriculture in Nigeria is largely seasonal and rain-fed and therefore
vulnerable to climatic changes. Thus climate change poses a risk to about 40 per cent of the
gross domestic product (GDP) and 60 per cent of employment, which are dependent on
agriculture. Climate change would also have considerable impact on agricultural systems by
changing the crop calendar and the length of growing seasons.
3.
Impact on Economic Infrastructure: Climate change is often accompanied by greater
variability in rainfall, temperature, atmospheric conditions, resulting in floods, wind and dust
covers that damage economic infrastructure such as bridges, dams, air transportation
facilities, roads, houses among other. These require increased budgetary outlays for
rehabilitation and reconstruction.
Implications for Policy
Climate change has serious implications for output, employment and price developments. It is,
therefore, important for policy makers to be aware of these implications in order to formulate
appropriate policies and interventions including insurance, strategic grain reserves and clean
development mechanisms to ameliorate the impact of climatic changes on economic activities
and price stability.


CBN Monetary Policy Review

CBN Monetary Policy Review

CHAPTER 3
MONETARY POLICY

At the beginning of the second half of 2013, volatility was observed in the foreign
exchange market and there were concerns about the consequence of the
unwinding of the US Federal Reserve bond-buying programme. Another cause of
concern was the build-up in excess liquidity in the banking system and the
associated costs of liquidity management. The banking system environment
showed signs of growing dollarization. Globally, the U.S., U.K., the Euro Area and
Japan experienced modest recovery, which signalled the possibility of capital flow
reversal. Broadly, these developments provided the background for and
dominance of monetary policy decisions in the second half of 2013.

3.1
Highlight of Monetary Policy Measures
The Bank retained the tight monetary policy during the second half of 2013 with
the MPR at 12.0 per cent. The continuous use of the policy regime was to sustain
the stability of the exchange rate and moderate potential inflationary risks arising
from excess liquidity in the system. The liquidity surfeit, occasioned by the hike in
oil-price budget benchmark to US$79 per barrel in the 2013 budget up from US$75
per barrel in 2012, resulted in higher fiscal spending. The other major factors that
engendered liquidity surfeit were the availability of public sector deposits in DMBs
in the face of the lingering implementation of the Treasury Single Account (TSA)
policy as well as inflow of short-term capital.

The MPC at the July 2013 meeting introduced a separate CRR of 50.0 per cent on
public sector deposits, and retained that of the private sector at 12.0 per cent, to
further constrain liquidity in DMBs. The dual CRR regime was maintained
throughout the period along with the NOP at 1.0 per cent and the mid-point of the
exchange rate at N155.00/US$1.00 with a band of +/- 3.0 per cent. The policies
were designed to sustain the stability and value of the domestic currency, attract
foreign investments and build up external reserves.

3.2
Decisions of the Monetary Policy Committee
MPC decisions in the second half of 2013 were based on major developments in
the domestic and global economies. The key global challenges during the period
included, but not limited to, the continued sluggish recovery in the global
economy, threats to international commodity prices, and the exacerbation of the
European debt crisis. Whereas the key domestic challenges were financial market
fragility and fiscal weakness, a lack-lustre output growth, high unemployment,
capital outflow volatility and anticipation of speculative attacks on the naira.


CBN Monetary Policy Review

3.2.1 July 2013 MPC Meeting
In general, the Committee was satisfied with the prevailing macroeconomic
stability, characterised by single digit inflation, stable banking system, exchange
rate stability, favourable output growth, capital market recovery and growth in
external reserves, which helped to sustain internal balance and external sector
viability. Members observed the volatility in the foreign exchange market, and
reaffirmed the commitment of the Bank to preserve stability of the currency (given
the capital flow reversals) in order to stem further depreciation. Consequently, the
Bank succeeded in sustaining the dual objectives of financial and price stability.

The Committee further noted the build-up in excess liquidity in the banking system,
and was concerned about the rising costs of liquidity management. The liquidity
surfeit was due largely to the availability of public sector deposits with DMBs
because of the delays in the implementation of the TSA policy. The inflationary
outlook for the rest of the year was considered benign. However, risks remained
primarily due to the expansionary fiscal policy and rising deficits, excess liquidity in
the banking system and risks to the exchange rate due to depletion of fiscal
buffers in the Excess Crude Account (ECA). Despite the potential risks, the
Committee voted to hold the MPR at 12 per cent, maintain the symmetric corridor
around the MPR at +/-2 per cent and to retain the CRR at 12 per cent for private
sector deposits. The Committee, however, introduced a 50 per cent CRR on public
sector deposits applicable to Federal, State and Local Government deposits to
rein-in on widespread systemic liquidity.

3.2.2 September 2013 MPC Meeting
The Committee was impressed with the continued positive developments in the
economy, especially moderation in inflation and stability in the domestic financial
markets. It was also noted that output growth continued to be robust with strong
growth forecast by the National Bureau of Statistics for Q3 and Q4. The
Committee, however, observed that certain economic fundamentals, which
necessitated the July MPC policies had not changed substantially. In particular,
the strong demand pressures in the foreign exchange market and the risk of
capital flow reversal still remained potential threats.

The Committee was therefore faced with three policy options. The first was the
option to increase the MPR in response to pressures in the foreign exchange
market. However, it was rejected because there were no major inflationary
concerns at the time. The second was to reduce the rates in the light of
moderating inflation and slow GDP growth to avoid sending wrong signals of a
premature termination of the tightening cycle. The third was to maintain the
existing policy regime and to give it enough time to impact the system. After due


CBN Monetary Policy Review

consideration of all options and issues, the Committee retained the MPR at 12.0
per cent with the symmetric corridor of 200 basis points. The 50.0 per cent CRR on
public sector deposits and 12.0 per cent on private sector deposits were also
retained. Liquidity ratio was retained at 30.0 per cent with the NOP at 1.0 per cent.

3.2.3 November 2013 MPC Meeting
The MPC meeting of November 2013 considered many issues that have significant
implications for monetary policy. In the global economy, the expected
commencement of QE3-tapering (Box 2) in the US in 2014 and the continued
economic recovery in the US and the Euro area were expected to bring about a
rise in interest rates, with downside risks to exchange rate and stock prices in the
domestic economy. Furthermore, there was the envisaged 2014 fiscal expansion,
arising from pre-election expenditure. The MPC believed that it was premature to
change the existing policy regime in view of the identified underlying risks. The
Committee further noted the significance of portfolio funds relative to the total
external reserves, and the implications of the extreme fragility of the domestic
financial market and vulnerability to external shocks.

With hindsight of the potential headwinds in 2014 and the Banks’s inflation target
of 6.0-9.0 per cent, alongside the need to retain portfolio investments, the
Committee decided to retain the MPR at 12.0 per cent with a corridor of +/- 200
basis points. In support of the tight monetary stance, the Committee also retained
the CRR on private sector deposits at 12.0 per cent and that of the public sector
at 50.0 per cent. Liquidity Ratio and NOP were also retained at 30.0 per cent and
1.0 per cent, respectively.


CBN Monetary Policy Review

Table 3.1
MPC Decisions
(July – November, 2013)
Items
July
September
November
MPR
Retain the MPR at
12%
Retain the MPR at
12%
Retain the MPR at
12%
MPR Corridor
Maintain +/- 200
basis points
Maintain +/- 200
basis points
Maintain +/- 200
basis points
SDF Rate
Maintain at 10%
Maintain at 10%
Maintain at 10%
SLF Rate
Maintain at 14%
Maintain at 14%
Maintain at 14%
CRR
Introduced 50%
CRR for Public
Sector Deposits

Retained 12% CRR
for Private Sector
Deposits
Retained 50%
CRR for Public
Sector Deposits

Retained 12%
CRR for Private
Sector Deposits
Retained 50%
CRR for Public
Sector Deposits

Retained 12%
CRR for Private
Sector Deposits
LR
Retain at 30%
Retain at 30%
Retain at 30%
NOP
Retained at 1%
Retain at 1%
Retain at 1%
FX Rate Mid–Point
Retain at N155/US$1
Retain at
N155/US$1
Retain at
N155/US$1
FX Band
Maintain +/-3 per
cent band
Maintain +/-3 per
cent band
Maintain +/-3 per
cent band


3.3
Monetary Policy Instruments
The MPC deployed a number of instruments to achieve the objectives of
monetary and price stability. The prime instrument, the MPR, was complemented
by CRR, Open Market Operations (OMO) and Discount Window Operations. The
choice of instruments
was
guided by
the
need
to
maintain overall
macroeconomic stability.

3.3.1 Monetary Policy Rate (MPR)
The Bank’s benchmark policy rate, the MPR, continued to be the major instrument
for monetary policy, and was complemented by the interest rate corridor
(standing lending/deposit facility rates) and CRR. The Committee kept the MPR


CBN Monetary Policy Review

unchanged at 12.0 per cent with a symmetric corridor of +/- 200 basis points
during the three regular meetings held in the second half of 2013.

3.3.2 Open Market Operations (OMO)
Open Market Operations (OMO) remained the major medium for liquidity
management. CBN Bills were the main securities for OMO transactions during the
period, with total amount of N4,670.0 billion offered, while subscription was
N5,377.0 billion. Actual sales, however, amounted to N3,348.39 billion in the
second half of 2013, compared with N7,099.54 billion in the first half of 2013, and
N2, 795.58 billion in the corresponding period of 2012. This represented a decrease
of 52.83 per cent in the second half and an increase of 153.95 per cent in the first
half, respectively. The decrease in OMO sales was probably due to the increase in
CRR on public sector deposits and exclusion of speculative bids.

3.3.3 Reserve Requirements
The Bank did not only retain reserve requirements (Cash Reserve and liquidity
ratios), but also introduced an asymmetric Cash Reserve Ratio (CRR) for public
and private sector deposits to complement OMO and other instruments to ensure
sound liquidity management. The asymmetric CRR was introduced to contain the
liquidity threat posed by increasing government deposits in the DMBs and its
impact on financial asset prices. Thus, the Cash Reserve Ratio for private sector
deposits was retained at 12.0 per cent, while that of government was increased to
50.0 per cent. The liquidity ratio was unchanged at 30.0 per cent in the second
half of 2013.


CBN Monetary Policy Review

Table 3.2
OMO Bills Auction
(January 2009 – December 2013)
(N’million)
Date

% Change over the
Previous Period
Jan


Feb


Mar


Apr


May


Jun


1st Half

Jul


Aug


Sep


Oct


Nov


Dec


2nd Half


Cumulative
Figure


3.4
Standing Facilities
The DMBs and Discount Houses (DH) actively accessed the standing facilities
(lending/ deposit) in the second half of 2013. There was a marginal increase in the
cumulative volume of transactions at the CBN standing lending facility (SLF)
window during the period. Requests for SLF amounted to N6, 923.86 billion
compared with N5, 248.70 billion in the first half of 2013, and N7, 733.53 billion in the
corresponding period of 2012. In the second half of 2013, the volume of SLF
represented an increase of 30.7 per cent relative to the first half of the year but a
decrease of 10.5 per cent compared with the second half of 2012 (Table 3.3). The
relative increase in the volume of SLF transactions was traced to the 38
percentage points hike (12.0 to 50.0 per cent) in the CRR on public sector deposits
with the DMBs.


