Central Bank of Nigeria Communiqué No. 106 of the Monetary Policy
Committee Meeting of Monday and Tuesday, March 21 and 22, 2016
The Monetary Policy Committee met on 21st and 22nd March 2016
amidst uncertain global economic prospects and continuing
challenges in the domestic economy. In attendance were 8 out of
the 12 members. The Committee appraised the international and
domestic economic and financial environments in the first two
months of 2016 as well as the outlook for the rest of the year.
International Economic Developments
The Committee noted with concern the further decline in global
output at the end of 2015, which grew at 2.3 per cent, year-on-year
in Q4, its slowest in three years, representing a 0.3 percentage point
decline compared with 2.6 per cent in Q3. This deceleration
stemmed from the continuous slowdown of growth in the emerging
market economies, worsened by deteriorating conditions in the Euro
area and China as well as key emerging market economies. Other
factors include sustained pressure in global financial markets arising

from US monetary policy normalization, depressed global oil market
and persistently weakened global aggregate demand.
The slowdown in growth in the United States to 1.0 per cent in Q4
from 2.0 per cent in Q3 was attributed to slowdown in private
consumption
expenditure
(PCE)
and
non-residential
fixed
investments. In Japan, output declined by 1.4 percentage points in
Q4, 2015 in contrast to the 1.3 per cent growth recorded in Q3. The
Bank of Japan’s monthly asset purchase program of ¥6.7 trillion
($56.71 billion) remains substantially sub-optimal, as the economy
continues to lurch between contraction and expansion, with the
adoption of a negative interest rate policy in January 2016.
In the Euro area, GDP grew by 1.5 per cent in Q4 of 2015, and
projected to grow at 1.7 per cent in 2016. The European Central
Bank (ECB), at its meeting on 10th of March, 2016 eased monetary
policy by further reducing its refinancing rate to 0.0 per cent and
deposit rate to -0.4 per cent. The Bank also expanded its monthly
asset purchase program from €60 billion ($65.4 billion) to €80 billion
($87.2 billion) to further stimulate output growth and move inflation
towards its long term objective of 2.0 per cent.
On the other hand, the Bank of England (BoE) sustained its stock of
assets purchase, financed through the issuance of reserves at ₤375
billion ($536.25 billion), while retaining its policy rate at 0.5 per cent.
The BoE further committed to investing ₤8.4 billion ($12.01 billion) of

cash flows associated with redemption of the January 2016
government securities held in the Asset Purchase Facility, with a
commitment to bring inflation closer to the 2.0 per cent target,
reducing unemployment and promoting growth.
Uncertainties and geo-political tensions in the Middle East, including
a negotiated ceasefire agreement in Syria and Iran’s re-entry into
mainstream international oil market may have further redefined
conditions in the oil market. The market witnessed some uptick in
prices following the resolve of the Organization of the Petroleum
Exporting Countries (OPEC) and some non-OPEC members to pursue
a higher anchor price, coupled with smaller-than-anticipated buildup in stocks at the Cushing Oklahoma delivery hub for United States
crude futures.
The Emerging markets and developing economies (EMDEs) were
forecast to grow at 4.3 per cent in 2016, an improvement over the
4.0 per cent recorded in 2015. However, external and domestic
challenges have persisted, stemming from low commodity prices,
troubled financial markets, tepid global demand, policy uncertainty
as well as continuously feeble growth in global trade. In addition,
weaknesses in major emerging market economies, diminished
capital inflows, rising borrowing costs and geopolitical factors have
been identified as possible deterrents to growth in the EMDEs. In the
environment of suppressed inflation, slow growth, weak global
demand and volatile financial markets, the stance of monetary