CBN Monetary Policy Review

Table 3.3
CBN Standing Lending Facility
(January 2009- December 2013)
(N'billion)
Date

% change over the
preceding/corresponding
period
Jan

Feb

Mar

Apr

May

Jun

1st
Half

Jul

Aug
3,733.78


Sep

Oct

Nov

Dec

2nd
Half

Total


There was also a significant increase in the cumulative volume of transactions at
the CBN Standing Deposit Facility (SDF) window. The cumulative volume of SDF
stood at N26,862.21 billion in the second half of 2013, compared with N17,484.79
billion in the first half of 2013, and N9,885.25 billion in the corresponding period of
2012. The volume of SDF at end-December 2013 represented 171.74 per cent
increase over that of the corresponding period in 2012 (Table 3.4). The observed
increase in the use of the SDF window was a reflection of the insignificant trading
activities in the interbank market in the review period, compared with the
corresponding period of 2012.


CBN Monetary Policy Review

Table 3.4
CBN Standing Deposit Facility
(January 2009- December 2013)
(N'billion)
Date

% Change over the
preceding/corresponding
period
Jan

Feb

Mar

Apr
-
6,853.06
49.65

2,817.00
(53.83)
May
-
1,735.45

1,242.50
1,718.53
(38.99)
Jun

1st Half

Jul


Aug

Sep

Oct

Nov

Dec

2nd
Half

Total


3.5
Foreign Exchange Intervention
To sustain the stability of the naira achieved in the first half of 2013, the Bank
continued its intervention in the foreign exchange market during the review
period. The total supply of foreign exchange by the Bank was US$17,728.04 million
compared with US$13,869.92 million during the first half of 2013 but lower than the
US$23,458.70 million in the corresponding period of 2012 (Table 3.5). The increase in
total foreign exchange supply compared with that of the preceding half-year was
primarily due to the demand pressure. The Bank re-introduced the Retail Dutch
Auction System (rDAS) as part of measures to address speculative demand.


.


CBN Monetary Policy Review

Table 3.5
Foreign Exchange Supply by the CBN
(US$ million)

3.6
Performance of the Monetary Aggregates
The sluggish growth in the monetary aggregates continued in the second half of
2013 owing partly to the tight monetary policy by the Bank. Broad money stock
(M2) changed from N15,483.85 billion to N15,668.95 billion, a marginal increase of
1.2 per cent between end-December 2012 and end-December 2013, compared
with 16.39 per cent increase in the corresponding period of 2012 and with endDecember 2013 benchmark of 15.20 per cent. Narrow money (M1) declined by
5.50 per cent to N7,012.83 billion at end-December 2013 from N7,420.95 billion at
end-December 2012, compared with the growth of 9.59 per cent in the
corresponding period of 2012 and the benchmark of 17.44 per cent for endDecember 2013. Reserve Money (RM) increased by 77.92 per cent to N 5,361.37
billion at end-December 2013 from N3,013.32 billion at end-December 2012. The
end-December 2013 RM volume was 7.02 per cent (N351.49 billion) higher than
the benchmark of N5,009.88 billion for the fourth quarter 2013.


YEAR

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

Feb
1,838.85


Mar

Apr

May

Jun

1st
Half

Jul

Aug

Sep

Oct

Nov

Dec

2nd
Half

Total


CBN Monetary Policy Review

Table 3.6
Performance of the Monetary Aggregates
(H2: 2012 and 2013)

Monetary
Aggregate
2012 (Percentage Growth)
2013 (Percentage Growth)
Change

Benchmark
Actual
endDecember.
(H2: 2012)
Deviation
(Actual –
Benchmark)
Actual
endJune.
(H1:
2013))
Benchmark
Actual
end-
December.
(H2: 2013))
Deviation
(Actual –
Benchmark)
Over endDecember

Over
endJune

M2 (N’b)
16,577.53
15,483.85
-1,093.68


M2 (%)
24.64
16.20
-8.44


M1(N’b)
9,117.64
7,420.95
-1,696.69


M1 (%)
34.71
9.58
-25.13


RM (N’b)
3,013.32
3,704.48
691.16


RM (%)
8.23
33.05
24.82


NDC (N’b)
18,873.49
12,698.20
-6,175.29


NDC (%)
52.17
-7.22
-59.39


Cg (N’b)
-204.66
-2,453.56
-2,248.90


Cg (%)
61.47
393.81
332.34


Cp (N’b)
19,078.15
15,151.76
-3,926.39


Cp (%)
47.50
6.82
-40.68


NFA (N’b)
7,654.56
9,043.68
1,389.12


NFA (%)
6.60
26.68
20.08


Fig 3.1
The Performance of M1, M2 and RM
(H1: 2011 - 2013)

-15
-10
-5

M2(%)
M1(%)
RM(%)
M2(%)
M1(%)
RM(%)
M2(%)
M1(%)
RM(%)
H:2011
H1:2012
H1:2013
Benchmark
Actual


CBN Monetary Policy Review

Net domestic credit (NDC) increased by 18.45 per cent to N15,040.69 billion at
end-December 2013 from N12,698.21 billion at end-December 2012, compared
with the benchmark of 22.98 per cent for 2013. The improved performance was
partly due to less reliance of the FGN on issuance of bonds for public financing,
thereby freeing up resources for the private sector.

Net Credit to Government (Cg) declined by 40.14 per cent to stand at N1,468.78
billion at end-December 2013 from N2,453.56 billion in December 2012, compared
with the indicative benchmark of 18.27 per cent for end-December 2013. Thus, the
FGN continued to be a net creditor to the banking system during the review
period.

Fig 3.2
The Performance of NDC, Cg and Cp
(H1: 2011 – 2013)


NDC(%)
Cg (%)
Cp (%)
NDC(%)
Cg (%)
Cp (%)
NDC(%)
Cg (%)
Cp (%)
H1:2011
H1:2012
H1:2013
Benchmark
Actual


Credit to the private sector (Cp) rose by 8.96 per cent to N16,509.47 billion at endDecember 2013 from N15,151.76 billion at end-December 2012, compared with
the benchmark of 19.39 per cent for end-December, 2013. Net foreign assets
(NFA) declined by 5.86 per cent to N8, 513.27 billion at end-December 2013 from
N9, 043.68 billion at end-December 2012, compared with the benchmarks of 16.78
per cent for end-December 2013.


CBN Monetary Policy Review

Box 2
Effects of US QE3 Tapering on Emerging Markets

Quantitative easing (QE) is an unconventional monetary policy tool used by central banks to
stimulate the economy when standard monetary policy instruments have become ineffective.
Many central banks around the world embarked on QE in the wake of the global financial and
economic slowdown. The U.S is currently implementing its third round of QE codenamed QE3,
which commenced in the third quarter of 2012 with monthly bonds purchase of US$85 billion as
the main component.

The indication by the US Fed to commence tapering its bond buying programme under QE3 in
January 2014, has expectedly begun to have some adverse effects in emerging markets and
developing economies that benefited from cheap foreign resources in stimulating growth. The
planned scale-back of QE3 has set in motion a process of reversal of some or all of the earlier
gains in the economies of those countries. The proposal, coupled with economic recovery in the
advanced economies, has the potential to raise interest rates and yields in the US. Given this
scenario, foreign investors have started to move funds back to source countries. As a result, asset
prices, especially, exchange rate, stock and bond prices have come under pressure due to
reduced inflows or flow reversals in a number of countries including Mexico, Argentina, Turkey,
South Africa, India and Ghana. For instance, the Istanbul BIST100 Index declined by about 2.2 %
and the South African ASI by 0.5% in the review period. In terms of currencies, the Rand, Ruble,
Peso and Lira have all weakened against the Euro and the US dollars in the review period. This
sequence of events could hurt growth, employment and domestic price level. Financial markets
in Emerging Market Economies (EMEs) could face challenges as banks lose their ability to raise
new debt and external credit lines dry up. In addition, corporate foreign debt could become
more expensive to service if local currencies depreciate substantially. Furthermore, prolonged
monetary tightening by central banks to defend their currencies in the face of sustained
recovery in the advanced economies could be counter-productive in the long run.
Quantitative easing in advanced economies contributed to the recovery of the Nigerian stock
market and added to reserve accretion. However, tapering and continued recovery in
advanced economies would leave monetary policy with limited options. Like most emerging
markets, economic managers in Nigeria have to admit that the days of easy money from
expansionary monetary policy in advanced countries are ending slowly especially as most are
not likely to move policy rates to pre-crisis level in the short- to medium-term. Given these risks,
Nigeria appears to enjoy some levers: flexible exchange rate regime; a current account surplus;
naira dominated public debt and a sizeable level of external reserves. There are, however,
vulnerabilities the Bank would have to respond to by keeping domestic rates moderately high in
order to stem the negative impact of rapid capital reversal. In addition, the Bank needs to make
effective use of communication and forward policy guidance to sustain investor’s confidence.
However, there is a limit to the role monetary policy alone can play. Thus, rebuilding fiscal buffers
and consolidation, coupled with sound monetary policy has the potential to contribute to
sustainable macroeconomic stability as the tapering unfolds in the medium- to long- term.
Nevertheless, there is a possible repatriation of foreign funds before the close of the year, as QE is
gradually withdrawn and as Nigeria gradually moves closer to her electioneering year.
Therefore, Nigeria should be prepared for the a potential shock waves engendered by the
complete withdrawal of the QE Policy, because it will have severe impact on its economy, as
well as on the rest of the global economy.


CBN Monetary Policy Review

CHAPTER 4
DOMESTIC FINANCIAL MARKETS

4.1
Money Market
The money market remained active in the second half of 2013 with government
securities and CBN OMO bills being actively traded. Market activities were largely
influenced by liquidity conditions as well as the implementation of administrative
measures such as the introduction of 50.0 per cent CRR on public sector deposits,
prohibition of concurrent dealings in wDAS and the Bank’s standing lending
facility. Interbank interest rates remained largely locked-in within the corridor of +/-
200 basis points around the MPR of 12.0 per cent. However, occasional spikes were
observed, particularly during periods of temporary liquidity shortfalls and at the
implementation of the 50.0 per cent CRR on public sector deposits.

4.1.1 Developments in Short-Term Interest Rates
Stabilizing short-term interest rates around the policy rate remained a challenge
for monetary management during the review period. This was because the
monthly allocation of federally-collected revenue among the three tiers of
government created system-wide liquidity swings in short-term interest rates (Figure
4.1). The average interbank call rate ranged from 10.63 to 16.22 per cent, while
the open buy-back (OBB) rate ranged from 10.46 to 18.18 per cent in the second
half of 2013.

Table 4.1
Weighted Average Money Market Interest Rates
(June – December 2013)
(Per cent)

Month
Monetary
Policy Rate
Overnight Interest Rates
Tenored
Call Rate
Open BuyBack
NIBOR 30-Day
Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13


CBN Monetary Policy Review

Fig 4.1
Weighted Average Money Market Interest Rates
(June – December 2013)
(Per cent)

Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
%
Weighted Average Money Market Interest Rates
Monetary Policy Rate
Call Rate
Open-Buy-Back
NIBOR 7-Day
NIBOR 30-Day


(i)
Interbank Call Interest Rate
The average (weighted) interbank call rate dropped to 10.75 per cent in
December 2013 from 11.59 per cent in June 2013. During the intervening months,
the rate rose to 15.24 and 16.22 per cent in August and September 2013
respectively. Over the second half of 2013, interbank rates dropped by
approximately 84 basis points in contrast to an increase of 29 basis points between
December 2012 and June 2013. On a year-on-year basis, the weighted average
interbank (call) rate declined by 113 basis points (Figure 4.2).

Fig 4.2
Daily Interbank Call Rates
(June 2013 – December 2013)
(Per cent)

Daily Interbank Call Rates


CBN Monetary Policy Review

(ii) Open Buy-Back Rate
The average (weighted) open buy-back (OBB) rate rose to 11.24 per cent in
December 2013 from 11.19 per cent in June 2013 (Figure 4.3). Over the first half of
2013, the OBB rate rose by approximately 5 basis points compared with a decline
of 54 points between December 2012 and June 2013. On a year-on-year basis, the
average OBB rate declined by 49 basis points.

Fig 4.3
Daily Open Buy-Back (OBB) Rates
(June 2012 – December 2013)
(Per cent)

Daily OBB Rates


(iii) Nigeria Interbank Offered Rate (NIBOR)
Nigeria Interbank Offered Rate (NIBOR), the traditional reference rate for tenured
transactions, remained relatively stable in the review period. The average
weighted 30-day NIBOR, which was 12.96 per cent in December 2012 moderated
to 11.00 per cent in June 2013, but rose marginally to 11.13 per cent at the end of
the second half of 2013 (Table 4.1 and Figure 4.1).

The general decline in short-term rates during the period was due primarily to
easing of liquidity conditions partly engendered by OMO bill maturities,
redemption of AMCON bonds and government’s fiscal operations.

4.2
Foreign Exchange Market
The policy thrust of the Central Bank remained primarily to maintain a stable
exchange rate of the naira. This informed the Bank’s interventions in the market
were to stabilize the exchange rate around the mid-point of N155/US$ +/- 3.0 per
cent. The second half of 2013 had stable exchange rates, but there were some


CBN Monetary Policy Review

spikes between October and December 2013 due to the introduction of the policy
of payment of inward remittances in the domestic currency on the one hand and
short-term capital outflows, on the other. On the average, the exchange rate was
fairly stable at N157.32/US$ in the period under review, similar to that of the
preceding period at N157.30/US$ and to the corresponding period of 2012 at
N157.35/US$ (Figure 4.4).

Fig 4.4
Daily Exchange Rate
(June 2013 – December 2013)


4.2.1 Average Exchange Rate
The w/rDAS spot rate depreciated mildly to an average of N157.32/US$ in the
second half of 2013 from N157.30/US$ in the first half of 2013 but appreciated
when compared with N157.35/US$ in the corresponding period of 2012. This
represented depreciation and appreciation of 0.01 and 0.02 per cent
respectively.

At the interbank foreign exchange market (IFEM), the naira exchange rate
averaged N160.32/US$ in the second half of 2013 compared with N158.18/US$ in
the first half of 2013, a depreciation of 1.35 per cent. Similarly, relative to
N158.37/US$ in the second half of 2012, the exchange rate at the interbank
market depreciated by 1.23 per cent. The rate at the BDC segment averaged
N165.19/US$ in the second half of 2013 in contrast to N159.66/US$ in the
preceeding period and N160.49/US$ in the second half of 2012. This represented
depreciations of 3.46 and 2.93 per cent, respectively.


CBN Monetary Policy Review

The mild depreciation in average exchange rates across all segments of the
foreign exchange market was attributed to decreased supply of forex and in the
face of increased demand pressure (Table 4.2).

Table 4.2
Average Monthly Spot Exchange Rates
July 2012 – December 2013
(N/US$)

CBN
IFEM
BDC
Jul-12
157.43
161.33
163.32
Aug-12
157.38
158.97
162.24
Sep-12
157.34
157.78
159.8
Oct-12
157.32
157.24

Nov-12
157.31
157.58
159.32
Dec-12
157.32
157.33
159.26
2012: H2 Average
157.35
158.37
160.49
2012 Average
157.50
158.84
160.86
Jan-13
157.3
156.95
159.13
Feb-13
157.3
157.5
158.68
Mar-13
157.31
158.37
159.8
Apr-13
157.31
158.2
159.81
May-13
157.3
158.02
159.57
Jun-13
157.31
160.02
160.98
2013: H1 Average
157.30
158.18
159.66
Jul-13
157.32
161.12
162.43
Aug-13
157.31
161.15
162.00
Sep-13
157.32
161.96
163.14
Oct-13
157.42
159.83
165.00
Nov-13
157.27
158.79
167.19
Dec-13
157.27
159.04
171.35
2013: H2 Average
157.32
160.32
165.19
2013 Average
157.31
159.58
163.01

4.2.3 End-Period (Month) Exchange Rate
The naira appreciated in the w/rDAS segment of the foreign exchange market at
end-December 2013, but depreciated at the Interbank and significantly so at the
BDC segment when compared with end-June 2013. At the w/rDAS, the naira
appreciated by 0.03 per cent to N157.26/US$ from N157.31/US$ at end-June 2013.


CBN Monetary Policy Review

Year-on-year, the naira appreciated by 0.04 per cent at end-December 2013
(Table 4.3).

At the interbank segment, the naira exchange rate fell to N159.90/US$ from
N160.60/US$ at end-June 2013, an appreciation of 0.40 per cent. However, relative
to end-December 2012 rate of N157.25/US$, the naira depreciated marginally by
about N2.65 or 1.69 per cent. At the BDC segment, the naira depreciated by 6.17
per cent to N172.00/US$ at end-December 2013, from N162.00/US$ at end-June
2013. The depreciation can be attributed to the yuletide season during the review
period. Relative to the end-December 2012 rate of N159.00/US$, the exchange
rate of the naira at the BDC segment, however, depreciated by 8.18 per cent
(Table 4.3 and Figure 4.5).

The depreciation in rates across all but one segment of the foreign exchange
market was explained by the decreased supply of foreign exchange; particularly,
the introduction of a cap on purchases by BDCs from authorised dealers,
restriction on importation of foreign currency bills without prior approval of the
Bank and stringent returns requirement on forex utilization.

Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
US$/N
Fig 4.5
End-Month Exchange Rate
(Jul 2012 - December 2013)
CBN
IFEM
BDC


CBN Monetary Policy Review

Table 4.3
End-Month Exchange Rates Movements
(July 2012 – December 2013)
(N/US$)

CBN
IFEM
BDC
Jul-12
157.40
160.75
164.00
Aug-12
157.36
158.17
161.00
Sep-12
157.34
157.24
159.00
Oct-12
157.27
157.06
159.00
Nov-12
152.32
157.40
159.00
Dec-12
157.33
157.25
159.00
Jan-13
157.30
157.20
159.00
Feb-13
157.31
158.05
158.50
Mar-13
157.31
158.63
160.00
Apr-13
157.31
157.90
160.00
May-13
157.30
158.10
159.50
Jun-13
157.31
162.60
162.00
Jul-13
157.32
160.55
162.00
Aug-13
157.32
161.90
162.00
Sep-13
157.31
160.65
162.00
Oct-13
157.36
158.85
166.00
Nov-13
157.28
158.40
169.00
Dec-13
157.26
159.90
172.00

4.2.4 Nominal and Real Effective Exchange Rate

The Nominal Effective Exchange Rate (NEER) appreciated by 0.31 per cent to
96.10 at end-December 2013 from 96.40 at end-June 2013. On comparison with
the end-December 2012 rate of 98 per cent, the NEER appreciated by 1.94 per
cent. The Real Effective Exchange Rate (REER) appreciated slightly by 0.23
percent at end-December 2013 from 76.50 at end-June 2013 and by 3.09 per cent
above end-December 2012 rate (Table 4.4 and Figure 4.6).

On the average, both the NEER and REER decreased at end-December 2013,
when compared with their end-December 2012 figures, indicating exchange rate
appreciation in both nominal and real terms relative to the currencies of Nigeria’s
major trading partners.


CBN Monetary Policy Review

Table 4.4
Nominal and Real Effective Exchange Rates Indices
(July 2012 – December 2013)


NEER
REER
Jul-2012
98.00
79.40
Aug-2012
97.90
78.90
Sep-2012
98.60
78.80
Oct-2012
98.20
77.80
Nov-2012
97.80
77.00
Dec-2012
98.00
76.70
2012: H2 Average
98.08
78.10
2012: Average
98.90
80.20
Jan-2013
99.00
77.90
Feb-2013
98.80
77.50
Mar-2013
98.60
76.60
Apr-2013
98.80
77.70
May-2013
97.20
75.50
Jun-2013
96.40
74.50
2013: H1 Average
98.13
76.62
Jul-2013
96.10
74.30
Aug-2013
94.80
73.50
Sep-2013
96.10
74.40
Oct-2013
96.50
74.60
Nov-2013
96.00
74.30
Dec-2013
96.34
72.34
2013: H2 Average
95.93
74.24
2013: Average
97.03
75.43


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Fig 4.6
Nominal and Real Effective Exchange Rate Indices
(July 2012 – December 2013)


4.2.5 Demand and Supply of Foreign Exchange
The total demand for foreign exchange at the w/rDAS during the review period
increased by 74.23 per cent to US$18,727.85 million from US$10,748.71 million in the
first half of 2013. On a year-on-year basis, the demand for foreign exchange
increased by 115.12 per cent in 2013 compared with the second half of 2012. The
development was attributed to the high demand for foreign exchange associated
with the end of the year festivities and increased capital outflows following foreign
investors’ divestment of their portfolio holdings in flight to safety. The total supply of
foreign exchange at the w/rDAS in the second half of 2013 increased by 38.93 per
cent to US$14,880.32 million, compared with US$10,711.03 million recorded in the
first half of 2013. It also rose by 26.94 per cent when compared with end-December
2012 (Table 4.5 and Figure 4.7).

Furthermore, a number of policy measures were undertaken to complement
existing ones in order to moderate the demand pressure for foreign exchange.
These included the re-introduction of the rDAS, prohibition of importation of foreign
currency bills by authorized dealers without prior CBN approval, cap on purchases
by BDCs from authorised dealers and stringent returns requirement on forex
utilization. In addition, the degree of intervention was increased, leading to
relative stability in the exchange rate of the domestic currency.