policy in the advanced economies is expected to remain
accommodative in 2016, while in the EMDEs, it is expected to be
underpinned by currency adjustments and other complementary
policies.
Domestic Economic and Financial Developments
Output
The Bank had adopted accommodative monetary policy since July
2015 in the hope of addressing growth concerns in the economy,
effectively freeing up more funds for DMBs by lowering both CRR
and MPR, with excess liquidity arising from the lower CRR
warehoused at the CBN. DMBs were to access these funds by
submitting verifiable investment proposals in the real sector of the
economy. The funds have not impacted the market yet because the
CBN was still processing some of the proposals submitted by the
DMBs. In the first episode of easing which resulted in injecting liquidity
into the Banking system, DMBs did not grant credit as envisaged.
Moreover, the delay in passage of the 2016 Budget has further
accentuated the difficult financial condition of economic agents as
output continues to decline due to low investment arising from weak
demand. The cautious approach to lending by the banking system
underpinned by a strict regulatory regime conditioned by the Basel
Committee in the post global financial crisis era has further alienated

investors from access to credit as banks prefer to build liquidity
profiles in anticipation of government borrowing.
In the light of these developments, domestic output growth in 2015
remained subdued as reported by the National Bureau of Statistics
(NBS). Consequently, real GDP grew by 2.11 per cent in the last
quarter of 2015, more than half a percentage point lower than the
2.84 per cent recorded in the third quarter and 3.83 percentage
points in the corresponding period of 2014. Overall, growth in 2015
was estimated at 2.79 per cent, compared with 6.22 per cent in
2014. The major impetus for growth continued to come from the nonoil sector which grew by 3.14 per cent in Q4, 2015 compared with
3.05 per cent in the preceding quarter. The key drivers of growth in
the non-oil sector were Services, Agriculture and Trade; contributing
1.23, 0.83 and 0.76 percentage points, respectively.
The Committee noted that the sluggish growth in output was directly
attributable to certain fiscal uncertainties, which inadvertently
hampered movement of labor and goods; fuel scarcity, increased
energy tariffs, foreign exchange scarcity as well as slow growth in
credit to private sector in preference to high credit growth to the
public sector. The Committee noted that many of these factors were
outside the control of monetary policy and given these limitations, in
the absence of complementary fiscal and structural policies, the
only option was to continue with the existing measures. The MPC

believes that complementary fiscal and structural policies are
essential for reinvigorating growth.

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

Monetary, Credit and Financial Markets Developments
Broad money supply (M2) grew by 2.29 per cent in February, 2016 in
contrast to 1.69 and 0.25 per cent in January 2016 and February
2015, respectively. When annualized, M2 grew by 13.74 per cent in
February 2016 against the provisional growth benchmark of 10.98 per
cent for 2016. Net domestic credit (NDC) grew by 3.71 per cent in
the same period, annualized, at 22.26 per cent. At this rate, the
growth rate of NDC was below the provisional benchmark of 17.94
per cent for 2016. Credit to the private sector grew by 1.45 per cent
in February 2016, which annualized to a growth of 8.70 per cent,
below the benchmark growth of 13.28 per cent. The Committee
noted with concern, the dismal performance of growth in credit to
the private sector, noting that even at that, credit went primarily to
low employment elasticity sectors of the economy. This had a
significant negative impact on output growth.
Money market interest rates reflected the liquidity situation in the
banking system. Average inter-bank call and OBB rates, which stood
at 0.5 and 2.77 per cent on 25 January 2016, closed at 4.00 and 5.00
per cent, respectively, on March 9, 2016. Between January 25th and
end-February 2015, interbank call and OBB rates averaged 1.43 and
2.68 per cent, respectively. This was traced to liquidity surfeit in the
banking system. The deposit money banks were, however, reluctant
to grant new credit because of rising non-performing loans (NPLs),
mainly in the oil sector, amongst other reasons.

The Committee also noted the slight improvement in the equities
segment of the capital market during the review period. The AllShare Index (ASI) rose by 8.1 per cent from 23,916.15 on January 29,
2016 to 25,853.58 on March 14, 2016. Similarly, Market Capitalization
(MC) rose by 8.02 per cent from N8.23 trillion to N8.89 trillion during
the same period. However, relative to end-December 2015, the
indices declined by 9.73 per cent and 9.74 per cent, respectively.
External Sector Developments
The average naira exchange rate remained stable at the inter-bank
segment of the foreign exchange market during the review period.
The exchange rate at the interbank market opened at N197.00/US$
and closed at N197.00/US$, with a daily average of N196.99/US$
between January 25 and March 14, 2016. The Committee reiterated
its commitment to maintaining a stable naira exchange rate. The
MPC took note of the level of activity in the autonomous foreign
exchange market as well as the rising demand in the interbank
market but observed that the data on demand for foreign
exchange, was being overshadowed by speculative demand.
However, the Committee charged the Bank to speed up reforms of
the foreign exchange market to improve certainty and eliminate
noise and opportunities for arbitrage.