CBN Monetary Policy Review

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

w/rDAS Demand
w/rDAS Supply
Jul-12
2,166.32
2,280.00
Aug-12
1,646.41
1,780.00
Sep-12
1,549.18
1,590.00
Oct-12
1,112.89
1,250.00
Nov-12
1,236.98
1,250.00
Dec-12
993.81
1,020.00
2012: H2 Total
8,705.60
9,170.00
2012: Total
19,668.75
19,920.00
Jan-13
836.39
713.50
Feb-13
1,164.28
1,072.82
Mar-13
1,911.29
1,801.54
Apr-13
2,156.22
2,154.47
May-13
2,019.20
2,018.70
Jun-13
2,661.33
2,650.00
2013: H1 Total
10,748.71
10,711.03
Jul-13
3,325.56
3,298.09
Aug-13
2,179.38
2,166.99
Sep-13
2,660.13
2,625.22
Oct-13
3,541.93
2,387.28
Nov-13
3,095.32
2,404.72
Dec-13
3,925.53
1,998.02
2013: H2 Total
18,727.85
14,880.32
2013: Total
29,476.56
25,291.35


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Figure 4.7
Demand and Supply of Foreign Exchange at rDAS
(July 2012 – December 2013)


US$ 'Million
Demand and Supply of Foreign Excahnge at rDAS


4.2.6 Foreign Exchange Flows

4.2.6.1 Foreign Exchange Flows through the CBN
Gross foreign exchange inflow through the CBN increased by 7.98 per cent from
US$19,747.38 million in the first half of 2013 to US$21,322.87 million in the second
half, an increase of about 8 per cent. Relative to the corresponding period of
2012, gross foreign exchange inflow declined by 13.36 per cent from US$24,611.59
million. Foreign exchange outflow rose by a whopping 24.64 per cent from
US$18,813.70 million in the first half of 2013 to US$23,456.94 million in the second half
of 2013. It, however, rose by 48.13 per cent in second half of 2013 from
US$15,835.23 million in the same period in 2012.

During the period under review, foreign exchange flows through the CBN resulted
in a net inflow of US$-2,134.07 million compared with US$933.77 million and
US$8,776.36 million in the first half and corresponding period of 2012, respectively
(Table 4.6).


CBN Monetary Policy Review

Table 4.6
CBN Monthly Foreign Exchange Flows
(July 2012 – December 2013)
(US$ million)

INFLOW
OUTFLOW
NET FLOW
Jul-2012
4,132.09
3,006.72
1,125.37
Aug-2012
5,953.41
2,796.59
3,156.82
Sep-2012
3,358.57
2,277.44
1,081.13
Oct-2012
3,576.35
1,960.37
1,615.98
Nov-2012
4,272.42
3,794.48
477.94
Dec-2012
3,318.75
1,999.63
1,319.12
2012: H2
24,611.59
15,835.23
8,776.36
2012 Total
46,782.34
35,190.67
11,591.67
Jan-2013
3,320.75
1,538.09
1,782.66
Feb-2013
3,681.07
2,103.40
1,577.67
Mar-2013
3,302.64
2,671.54
631.1
Apr-2013
3,238.83
3,369.37
-130.55
May-2013
3,095.50
3,233.67
-138.17
Jun-2013
3,108.60
5,897.63
-2,789.04
2013: H1
19,747.39
18,813.70
933.67
Jul-2013
5,778.32
4,891.28
887.04
Aug-2013
3,132.99
3,467.97
-334.98
Sep-2013
2,946.03
4,308.07
-1,362.04
Oct-2013
3,175.31
3,177.74
-2.43
Nov-2013
3,125.45
3,837.85
-712.4
Dec-2013
3,164.77
3,774.03
-609.26
2013: H2
21,322.87
23,456.94
-2,134.07
2013 Total
41,070.26
42,270.64
-1,200.40


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Figure 4.8
Foreign Exchange Flows through the CBN
(July 2012 – December 2013)

US$ 'Million
Foreign Exchange Flows
NET FLOW
INFLOW
OUTFLOW


4.2.6.2 Foreign Exchange Flows through the Economy
Gross foreign exchange inflow to the economy rose to US$73,822.74 million in the
second half of 2013 from US$72,277.13 million in the first half of 2013, and
US$63,466.93 million in the second half of 2012, an increase of 2.14 and 16.32 per
cent, respectively. Gross foreign exchange outflow rose by 25.16 per cent to
US$23,798.15 million from US$19,014.82 million in the first half of 2013. Similarly, it
increased by 41.47 per cent from US$16,822.06 million in the corresponding period
of 2012, again, indicating upward trends in foreign exchange outflow in the
economy.

During the second half of 2013, foreign exchange flows resulted in a net inflow of
US$50,024.60 million compared with US$53,378.26 million in the first half of 2013 and
US$46,644.90 million in the second half of 2012 (Table 4.7). The reduction in the net
inflows was attributed to the relative increase in capital reversal due to the US
quantitative easing programme in the review period.


CBN Monetary Policy Review

Table 4.7
Monthly Foreign Exchange Flows through the Economy
(July 2012 – December 2013)
(US$ million)
Descriptor
Total
Inflow
Inflow
(CBN)
Inflow
(Autonomous)
Total
Outflow
Outflow
(CBN)
Outflow
(Autonomous)
Net Flow
Net Flow
(CBN)
Net Flow
(Autonomous)
Jan. 2012

Feb. 2012

Mar. 2012

Apr. 2012

May. 2012

Jun. 2012

Total H1


Jul. 2012

Aug. 2012

Sep. 2012

Dec. 2012

Total H2


Total 2012

Jan. 2013

Feb. 2013

Mar. 2013

Apr. 2013

May. 2013

Jun. 2013

Total H1


Jul. 2013

Aug. 2013

Sep. 2013

Oct. 2013

Nov. 2013

Dec. 2013

Total H2


Total 2013


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Figure 4.9
Foreign Exchange Flows through the Economy
(July 2012 – December 2013)


4.3
Capital Market
The capital market witnessed improved performance in the second half of 2013,
compared with the first half and the corresponding period of 2012. This
development was due largely to improved earnings and increase in foreign
portfolio investments driven by improved investor confidence in the economy.

4.3.1
Equities Market
The All-Share Index (ASI) rose by 14.28 per cent to 41,329.19 at end-December
2013, from 36,164.31 at end-June 2013, and by 47.19 per cent relative to the same
period in 2012. Market Capitalization (MC) for equities also increased by 15.75 per
cent to N13.23 trillion at end-December 2013 from N11.43 trillion at end-June 2013,
and by 47.49 per cent when compared with the N8.97 trillion recorded at endDecember 2012 (Table 4.9 and Figure 4.10).

The ASI’s 47.19 per cent year-to-date increase was driven mainly by the strong
performance in the financial services sector, primarily banking and insurance. The
Bloomberg NSE Banking Index rose by 31.94 per cent, while the Insurance Index
increased by 29.80 per cent relative to 2012. In particular, the Bloomberg NSE
Consumer Goods and the Bloomberg Oil and Gas indices also rose by 31.14 and
122.25 per cent, respectively, in 2013 relative to 2012.


CBN Monetary Policy Review

Table 4.8
NSE All-Share Index and Market Capitalization
(December 2012 – December 2013)

Date
ASI
MC (Equities)
(N’ Trillion)
Dec-12
28,078.81
8.97
Jan-13
31,853.19
10.19
Feb-13
33,075.14
10.58
Mar-13
33,536.25
10.73
Apr-13
33,440.57
10.69
May-13
37,794.75
12.08
Jun-13
36,164.31
11.43
Jul-13
37,914.32
12.01
Aug-13
36,248.53
11.50
Sep-13
36,585.08
11.65
Oct-13
37,622.74
12.02
Nov-13
38,920.85
12.45
Dec-13
41,329.19
13.23
Source: NSE

Figure 4.10
NSE ASI and MC
(December 2012 – December 2013)


Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

ASI
MC (Equities) (N’ Trillion)

Source: NSE


CBN Monetary Policy Review

Figure 4.11
NSE ASI and MC
(June – December 2013)


Jun 2013
Jul 2013
Aug 2013
Sep 2013
Oct 2013
Nov 2013
Dec 2013
ASI
MC (Equities) (N’ Trillion)


Source: NSE

4.3.2 Market Turnover
Aggregate stock market turnover in the second half of 2013 decreased by 17.38
per cent to 48.20 billion shares, valued at N451.76 billion, in 616,780 deals,
compared with 58.34 billion shares valued at N591.56 billion, in 763,974 deals in the
first half of 2013. Relative to the second half of 2012, market turnover increased by
12.01 per cent from 43.03 billion shares valued at N340.58 billion, in 528,299 deals.

4.3.3 Sectors and Equities Market Capitalization
The building materials sub-sector was the most capitalized sector in the review
period. Its share in overall market capitalization rose to 31.6 per cent at the end of
the second half of 2013 from 30.4 per cent in the first half. Other leading subsectors were banking, breweries, and food, beverages and tobacco, with
respective market shares of 22.2, 13.1 and 12.6 per cent, at end-December 2013
(Figure 4:12).


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Figure 4.12
NSE Market Capitalisation by Sector as at End-June 2013


Breweries
13.1%
Banking
22.2%
Food &
Beverages
12.6%
Conglomerates
2.3%
Insurance
1.3%
Oil and Gas
3.4%
Building
Materials
31.6%
Other Sectors
13.4%
NSE Market Capitalisation by Sector as at December 31, 2013

Source: NSE

4.3.4 Bonds Market
The fixed income securities market in Nigeria continued to be dominated by the
Federal Government of Nigeria (FGN) bonds. Sub-national government bonds
have witnessed some activity but the corporate bonds segment has the least
share of the market by volume.

4.3.4.1 Federal Government of Nigeria Bonds
Total transactions in FGN Bonds in the over-the-counter (OTC) market in the
second half of 2013 was 2.61 billion units valued at N3.08 trillion in 17,582 deals. This
performance was dwarfed by 4.89 billion units valued at N5.77 trillion in 28,840
deals achieved in the first half of 2013 and by a turnover of 4.22 billion units valued
at N4.32 trillion in 24,082 deals in the second half of 2012 (Figure 4.13). The
outstanding FGN bonds were valued at N3, 941.59 billion as at December 2013.
The increase in activities in the FGN bonds market was as a result of continued
improvement in investor confidence following various reforms in the Capital
Market and increased short-term capital inflow; resulting from the implementation


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of unconventional monetary policy in various jurisdictions as well as the tight
monetary policy stance that drove up yields on FGN bonds.

Figure 4.13
Volume and Value of FGN Bonds Traded in the OTC Market
(H2:2011 – H1:2013)

2011:H2
2012:H1
2012: H2
2013:H1
2013:H2
Volume (Billions)
Value (N'Trillions)
Billions
Trillions


Source: NSE

FGN Eurobond
The Federal Government of Nigeria issued two (2) additional Eurobonds during the
review period: US$500M Jul 2018 5.125% and US$500M Jul 2023 6.375% issued on
July 12, 2013. As at end-December 2013 the outstanding FGN Eurobond
amounted to US$1.5 billion compared with US$0.5 billion at end-June 2013. Yields
on dollar-denominated assets declined on account of the strengthening of the US
dollar. Consequently, the yield on the FGN Eurobond dropped to 5.33 per cent at
end-December 2013 from 5.83 at end-June 2013. However, the yield remained
above that of end-December 2012 at 4.04 per cent (Figure 4.15).


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Figure 4.14
Yields on Nigeria’s 10-Year U.S. Dollar-denominated Bond
(December 1, 2012 – December 31, 2013)

3-Dec-12
18-Dec-12
2-Jan-13
17-Jan-13
1-Feb-13
16-Feb-13
3-Mar-13
18-Mar-13
2-Apr-13
17-Apr-13
2-May-13
17-May-13
1-Jun-13
16-Jun-13
1-Jul-13
16-Jul-13
31-Jul-13
15-Aug-13
30-Aug-13
14-Sep-13
29-Sep-13
14-Oct-13
29-Oct-13
13-Nov-13
28-Nov-13
13-Dec-13
28-Dec-13
Yield (%)


Source: Bloomberg

4.3.4.3 Yields on Federal Government Bonds
The FGN bonds yield curve at end-December 2013 trended downwards by 60
basis points relative to end-June 2013, and upwards by 89 basis points compared
with the end-December 2012 (Figure 4.16). This development reflected
improvements in inflation expectations arising from sustained tight monetary policy
stance, justified by the single digit inflation between January and November, 2013,
along with the broad-based macroeconomic stability.

Figure 4.15
FGN Bonds Yield Curves
End-December 2012 vs. End-June 2013 vs. End-December 2013


Yields (%)
Term to Maturity (Years)
FGN Bond Yield Curves Dec 31, 2012 vs Jun 28, 2013 vs Dec 31, 2013
Dec 31, 2013
Dec 31, 2012
Jun 28, 2013


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4.3.4.4 State/Local Government Bonds
There were increased activities in the sub-national bonds market. The total value
of outstanding state/local government bonds at end-December 2013 was N626.25
billion compared with N526.75 billion in the first half. Two new sub-national
government bonds were issued in the review period: the N12 billion 5-year bonds
issued by Niger State Government and N87.5 billion 7-year bonds issued by Lagos
State Government in November 2013. This compared with one sub-national
government bond of N10.0 billion issued by Osun State with a 7-year tenor in the
first half of 2013.

4.3.4.5 Corporate Bonds
In the second half of 2013, the value of outstanding corporate bonds was N571.24
billion, compared with N563.66 billion recorded in the first half of 2013. Two new
corporate bonds were issued in the review period compared with four corporate
bonds issued in the preceding period. FSDH SPV Plc. issued a 3-year bond of N5.53
billion on October 25, 2013 while NAHCO issued a 7-year bond of N2.05 billion on
December 5, 2013.

In July 2013, First Bank of Nigeria Plc. issued a US$300 million Eurobond callable in
2018 but maturing in 2020. Also, on November 4, 2013, GTBank issued a 5-year 7.0
per cent Eurobond at a yield of 6.125 per cent and 469 basis points (bps) spread
over United States Treasuries (UST). The issue, the second, under GTBank’s Medium
Term Notes (MTN) programme, had an approved limit of US$2-3 billion. Beside First
Bank and GTBank, two other banks, Access and Fidelity had previously issued
Eurobonds. The two issues in the review period brought the total value of
Eurobonds issued by Nigerian banks and outstanding at the end of 2013 to US$1.85
billion. Of this amount, US$1 billion was issued in 2013, out of which US$800 billion
was issued in the second half of the year.


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CBN Monetary Policy Review

CHAPTER 5
ECONOMIC OUTLOOK

5.1
Overview
The global economy accelerated more in the second half of 2013 than the first
half according to IMF World Economic Outlook (WEO, January 2014). World output
growth for the year was estimated at 3.0 per cent, up from an earlier estimate of
2.9 per cent in October 2013. The up-tick in activity was attributed to broad
expansion in final demand in the advanced economies and rebound in exports in
emerging market economies. Other contributors to global output growth in the
review period included increased domestic demand in China and easing of
financial conditions in the advanced economies despite the announcement by
the U.S. Federal Reserve on December 18 that it will begin tapering its quantitative
easing in January 2014.

The global economy experienced a structural adjustment in its growth trajectory in
the advanced and emerging market and developing economies. Outlook for
global growth in 2014 is 3.7 per cent. With the advanced economies recovering at
full steam, the pre-crisis growth momentum is anticipated in the region, which is
expected to grow by 2.2 per cent in 2014 up from 1.3 per cent in 2013. Similarly,
the emerging market and developing economies are projected to grow at 5.1 per
cent in 2014, compared with 4.7 per cent in 2013. For Sub-Saharan Africa, growth
was projected to rise to 6.1 per cent, from 5.1 per cent in 2013 and the Fund
estimated growth of 7.4 per cent for Nigeria, up from 6.2 per cent in 2013.

Global inflation remained low during the year 2013, averaging 3.1 per cent. In the
advanced economies, the average headline inflation rate was 1.4 per cent while
for emerging market and developing economies, it averaged 6.1 per cent.
Headline inflation in sub Saharan Africa in 2013 settled at 7.8 per cent while the
end period inflation was 8.0 per cent in Nigeria.

In the advanced countries, monetary policy remained easy, with policy rates of
the Fed, the BoE, BoJ and ECB ranging from 0 – 0.5 per cent so as to boost output
growth and employment in those countries. In the emerging and developing
economies, however, policy rates were much higher as a means of moderating
inflation and currency volatility. Nigeria retained its policy rate at 12.0 per cent
throughout 2013.
The outlook for inflation and output in Nigeria in the first half of 2014 is positive on
the back of strong oil price performance and sustained recovery in the advanced
economies.


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5.2
Output1 Growth
5.2.1 Global Output and Outlook
Overall, global economic growth was estimated to have dropped slightly to 3.0
per cent in 2013 from 3.1 per cent in 2012. Provisional data from the IMF WEO
January 2014 Update indicated that the annual output growth for 2013 in the
advanced economies was 1.3 per cent; emerging markets and developing
economies (EMDEs), 4.7 per cent and sub-Saharan Africa, 5.1per cent (Table 5.1).
Global output growth in the second half of 2013 was stronger than July forecast
with much of it coming from the advanced economies, due to a rise in inventory
demand. Notably, UK’s growth forecast projected at 1.4 per cent in October 2013
ended at 1.7 per cent during the review period.

Growth outlook in the near term is positive, following the momentum gained in the
review period. In a report by Credit Suisse on its outlook for 2014, progress in the
global economy was forecast to be anchored largely on improvements in the
Euro Zone, scaling back on debt by the U.S private sector and enhancing
economic policies by Japan. On the other hand, growth in the emerging
economies would slow down. The reasons for the weaker growth differed across
emerging market and developing economies, and included tightening capacity
constraints, stabilizing or falling commodity prices, less policy support, and slowing
credit growth after a period of rapid financial deepening.

The IMF opined that the impetus to global growth was expected to come largely
from the United States given that monetary conditions remain supportive and
fiscal consolidation continues to ease. In addition, the US economy as a result of
sharp fiscal tightening was characterised by a gradual recovery of the real estate
sector, increased wealth of households and easier bank lending conditions.

According to the IMF, business confidence indicators in the Euro Zone suggested
that economic activities were stabilizing in the core economies in the region as a
result of the reduction in the pace of fiscal tightening. However, growth in the
region for 2014 was estimated at only 1.00 per cent due to the tight credit
conditions in the peripheral states.

Exports, underpinned by strong growth as well as increased consumption driven by
low level unemployment in the advanced economies are expected to support
activities in emerging markets and developing economies. Growth is expected to
remain modest, against the backdrop of supply-side impediments, including

1 Quarterly and half year data obtained from Bloomberg, annual data from the IMF WEO


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infrastructure bottlenecks and capacity constraints, although the recent
stabilisation of financial market conditions should provide overall support to the
economic recovery in the short term.

On the fiscal side, polices are expected to be neutral and investment is predicted
to increase in the region; however, conditions for external funding have become
more constricted. In China, it is anticipated that the authorities would settle for
lower growth which is in line with their transition to a more balanced and
sustainable growth path and this slow growth is expected to cut across
developing Asia in 2014.

Growth in sub-Saharan Africa is expected to be supported largely by commodityrelated projects while that of the Middle East, North Africa, Afghanistan and
Pakistan is expected to be motivated by a modest recovery in oil production.

The global outlook is shrouded by substantial uncertainties and the balance of risks
remains skewed to the downside. Furthermore, developments in global funds and
financial market conditions as well as their related uncertainties may have the
potential to negatively affect economic conditions.


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Table 5.1
Global Output and Outlook
(2012 – 2015)

Source: IMF World Economic Outlook, Update, January 2014

5.1.2 Domestic Output Growth and Outlook
Overall domestic growth rate for 2013 is projected at 6.87 per cent up from 6.58
per cent in 2012. Provisional data from the NBS indicated output growth of 6.64 per
cent in the second half of 2013 compared with 6.36 per cent in the second half of
2012. The non-oil sector remained the major driver of growth in the review period
and the agricultural, wholesale and retail trade and services sub sectors had the

A. World Output


World Output 3.1
3.0
3.7
3.9
Advanced Economies 1.4
1.3
2.2
2.3
USA 2.8
1.9
2.8
3.0
Euro Area -0.7
-0.4
1.0
1.4
Japan 1.4
1.7
1.7
1.0
UK 0.3
1.7
2.4
2.2
Canada 1.7
1.7
2.2
2.4
Other Advanced Economies 1.9
2.2
3.0
3.2
Emerging & Developing
Economies

Central and Eastern Europe 1.4
2.5
2.8
3.1
Commonwealth of
Independent States

Developing Asia 6.4
6.5
6.7
6.8
Latin America and the
Caribbean

Middle East, North Africa
Afghanistan, and Pakistan

Sub-Saharan Africa 5.5
4.9
5.0
6.0
B. Commodity Prices (US' Dollars)


Oil 1.0
-0.9
-0.3
-5.2
Non-fuel -10.0
-1.5
-6.1
-2.4
C. Consumer Prices


Advanced Economies 2.0
1.4
1.7
1.8
Emerging & Developing
Economies


CBN Monetary Policy Review

best growth performance. The outlook for growth remains positive as the IMF has
projected a 7.4 per cent growth compared with 6.2 per cent in 2013 (WEO,
October 2013). Growth performance would be driven by high oil prices,
improvements in infrastructure and robust domestic demand. According to the
Lagos Chamber of Commerce and Industry (LCCI), growth in 2014 will exceed 6
per cent and the major drivers would be telecommunications, building and
construction, hotel and restaurants and solid minerals. Key risks to the growth
outlook include slow economic recovery in major trading partner-countries,
continuing security concerns, oil production losses, exchange rate instability and
loss of oil export markets to shale oil production and new crude producers in
Africa.

5.3
Inflation Trend
5.3.1 Global Inflation and Outlook
Global inflation fell to 3.10 per cent in the second half of 2013 from 3.53 per cent in
the second half of 2012. In the advanced economies, inflation averaged 1.33 per
cent in the second half of 2013 as against 1.73 per cent in Q4 of 2012. Consumer
price inflation was estimated at 6.54 per cent in the second half of 2013 up from
6.27 per cent in Q4 of 2012. Similarly, sub-Saharan Africa recorded average
inflation rate of 8.36 per cent in December 2013 as against 10.53 per cent in Q4 of
2012.

Globally, price inflation will remain subdued even as activities in the advanced
economies pick up because there’s still a huge output gap to be filled. Improved
supply and lower demand growth in key emerging market economies for
commodities, coupled with the fall in prices should help to moderate global prices
in 2014. In the advanced economies, inflation is projected at 1.7 per cent in 2014
and an average of 5.6 per cent in the emerging and developing economies in the
same period. Moderation in non-oil commodity prices, good agricultural harvests
and appropriate macroeconomic policy mix are expected to reduce inflation in
2014 to below 6.3 per cent.