The Committee’s Considerations

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

current price spiral, the Committee stressed the need to urgently
address the key sources of the pressures. In this regard, the
Committee reaffirmed its commitment to closely monitor the
development while encouraging relevant authorities to address the
structural bottlenecks.
From the monetary data, the Committee noted that the excess
liquidity in the banking system was contributing to the current
pressure in the foreign exchange market with a strong pass-through
to consumer prices. The Committee further noted that previous
efforts to reflate the economy in order to spur growth did not elicit
the required response from DMBs, hence; the surfeit of liquidity in the
interbank market. Obviously, the attendant low rates at that market
have not transmitted to the term structure of interest rates.
Concerned about the need for low interest rates to support growth
and employment, the Committee urged the CBN to explore
innovative ways of ensuring the unhindered flow of credit at low cost
to key growth sectors even as monetary policy has to, under the
circumstance, address the liquidity surfeit in the banking system as
well as the pressure on exchange rate and consumer prices. The
Committee hopes that fiscal and other structural policies would soon
be deployed to strengthen the overall response of macroeconomic
policy to the shocks.
The Committee was also concerned that with headline inflation at
11.38 per cent, noting that the policy rate had become negative in

real terms. This development has the potential of keeping both
foreign and domestic investments on hold. As part of measures to
address the supply constraint in the foreign exchange market, yields
on domestic instruments have to be competitive to attract the much
needed foreign inflows. On the administrative side, this will have to
be complemented by a comprehensive reform of the foreign
exchange market which is currently being undertaken. For the
avoidance of doubt, the Bank would continue to allow domiciliary
account holders unfettered access to funds in their accounts.
The Committee also urged speedy passage of the 2016 Budget in
order to halt the depressing effect of the uncertainty that engulfs the
waiting period, hoping that the implementation of the budget would
go a long way in boosting business confidence, and reinvigorating
the financial markets. In the circumstance, the Committee urged the
Bank to continue to upscale its surveillance of the financial system
with the aim of promptly detecting and managing vulnerabilities to
ensure sustained stability.
Finally, the Committee remains committed to price stability across
the range of consumer prices, exchange rate and interest rate,
which is fundamental to reviving economic growth and employment
generation. In the meantime, the Bank would continue to leverage
its development finance policy to support critical sectors of the
economy. The MPC also stressed the need to sustain, deepen and

speed up reforms designed to ensure focused coordination of
monetary and fiscal policies.
The Committee’s Decisions
The Committee, in its assessment of relevant internal and external
indices, came to the conclusion that the balance of risks is tilted
against price stability. The MPC therefore, voted to tighten the
stance of monetary policy. One member voted to retain the CRR at
20.00 per cent while another member voted to retain the current
width of the asymmetric corridor.
In summary, the MPC voted to:
(i) Raise MPR by 100 basis points from 11.00 per cent to 12.00 per
cent;
(ii) Raise CRR by 250 basis points from 20.00 to 22.50 per cent;
(iii) Retain Liquidity Ratio at 30.00 per cent; and
(iv) Narrow the asymmetric corridor from +200 and -700 basis points
to +200 and -500 basis points
Thank you for listening.
Godwin I. Emefiele
Governor, Central Bank of Nigeria
22nd March 2016.