5.3.2 Domestic Inflation Outlook
Inflation continued to moderate in the second half of 2013, falling to 8 per cent in
December 2013 compared with 12.0 per cent in the corresponding period of 2012.
Also, both core and food inflation decreased significantly to 7.9 and 9.3 per cent
in December 2013, compared with 13.7 and 10.2 per cent in December 2012,
respectively.

Staff projections suggest that headline inflation would lie between 8.00 and 9.30
per cent in March and June 2014, respectively. On a higher confidence, headline


CBN Monetary Policy Review

inflation could lie between 8.6 and 9.9 per cent in March and June 2014,
respectively. The expected moderation in inflation is anticipated to be driven by
growth in output and the use of appropriate monetary policy tools. The major
upside risks to the projections are increases in aggregate spending by the
government in the run-up to the 2015 elections, pressure on the exchange rate
due to capital outflows caused by QE tapering in the US and rising interest rates in
Europe.

5.4
Outlook for Monetary Policy in 2014
Nigeria’s monetary policy environment in the second half of 2013 was stable;
output was robust, inflation moderated throughout the period, fuel supply
remained steady, and agricultural production enjoyed favourable weather
conditions. The sustained tight monetary policy contributed immensely to the
maintenance of macroeconomic stability. In particular, the tight monetary policy
had a salutary impact on portfolio investments, which helped to drive the
recovery of asset prices on the Nigerian Stock Exchange and also enhanced
external reserves.

It is expected that the monetary stance in the first half of 2014 will continue to be
tight as the US commences QE tapering in January in addition to increased
election spending in the domestic economy.


Figure 5.1
Fan Chart for Headline Inflation
(Per cent)

Source: Research Department


CBN Monetary Policy Review

APPENDICES
APPENDIX 1

Central Bank of Nigeria Communiqué No. 90 of the Monetary Policy
Committee Meeting of Monday and Tuesday, July 22 and 23, 2013

The Monetary Policy Committee met on July 22 and 23, 2013 with 10 out of the 12
members in attendance. A new member, Mr. Stephen O. Oronsaye, who is a
Board member, replaced Professor Sam Olofin whose tenure as a Board member
had expired. The Committee reviewed the economic conditions and challenges
that confronted the domestic economy in the first half of the year, particularly
since the last MPC meeting in May 2013. It also re-evaluated the short-to-medium
term risks to inflation, domestic output, external balance and financial stability.

International Economic Developments
Global economic recovery remained weak, as new risks have emerged including
the possibility of a further slowdown in growth in the emerging market economies.
The old risks of a recession in the Eurozone have persisted alongside slowing
growth in China and the possibility of tighter financial conditions when central
banks gradually exit from their current monetary accommodation stance.

Consequently, global growth prospects have not improved. Blaming weaker
domestic demand and slower growth in several key emerging market economies,
as well as a more protracted recession in the euro area, the IMF in July 2013
reviewed downward its global growth forecast. It also reviewed downward its
growth forecast for the US and China to 1.7 and 7.8 per cent, from 1.9 and 8.0 per
cent in April 2013, respectively, but raised the forecast for the UK from 0.7 per cent
to 0.9 per cent in the same period. For the Eurozone which has seen its longest
recession since monetary union, the IMF projects a further contraction of 0.6 per
cent in 2013, which more or less doubled the earlier forecast in April. The IMF has
also cut the growth forecast for Brazil, South Africa, India and Russia to 2.5, 2.0, 5.6
and 2.5 per cent from 3.0, 2.8, 5.8 and 3.4 per cent, respectively. Japan’s growth
rate forecast is projected at 2.0 per cent, up from a forecast of 1.5 per cent.

The slowdown in global growth is likely to impact on commodity prices and thus,
adversely impact oil exporting countries like Nigeria. In addition, continued fragility
in financial markets continues to generate bouts of capital flow reversals and
inflows that are potentially disruptive to emerging and transition markets.


CBN Monetary Policy Review

Domestic Economic and Financial Developments

Output
The National Bureau of Statistics (NBS) estimated the real Gross Domestic Product
(GDP) growth at 6.72 per cent for Q2 2013, slightly higher than the 6.56 per cent
recorded in Q1, and 6.39 per cent in Q1 of 2012. Overall, GDP growth for fiscal
2013 was projected at 6.91 per cent up from 6.58 per cent in 2012. The non-oil
sector remained the major driver of growth recording 7.91 per cent in contrast to
the growth rate of -0.68 per cent for the oil sector during the second quarter of
2013. The drivers of the non-oil sector growth remained agriculture; wholesale and
retail trade; and services which contributed 1.72, 1.47, and 2.90 per cent,
respectively. The Committee noted the continued decline in the contribution of
the oil sector to overall GDP and the underlying factors responsible for this state of
affairs. These factors include; sustained oil theft which has led to a decline in
output volumes in the face of an uncertain international oil market and price
signals, weak infrastructure, and downside risks due to discovery of shale oil and
the emergence of other African oil exporters competing for Nigeria’s traditional oil
market.

Prices
Inflationary pressures continued to moderate partly in response to the tight
monetary policy and base effect. The year-on-year headline inflation decelerated
to 8.4 per cent in June from 9.0 per cent in May. Also, core inflation declined
significantly to 5.5 per cent in June from 6.2 per cent in May and 6.9 per cent in
April. Food inflation, however, rose to 9.6 per cent in June from 9.3 per cent in May
2013. Notwithstanding the moderation in headline inflation, there are benign risks
on the horizon, including the possibility of accelerated fiscal releases in the later
part of the year and the effects of the upward review in electricity tariffs in line
with the MYTO following the implementation of the full deregulation of the energy
sector.

The six-month inflation outlook indicates that inflation would remain within single
digit territory due to base effect and tight monetary policy. However, the current
state of government finances is likely to generate increased borrowing. The key
risks to the outlook, therefore, remain fiscal operations, increased pressure on the
exchange rate due to excess structural liquidity in the banking system and the
possibility of a capital flow reversal in the medium term.

Monetary, Credit and Financial Market Developments
Broad money supply (M2) grew by 0.71 per cent as at end-June 2013 over the
level at end-December 2012. When annualized, M2 grew by 1.42 per cent,


CBN Monetary Policy Review

compared with the growth of 2.70 per cent in the corresponding period of 2012.
Thus, M2 growth was also significantly below the growth benchmark of 15.20 per
cent for 2013 and 7.60 per cent for Q2 of 2013.

Interest rates in the interbank money market moved in tandem with the level of
liquidity conditions in the banking system. The average liquidity ratio was 67.79 per
cent compared with the prudential requirement of 30.0 per cent. Thus, the
average inter-bank call and open-buy-back (OBB) rates, which opened at 12.07
and 11.91 per cent on May 20, 2013, closed lower at 10.42 and 10.29 per cent,
respectively, on June 28, 2013. However, the average inter-bank call and OBB
rates for the period were 11.80 and 11.46 per cent, respectively.

The recovery in the Nigerian capital market continued, as equities market
indicators were upbeat in the review period. The All-Share Index (ASI) increased by
28.8 per cent from December 2012 to June 2013, while the equities Market
Capitalization (MC) increased by 27.3 per cent from N8.97 trillion on December 31,
2012 to N11.43 trillion on June 28, 2013. Improved earnings and investor
confidence in the economy contributed to the up-swing in stock prices. The
equities market median price-earnings ratio rose above the long-run median by
9.0 per cent in June 2013 indicating that share prices were recovering faster than
earnings and investor assessment of future returns was good.

External Sector Developments
At the Wholesale Dutch Auction System (wDAS), interbank and the BDC segments
of the foreign exchange market, the exchange rate depreciated to N157.32/US$,
N161.25/US$, and N163.00/US$ on July 19, 2013 from N157.30/US$, N158.30/US$,
and N159.50/US$ on 21st May, 2013. The Committee noted the depreciation
recorded in all segments of the foreign exchange market in the review period on
the back of a general sell-off by portfolio investors in emerging and frontier
markets following guidance by the US Federal Reserve Bank (FED) with respect to
its quantitative easing programs. It also observed that the experience in Nigeria
was not unique, as the spike in the US yields negatively impacted financial markets
globally. However, calm has since returned to the financial markets following
further clarifications by the FED that exit from quantitative easing is not imminent
and does not necessarily mean monetary tightening. Thus, the Nigerian capital
market has seen a rally, while the demand pressure in the foreign exchange
market has somewhat moderated. The Committee, however, noted the build-up
of structural excess liquidity in banks balance sheets, which poses risks to the
inflation and exchange rate outlook.


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The Committee noted the increase in external reserves to US$47.99 billion as at July
18, 2013 from US$43.83 billion at end-December, 2012, representing a rise of
US$4.16 billion or 9.49% year-to-date. This level of reserves provides cover for
approximately 11 months of import.

The Committee’s Considerations
The Committee was satisfied with the prevailing macroeconomic stability
achieved during the period, including the single digit inflation, stable banking
system, exchange rate stability, favourable output growth, capital market
recovery and growth in external reserves, thus sustaining internal balance and
external viability. The Committee also noted the recent volatility in the foreign
exchange market and also recognized that the commitment of the Bank to
defend the currency in the face of capital flow reversal and significant revenue
attrition has stemmed the depreciation of the naira. Consequently, the Bank has
been able to sustain the objectives of financial and price stability.

The Committee observed the build-up in excess liquidity in the banking system,
and expressed concern over the rising cost of liquidity management as well as the
sluggish growth in private sector credit, which was traced to DMB’s appetite for
government securities. This situation is made more serious by the perverse
incentive structure under which banks source huge amounts of public sector
deposits and lend same to the Government (through securities) and the CBN (via
OMO bills) at high rates of interest.

The Committee expressed strong concerns about the risks posed to government
revenues from oil theft, less than expected production, new discoveries of shale
oil, the fast increasing number of African oil exporters, the dwindling market for
Nigerian crude as well as the inevitability of a fall in global oil prices as well as
capital flow reversal, which may impact the current global (dollar) carry trade, for
which Nigeria has been a major beneficiary.

The Committee commended the Federal Government on its sustained efforts
towards fiscal consolidation in 2012 and stressed the need to reverse the loose
fiscal stance of 2013. The Committee articulated the monetary policy risks of
dwindling fiscal revenues to include: the crowding out effect of government
borrowing, depletion of excess crude savings and pressure on the exchange rate.
Available data indicates that capital expenditure is the first casualty of dwindling
government revenues as available resources are channeled into funding nondiscretionary recurrent expenditure.


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The Committee considered the inflationary outlook for the rest of the year as
benign. However, principal risks remain largely due to the loose fiscal stance and
rising deficit, excess liquidity in the banking system and risks to the exchange rate
due to a combination of revenue shocks and external developments.

Decisions
Having considered all the above factors, the Committee decided:
1.
By a vote of 9 to 1 to hold the MPR at 12 per cent. One member voted for
a 50 basis points reduction;

2.
By a vote of 9 to 1 to maintain the symmetric corridor around the MPR at
+/-2 per cent. One member voted for an asymmetric corridor;

3.
Unanimity to retain the CRR at 12 per cent; and

4.
9 to 1 to introduce a 50 per cent CRR on public sector deposits. This will be
applied on Federal, State and Local Government deposits and all MDAs.
For other deposits CRR will remain at 12 per cent.