PERSONAL STATEMENT BY THE MONETARY POLICY COMMITTEE
MEMBERS

1.0
ADELABU, ADEBAYO

The challenges in both the domestic and global macroeconomic
environments since the latter half of 2014 appear somehow
intensified. The global economic landscape is grappling with slow
recovery with global growth projected at 3.0 per cent in 2016, a
somewhat flat trend relative to 2015. Perhaps, more disturbing is the
medium to long term outlooks for key emerging and developing
economies where growth prospect is confronted by three significant
headwinds. The first one is the lingering slowdown of economic
activities in China in which the likelihood of quick bottom out remains
low given the complication introduced by the ongoing rebalancing
model. A sharper than expected slowdown in countries like China
would not only weigh down on growth prospects of other
developing and emerging economies but for Nigeria in particular it
would aggravate the weakness in external demand for export,
worsening the current account deficit which reared its ugly head at
end-December 2014.
Another headwind is the persisting lower energy and other primary
commodities prices. It is a little bit comforting that a rally was
observed in the price of crude oil in the last one week with the price

of Brent inching to about US$41/barrel but I would apply some
caution in building projections around this new price. This is because
the rally was not driven by fundamentals but by mere speculation of
likely cut in production by OPEC members at their next meeting in
April. Persistent softness in energy prices would directly impinge on at
least two macroeconomic accounts. The first is the current account
component of the balance of payment with potential implication on
external reserves. The other area is the fiscal account as the odd of
fiscal revenue under-running its target becomes elevated. The
implication is either under-implementation of the budget or
heightening of fiscal deficit with the attendant worsening of the
fragile condition of public debt.
The last headwind from the global environment is the ongoing
tightening of the monetary policy stance by the US Federal Reserves
(Fed). Further tightening of monetary policy by the US Federal
Reserves in the face of monetary stimulus by the European Central
Bank (ECB) would widen the diverging stance of monetary policy
between the two blocs, heightening volatilities in the global financial
markets. Given that the tightening process of the Fed would further
strengthen the dollars, the cumulative effect is elevated risk level for
financial markets in developing economies and consequent
acceleration of capital outflow.
The risk elements in the domestic environment are not in any way less
pronounced. Firstly, inflation is above the single digit threshold of the

Bank with the pressure emanating from both the core and food
components. Growth is tepid as overall output growth at 2.79 per
cent in 2015 was significantly lower than 6.22 per cent recorded in
2014. Another worrisome dimension on growth is the challenge with
some important subsectors of the GDP. The industrial sector, with the
greatest employment generating potential, contracted by 0.7 per
cent in 2015, thus, it is not much of surprise that unemployment rate
commenced an upward trend in the third quarter 2015. The
challenge of banking system liquidity is yet unabated while the
seemly perennial pressure in the foreign exchange market appears
intensified as external reserves recorded a mild negative growth
between end-December 2015 and March 18, 2016.
In the light of these multidimensional challenges, what is the logical
way forward for monetary policy? As I have always pointed out, a
careful diagnosis of the challenges revealed that monetary factors
could have played some roles but the dominant factors are
structural in nature. Take the issue of headline inflation for instance,
the only monetary factor that could have played some role is
exchange rate depreciation as other factors like growth in monetary
aggregates, which could fuel aggregate demand, remained
suppressed during the period. Analysis of inflation dynamics revealed
that food and non-alcoholic beverages which have the highest
weight in headline inflation (about 51 per cent), increased by 0.37
percentage point on year-on year basis in February 2016. Farm

produce, which is an important component of food inflation, also
increased by 39 percentage points during the same period. Given
the significant weight of these items on inflation, any enduring effort
to curtail headline inflation must of necessity tame rising risks in these
areas. Some prominent factors that drive price level in these sectors
are seasonality in agricultural produce, higher cost of energy, and
recurring fuel scarcity. The point here is that monetary policy
response alone would not be sufficient to address the current
underlying rising risk to price level but in view of the fact that some
forms of monetary factor is at play, I may be cautiously disposed to a
modest upward adjustment in the Monetary Policy Rate. With this in
mind, continuous efforts should be made to fast track fiscal and
structural policies that would address the inherent bottlenecks in
production process.
Another key issue is the liquidity surfeit which I would not want to
treat in isolation. I would, as always, like to consider it within the
context of overall macroeconomic objectives which are output
growth and employment. One of the key disadvantages of excess
banking system liquidity is the tendency to filter into inflation through
the channel of excessive aggregate demand. Available statistics is
indicative that this has not happened so far because broad money
only grew by 2.29 percent at end February 2016, translating to
annualized growth rate of 13.74 per cent. The major challenge with
the current liquidity surfeit is that it is not translating to improve

private sector credit as anticipated when we commenced
monetary easing in the second half of 2015. It is equally feared that
this might eventually drive pressure in the foreign exchange market,
thus a need for sterilization. My position is that we should not derail
from the overall goal of monetary policy on account of some
teething issues that could be handled administratively. As I pointed
out earlier, growth is not only softening but contraction is taking
place in key sectors like industrial sectors. If growth must be
enhanced, banks must lend, and if banks must lend, liquidity must be
available. From this perspective, I am of the view that concerted
efforts should be put in place by all stakeholders including Bankers
Committee on effective and efficient means of utilizing excess
banking system liquidity in the real sector of the economy instead of
sterilizing it through higher CRR.
In the light of the foregoing, I would like to propose that the MPR be
increased by 100 basis points to 12 percent while the CRR be
retained at 20 per cent. The asymmetry corridor around the MPR
could be adjusted from +2/-7 per cent to +2/-5 per cent.

2.0
ALADE, SARAH O.
Headline inflation accelerated to 11.38 percent in February
from 9.62 percent recorded in January, the highest since
December 2012. Projected growth for 2016 has been further
downgraded from over 4 percent to 2.3 percent according
to the IMF Article IV report. On the global scene, weak
economic activities in China and Euro area and geopolitical
tension pose great challenge to growth in 2016. The United
States is showing strong signs of recovery on the back of
stronger consumer spending and improved unemployment
figures. However, in the emerging market economies, lower
commodity prices and sluggish growth in the economies of
trading partners are affecting growth. These developments
suggest that monetary policy should remain balanced and
cautious in managing both domestic and global events in
the face of inflationary pressure; therefore I will support an
increase in Monetary Policy Rate and Cash Reserve
Requirement to counter adverse external shocks to the
economy and contain inflationary pressure.
Headline inflation edged up to 11.38 percent in February
reflecting a combination of limited foreign exchange supply
and seasonal effect as all categories of prices increased
during the period. Headline inflation edged up to 11.38
percent in February 2016, from 9.62 percent recorded in

January. Core inflation increased to 11.04 percent from 8.84
percent recorded in January, while food inflation rose to
11.35 percent from 10.64 percent in the previous month. This
is attributable to the pass-through effect exchange rate,
higher transportation cost as a result of inadequate fuel
supply and seasonal effect. The current level of inflation is
above the indicative target of between 6 to 9 percent set
by the Central Bank and the single digit rate set for the
ECOWAS monetary zone. The sudden upsurge in inflation will
need to be monitored to ensure that inflationary pressure is
contained, as staff projection suggests a further increase in
the coming months, before moderating towards the end of
the year. Therefore, in the short to medium term inflationary
pressure is a major concern and monetary policy must
respond appropriately.

Gross Domestic Product (GDP) growth is slowing on the back
of lower international oil price and lower government
revenue. The unabated decline in oil price and the negative
impact on government revenue poses downside risk for
domestic GDP growth in 2016 as growth has been sluggish.
This is because revenue measures to mitigate the negative
impact of oil price decline will include high borrowing which
may
impact
on
some
growth-enhancing
capital
expenditures and austerity measures, including increase in

tax rate and broadening of the tax base. These
developments suggest that both global events and
domestic risks pose huge challenge to growth in the coming
months. Policies should be mindful of the impact of the
fallout of decline in government revenue on growth and
therefore, efforts at economic diversification should be
intensified and judicious use of available resources made a
priority to minimize waste.

Foreign exchange scarcity is affecting economic activities
and impacting growth. While the Central Bank is making all
efforts to meet all legitimate foreign exchange demand,
reduced inflow is making foreign exchange scarce.. It is
important for the Bank to implement policies that will
encourage inflows and increase supply of foreign exchange
to meet import demand and reduce Current Account
Deficit (CAD) which has been widening. The lack of liquidity
in the interbank market is fueling capital outflow and
currency weaknesses outside the interbank market. These
developments are having a dampening effect on growth.
Under these uncertain conditions, monetary policy should
be focused at restoring confidence in the domestic
economy, increasing supply of foreign exchange, accretion
to reserve and making all efforts to bring inflation to the
target level.