Thank you.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
23rd July, 2013


CBN Monetary Policy Review

APPENDIX 2

Central Bank of Nigeria Communiqué No. 91 of the Monetary Policy Committee
Meeting of Monday 23 and Tuesday 24 September, 2013
The Monetary Policy Committee met on September 23 and 24, 2013, with all of the
12 members in attendance. The Committee reviewed the economic conditions
and challenges that confronted the domestic economy up to September,
particularly since the last MPC meeting in July 2013. It re-assessed the short-tomedium term risks to inflation, domestic output, external balance and financial
system stability.

International Economic Developments
The global economy continued on the slow path to recovery with financial
systems responding swiftly to new and expected risks. The risks include the
possibility of the US FED tapering off its accommodative monetary policy stance
(QE) and higher long-term interest rates as the economy enters the recovery
mode. This move which has been temporarily postponed portends uncertainties in
external conditions for emerging markets and developing economies, including
Nigeria. Meanwhile, the underlying risk of a recession in the Eurozone, weak
domestic demand and slowing growth in China have created tight financial
conditions; which could easily worsen and reduce global growth prospects by the
time monetary contraction begins in the U.S, Japan and the other advanced
economies. The conclusion of German elections (and the re-election of Angela
Merkel for a third term as Chancellor), should however open the door to much
speedier progress in key reforms, especially around the common resolution
mechanism for European banks.

In the interim, the IMF has declared that global growth is strengthening on the
back of accommodative monetary policy. The Fund has further emphasized that
though an end to unconventional monetary policy was certain, its impact would
largely depend on country specific circumstances and the pace of recovery
recorded by various economies.

The Organisation for Economic Cooperation and Development (OECD) has noted
that the momentum in the global economy was shifting away from the emerging
markets back to the advanced economies. The pace of business activity
increased in the Eurozone, while an official index of leading economic indicators
for the US also strengthened in August. Consequently, the OECD growth forecasts
for most advanced economies in 2013 have been revised upward to between 1.5
and 1.8 per cent. The positive outlook in the advanced economies has


CBN Monetary Policy Review

compensated for the slowdown of growth in the major emerging markets.
However, the OECD warned that a prolonged slowdown in major developing
countries could have profound effects on the world economy and translate into
weaker growth for the advanced economies. The IMF had projected global
growth at 3.1 per cent in 2013.

Domestic Economic and Financial Developments

Output
The National Bureau of Statistics (NBS) has reported a slowdown in the growth rate
of real Gross Domestic Product (GDP) in Q1 and Q2 2013 relative to Q4 2012.
Growth was estimated at 6.18 per cent in Q2, down from 6.56 per cent recorded
in Q1, 2013. Overall, GDP growth for fiscal 2013 was projected at 6.91 per cent up
from 6.58 per cent in 2012. The non-oil sector remained the major driver of growth
at 7.36 per cent in Q2 (lower than the 7.89 per cent reported for Q1) in contrast to
the oil sector output decline of 1.15 per cent (worse than the decline of 0.54 per
cent in Q1). The drivers of the non-oil sector growth remained Agriculture;
Wholesale and Retail trade; and Services which contributed 2.14, 1.48, and 3.0 per
cent, respectively. The Committee expressed concern about the worsening
performance of the oil sector, which is principally due to the reported incidence of
growing crude oil theft and significant revenue leakages in the oil sector. The
Committee, therefore, urged the government to step up efforts aimed at
curtailing the malfeasance in the oil sector, and adopting best practice in
establishing strong controls, independent oversight and transparency in the official
oil sector.

Prices
Inflationary pressures continued to moderate in response to the tight stance of
monetary policy. Headline inflation declined from 8.7 per cent in July to 8.2 per
cent in August. Food inflation declined to 9.7 per cent in August from 10.0 per cent
in July while core inflation, rose slightly to 7.2 per cent in August from 6.6 per cent in
July. The Committee noted with satisfaction that, overall, headline inflation has
remained below 10.0 per cent for eight (8) straight months and represented the
lowest level achieved over the past 5 years, the longest such stretch since 2008;
and that the six-month inflation outlook indicates that inflation would remain within
single digit range. The Committee was nonetheless, conscious of the potential risks
on the horizon, including the possibility of pressures coming from the fiscal activities
of the government in the later part of the year, and in the run up to the 2014
elections.

Monetary, Credit and Financial Market Developments


CBN Monetary Policy Review

Broad money supply (M2) contracted by 5.58 per cent in August 2013 over the
level at end-Decemberember 2012. When annualised, M2 contracted by 8.37 per
cent, compared with the growth of 3.51 per cent in the corresponding period of
2012. M2 growth rate was also below the benchmark of 15.20 per cent for 2013.
This is to be expected, given the tight monetary policy stance. Aggregate
domestic credit (net) grew by 3.85 per cent in August 2013 which annualises to a
growth rate of 5.78 per cent over the end-Decemberember 2012 level, compared
with the contraction of 3.56 per cent in the corresponding period of 2012. The
annualised growth rate in aggregate domestic credit (net) at end-August 2013 of
5.78 per cent was below the provisional benchmark of 22.98 per cent for 2013.

Reserve money (RM) rose by 30.64 per cent to N4,227.61 billion at end-August 2013
from N3,236.15 billion by end-Junee. At that level RM was N343.06 billion or 8.83 per
cent above the 3rd quarter, 2013, indicative benchmark of N3,884.55 billion.

Interest rates in all segments of the money market moved in tandem with the tight
level of liquidity in the banking system. The inter-bank call and OBB rates, which
opened at 10.69 and 10.22 per cent on July 29, 2013, closed at 15.67 and 14.92
per cent, respectively, on September 20, 2013. The average inter-bank call and
OBB rates for the period were 14.86 and 13.93 percent, respectively.

The recovery in the Nigerian capital market continued, as equities market
indicators all trended upward during the period under review. The All-Share Index
(ASI) increased by 28.9 per cent from 28,078.81 on December 31, 2012 to 36,188.72
on September 20, 2013. Market Capitalization (MC) increased by 28.4 per cent
from N8.97 trillion to N11.53 trillion over the same period. Improved earnings and
investor confidence in the economy contributed to the rise in stock prices.

External Sector Developments
The naira exchange rate remained stable at the wDAS segment of the foreign
exchange market. The exchange rate at the wDAS-SPT during the review period
opened and closed at N157.32/US$(including 1% commission). The average wDAS
exchange rate during the period was N157.31/US$. At the interbank segment, the
naira exchange rate opened at N160.75/US$ and closed at N161.47/US$,
representing a depreciation of N0.72/US$ or 0.45 per cent. The average interbank
exchange rate during the period was N160.78/US$. At the BDC segment, the
selling rate opened at N162.50/US$ and closed at N163.00/US$, representing a
depreciation of N0.50k/US$ or 0.31 per cent. The average BDC exchange rate for
the period was N162.14/US$. The stability of the exchange rate reflected the
commitment of the Bank to supporting the currency at a time of massive
depreciation in the currencies of emerging and frontier countries. This


CBN Monetary Policy Review

commitment was underscored by the policy of intervention to improve supply
conditions, and the very tight monetary conditions maintained since the last MPC
meeting.

The Committee noted the decline in external reserves to US$45.27 billion as at
September 19, 2013. External reserves, however, still increased by US$4.08 billion or
9.91 per cent, year-on-year, compared with US$41.19 billion at end-September
2012. However, the Committee noted that this level of accretion is too low given
the relatively high price of crude oil and further underscores the need for muchneeded reform of the oil sector.

The Committee’s Considerations
The Committee noted with satisfaction the positive developments in the economy,
especially, the moderation in inflation, stability in the financial system and currency
markets. It also noted the strong growth forecast by the National Bureau of
Statistics for Q3 and Q4 on the back of relatively slow growth in Q2. It observed
that the actions taken by the Bank since the last MPC yielded their intended effect
on stabilizing the exchange rate while maintaining inflation within its target range.
The Committee also noted that the fundamentals in the economy which
necessitated the July MPC measures had not changed substantially; except that
the US Federal Reserve had provided clearer insight into the tapering off of its
asset purchase programme - Quantitative Easing3. The Committee noted that in
more than 30 countries surveyed, the Naira exchange rate remained one of the
most stable having depreciated by only 2.3 per cent from year to date compared
with the massive depreciation in the value of other currencies such as the Indian
Rupee, the Indonesian Rupiah, the Brazilian Real, the South African Rand and the
Ghanaian cedi.

The clarifications provided by the Fed over its QE3 policy brought substantial relief
to the financial markets globally and initiated a reversal of the trend in capital
outflows from the country. However, the Committee noted the existence of strong
foreign exchange demand pressures coming domestically and which are not
necessarily linked to an increase in the import of goods. This non-import related
demand was attributed to the buildup in political activities in the country and
increasing resort to dollarization of the economy by the political class. The
Committee charged the Bank to ensure the stability of the currency in the face of
these challenges, and to fast-track plans for adopting new regulations aimed at
combating money laundering in the BDC segment.

The Committee considered the developments in money market rates which rose
astronomically to peak at 40.0 per cent on 18th September 2013. However, these


CBN Monetary Policy Review

developments were temporary, arising from the postponement/stalemate in
sharing the monthly Federation Account Allocation Committee Revenues. Banks
which participated in the wDAS widow expressed a preference for paying high
interbank rate for one day rather than their borrowing from the CBN at 14.0 per
cent and being barred from the wDAS window. In any case, the Committee noted
the continued dependence of the banking sector on monetised oil revenues for its
liquidity and stressed the need to keep pushing banks into altering their business
model to reduce vulnerability.

Decision
The Committee noted that the actions taken at the last MPC have served the
purpose of helping the naira avoid the fate of other developing-country
currencies by keeping it relatively stable. It also noted the continued moderation
in inflation and the benign outlook for the next six months. Finally, with the FOMC
decision not to begin tapering asset purchases immediately, and the improved
outlook for financial stability in Europe after the German elections, the risks of
currency instability are significantly reduced. The monetary stance maintained by
the US Federal Reserve is positive for international oil prices and portfolio flows.

In consideration of all the issues, the Committee decided by a vote of 11 members
to hold the MPR at 12.0 per cent. One member voted to reduce the MPR by 50
basis points. 11 members voted to retain the symmetric corridor of 200 basis points
around the MPR while one member voted for an asymmetric corridor of 200 basis
points above the MPR and 400 basis points below the MPR. All members voted to
retain the 50.0 per cent Cash Reserve Requirement (CRR) on public sector funds,
and 12.0 per cent CRR on private sector deposits.

Thank you.

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
24th September, 2013


CBN Monetary Policy Review

APPENDIX 3

Central Bank of Nigeria Communiqué No. 92 of the Monetary Policy Committee
Meeting of Monday 18 and Tuesday 19 November, 2013

The Monetary Policy Committee (MPC) met on November 18 and 19, 2013 against
the backdrop of widespread uncertainties and risks of deflation in the global
economy but stable domestic macroeconomic conditions. Eleven (11) out of the
twelve (12) members were in attendance. The Committee reviewed the global
and domestic economic environment from January to October 2013 and reassessed the short- to medium-term risks to inflation, domestic output and financial
stability and the outlook for the rest of the year.

International Economic Developments
The global economy is currently adjusting structurally to the evolving growth
dynamics in the advanced and emerging market economies. While growth in the
advanced economies has resumed, growth in the emerging economies has
slowed down. Global growth averaged 2.5 per cent in the first half of 2013, same
as in the second half of 2012. The United States (US), Japan and a few European
countries just emerging from recession are helping to drive the current growth.

Improvement in US output is anchored by enhanced industrial production buoyed
largely by strong private demand and extra-ordinary accommodative monetary
policy. The political standoff over fiscal sustainability, which led to a shutdown of
the US Government in October, 2013, was moderated, however, by discretionary
spending during the period. Strong signs of growth resumption have emerged from
some euro area economies, especially Portugal and Greece. Given the changing
global growth dynamics, the International Monetary Fund (IMF) revised its global
economic growth forecast in October to 2.9 per cent in 2013 and 3.6 per cent in
2014.

Global inflation is estimated to fall from 3.75 per cent in 2012 to 3.0 per cent in
2013, but could rise marginally in 2014. Food and fuel prices continued to positively
moderate global consumer price inflation. In the light of these developments,
most central banks responded by either maintaining current policy stance or
moderately easing the policy rate in the last three months. The financial markets
expect monetary conditions to remain easy through the first quarter of 2014.
Indications to this came from the Fed Chairman-designate during her Senate
screening. In addition, the Bank of England has given signals that its quantitative
easing would continue to late 2014 while the Bank of Japan has also indicated


CBN Monetary Policy Review

that its quantitative easing would continue until inflation reaches a 2.0 per cent
target.

Domestic Economic and Financial Developments

Output
The National Bureau of Statistics (NBS) estimated that real Gross Domestic Product
(GDP) grew by 6.81 per cent in the third quarter of 2013, which was higher than
the 6.18 per cent in Q2, and 6.48 per cent Q3 of 2012, respectively. Overall, growth
for 2013 was projected at 6.87 per cent, up from 6.58 per cent in 2012, indicating
that the economy is remaining on its steady growth trajectory.

The non-oil sector remained the major engine of growth recording 7.95 per cent
compared with a decline of 0.53 per cent for the oil sector in the third quarter of
2013. Agriculture, wholesale and retail trade, and services continued to be the
drivers of non-oil sector growth contributing 2.50, 1.96, and 2.82 per cent,
respectively. The relatively strong domestic growth forecast in an environment of
sluggish global growth and sturdy signs of deflation reflected the continuing
favourable conditions for increased agricultural production and incentives for
strong macroeconomic management.

Prices
The moderation in consumer price inflation, which began in the fourth quarter of
2012, continued in the third quarter of 2013. The year-on-year headline inflation
moderated to 7.8 per cent in October 2013 from 8.0 per cent in September. Also,
food inflation declined to 9.2 per cent in October from 9.4 per cent in September
2013. Core inflation, however, rose to 7.6 per cent in October 2013 from 7.4 per
cent in September. Thus, the decline in headline inflation reflected the moderation
in food prices. The Committee observed with satisfaction that in the last four
months, all the three measures of inflation continued to be within the single digit
inflation target. However, the Committee noted the potential risks to inflation of
increased aggregate spending in the run-up to the 2015 elections.

Monetary, Credit and Financial Market Developments
Broad money supply (M2) contracted by 6.16 per cent in October 2013 over the
level at end-Decemberember 2012. When annualised, M2 contracted by 7.39 per
cent, in contrast to the growth of 8.24 per cent in the corresponding period of
2012. M2 was also below the growth benchmark of 15.20 per cent for 2013.
Aggregate domestic credit (net), however, grew by 7.32 per cent in October
2013, which annualised to a growth rate of 8.78 per cent over the endDecemberember 2012 level, in contrast to the contraction of 3.30 per cent in the


CBN Monetary Policy Review

corresponding period of 2012. The annualised growth rate in aggregate domestic
credit (net) at end-October 2013 of 8.78 per cent was below the provisional
benchmark of 22.98 per cent for 2013. The decline in M2 was traced mainly to
decline in net credit to Federal Government and Net Foreign Assets and other
assets (net).

Overall, Government spending in the 2nd Half of 2013 has been more moderate
than it was in the earlier part of the year. The erosion of the fiscal buffers through
the depletion of the ECA has further exposed the economy to vulnerabilities while
the fall in oil revenue has left capital inflows as the only source of external reserves
accretion. The Federal Government debt has also risen phenomenally along with
its deposits at the deposit money banks, showing the Government as a net
creditor to the system. This underscores the urgent need for the immediate
implementation of the Treasury Single Account. The continued delay in returning
government accounts to the Central Bank is adding to the huge cost of
government debt due to poor cash flow management.

Reserve money (RM) declined marginally by N138.48 billion or 2.98 per cent to
N4,511.51 billion at end-October 2013, from N4,649.99 billion at end-September
2013. The level of RM at end-October 2013, was below the fourth quarter
indicative benchmark of N5,009.88 billion by N498.37 billion or 9.95 per cent.

Interest rates in all segments of the money market reflected the tight liquidity
conditions in the banking system. The weighted average inter-bank call and OBB
rates opened at 17.99 and 16.92 per cent on September 25, 2013 but closed at
12.50 and 11.73 per cent, respectively, on November 15, 2013.

The capital market continued its rally with the equities market providing the lead.
The All-Share Index (ASI) increased by 34.9 per cent from 28,078.81 on December
31, 2012 to 37,883.53 on November 15, 2013. Market Capitalization (MC) increased
by 35.0 per cent from N8.97 trillion to N12.12 trillion in the review period. Improved
earnings and investor confidence in macroeconomic management and
substantial portfolio inflows (as foreign investors took advantage of the favourable
domestic economic environment) accounted for the upswing in capital market
activities. Generally, equity market valuations remained close to their long run
median suggesting that equity prices were fully valued and the stock valuations
were close to economic fundamentals.


CBN Monetary Policy Review

External Sector Developments
The naira exchange rate remained stable at the w/rDAS and inter-bank segments
of the foreign exchange market. The exchange rate at the w/rDAS-SPT during the
review period opened at N157.31/US$ (including 1% commission) and closed at
N157.63/US$, representing a depreciation of N0.32k. The average official
exchange rate during the period was N157.38/US$. The inter-bank selling rate
opened at N160.00/US$ and closed at N158.65/US$, averaging N160.15/US$,
representing an appreciation of N1.35k for the period. However, at the BDC
segment of the foreign exchange market, the selling rate opened at N162.00/US$
and is hovering around N167US$ at present, reflecting the impact of reduction in
dollar supply to the segment-as part of the CBN anti-money laundering measures.

The Committee noted the increase in external reserves to US$45.37 billion as at
November 15, 2013, representing an increase of US$1.26 billion or 2.85 per cent
above the level of US$44.11 billion at end- September 2013. External reserves
increased by US$0.95 billion or 2.14 per cent on a year-on-year basis over the
US$44.47 billion at end-November 2012. The Committee continued to express its
disappointment at the low rate of reserve accretion in spite of strong oil prices;
which is a result of the absence of fiscal savings.

The Committee’s Considerations
The Committee recognized the importance of taking into consideration not just
the static indices at the point of meeting but overall strategic objectives and
targets, as well as the outlook for the domestic economy and the external
environment, especially with this being the last meeting for 2013.

The Committee noted the decline in inflation and the benign outlook going into
the first half of 2014. It further noted the positive impact of monetary policy in
engendering a stable exchange rate regime and attracting portfolio investment
thus driving the strong recovery of asset prices on the Nigerian Stock Exchange. It
also noted that global monetary conditions were likely to remain loose going into
Q1:2014 for a number of reasons. First, in the U.S.A, it is clear that the incoming
Federal Reserve Chairperson, Janet Yellen, does not see tapering as imminent
given the on-going disputes around the budget and the weakness of economic
recovery.

In England, although recovery appears to be firmly on track, the BoE is clearly not
going to consider raising rates until unemployment falls to 7%, probably in late
2014. The BoJ is likely to continue with QE until inflation reaches its 2% target which
is a long way off, and the ECB has just lowered its benchmark rate to avert the risk


CBN Monetary Policy Review

of deflation. For these reasons, the Committee does not anticipate any major
internal or external shocks before its next meeting in January 2014.

The MPC also noted that AMCON is expected to reduce its debt by N1 trillion in
December 2013. The CBN has directed that AMCON redeem its Bonds for
cancellation by exchanging them for FGN Treasury Bills on its books. Consequently,
the only impact of the repayment is that the Balance Sheet of AMCON (and the
contingent liability on the FGN from its guarantee of AMCON Bonds) will shrink by
N1 trillion. This is positive for the economy and the credit rating of the FGN and the
banking industry. Its impact on the markets will be minimal given that only
AMCON’s Balance Sheet is affected significantly and AMCON is not a player in
these markets.

The outlook for 2014, however, portends some potential headwinds that may lead
to further tightening in monetary conditions. It is expected that 2014 will be the
year for QE- tapering in the US and interest rate rises in Europe, both of which will
lead to some pressure on the exchange rate and stock prices due to the impact
on capital flows. It is also the year in which election spending is likely to take place
domestically, thus bringing more pressure to bear from the fiscal side. As a result,
the MPC is of the view that we are not yet at the end of the tightening cycle and
may need to tighten further in response to these eventualities next year.

The Committee also noted that, while Federal Government spending overall in
2013 has not been significantly higher than in 2012, oil revenues have continued to
decline in spite of the relative stability in oil price and output when compared with
preceding years. As a result, Excess Crude savings have fallen from about $11.5b
at year-end 2012 to less than $5b on November 14. External Reserves have
remained in excess of $45billion only because of a massive inflow in portfolio funds.
The implication of this is that financial markets are extremely fragile and
susceptible to external shocks. The MPC again calls on the Fiscal Authorities to
rebuild buffers in the excess crude account, and this can be done by blocking
fiscal leakages in the oil sector and increasing oil revenues. Clearly, the major risk
on the fiscal side at present is not one of escalation of spending but loss of
revenue from oil exports.

Finally, the Committee formally adopted an inflation target of 6-9% in 2014. It also
noted that ECOWAS Heads of State have set a 5% target at the Convergence
Council. The MPC reaffirmed its commitment to moving Nigeria firmly into being a
low-inflation environment in the medium term. However, the MPC recognizes the
high cost of rapid adjustment and plans to make the transition gradually.


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Decision
Having considered the success of Monetary Policy in attaining price and
exchange rates stability; the potential headwinds in 2014; the ultimate goal of
transiting to a truly low – inflation environment; and the need to retain portfolio
flows in view of the erosion of fiscal reserve buffers, the committee decided as
follows:
1.
Nine (9) members voted to keep MPR at 12% +/- 2%; private sector CRR at
12%; public sector CRR at 50% and Liquidity Ratio at 30%

2.
One (1) member voted for a 0.5% reduction in MPR and an increase in
public sector CRR from 50% to 75%

3.
One (1) member voted for 0.5% reduction in MPR and an increase in public
sector CRR from 50% to 100%

The Committee has therefore decided by a majority vote of 9 to 2, to hold all rates
at current levels.

Thank you for Listening

Sanusi Lamido Sanusi, CON
Governor
Central Bank of Nigeria
19th November, 2013


CBN Monetary Policy Review

CBN Monetary Policy Review