Against this background, I vote for a change in Monetary
Policy Rate from 11 percent to 12 percent, increase in
Private Sector Cash Reserve Requirement (CRR) to 22.5
percent, to address the increase in inflation rate.

3.0
BALAMI, DAHIRU HASSAN

Growth: The second MPC meeting for year 2016 is coming at a time
when the global economy is facing a number of headwinds which
includes; continued fall in crude oil and other commodity prices,
weak response to stimulus and deflation in Europe, slow economic
growth in China as well as declining import and export figures. In the
same vain, economic growth in Europe is expected to inch up to
1.7% in 2016. The tepid growth in the global economy would
continue to weaken demand for crude oil which will negatively
affect Nigeria’s fiscal position, budgetary revenue and ability to
execute the 2016 Federal budget and also affect the accretion to
foreign reserves. Furthermore the normalization of the U.S economy
and expected hike in US interest rate which also has implications on
the Nigerian economy. With Nigeria being an import dependent
economy, a hike in the US Fed rate implies further pressure on the
Naira, while a weaker Naira and stronger dollar will lead to higher
inflation in Nigeria; and this will also fuel capital outflows as investors
would want to take advantage of the U.S interest rate hike. The
divergence of monetary policy between the U.S.A and other
developed and emerging economies will present a problem to the
Nigerian economy e.g. higher interest in the U.S and lower rate in
Europe. The general implication of the slowdown in growth will mean
less aid for the rebuilding of the Northeast part of Nigeria that has

been
devastated
by
the
Boko
Haram
insurgency.
Though
reconstruction has commenced, it is estimated to gulp more than
N1.3 trillion in order to meet with the socio economic demand of the
people of the affected region. Hence, Boko Haram insurgency
should be treated as a global phenomenon. Thus requiring synergy
within and between countries.
At the domestic level the economy is currently heading towards
stagflation. This is evidenced in declining growth with unemployment
and inflation itching up. The headwinds affecting the domestic
economy
include
the
external
macroeconomic
imbalances
highlighted earlier. In my earlier statement, I had argued that Nigeria
should seriously promote growth rather than attacking inflation
because of its own medium and long-term effects on the economy.
Growth could be encouraged through targeted diversification of the
economy using sectors like agriculture, solid mineral, education and
industrialization. Nigeria has comparative advantage in the sectors.
The identified sectors can be used as major growth drivers of the
economy. However, it should be noted that development banking
will be critical in this pursuit. The issue of the fiscal side is also of
paramount importance.
Prices: The global inflation rate is likely to remain subdued as a result
of weak demand and negative output gaps. The global consumer
prices estimated for 2016 is expected to be as high as 6.9% for subSaharan Africa and 1.1% for advanced economies, while emerging

and developing countries will witness 5-6% increase in consumer
prices. The headline inflation in Nigeria rose from a single digit figure
of 9.0% and 9.6% in December 2015 and January 2016 respectively
to double digit figure of 11.4 % in February 2016 while unemployment
rate stood at about 9.9 % during this period and forecasted to
increase further as the implementation of 2016 budget starts.
The rise in Nigerian inflation has been attributed to several factors
among which are rising food prices, hike in electricity charges,
declining power generation and insufficient distribution system as
well as rising prices of imported commodities given that Nigeria is an
import dependent economy. In addition, lack of urgency in the
move towards diversification of the economy despite the collapse of
the oil prices, and lack of market friendly return to attract private
sector capital in real sector of the economy. It is also envisaged that
when the budget is finally approved in March the inflationary trend is
likely to rise in the short run. What policy option can be put in place
to tackle the problems of inflation? To my mind the shift from the
consumption of foreign to locally made goods should be sustained
while provision of infrastructural facilities that will encourage and
raise the level of production should be improved.
External Reserve: The external Reserve rose from $27.50 billion to
$27.78 billion in January and February respectively and later
declined to $27.43 billion on 16th March 27, 2016 which represents a
drop of 3.04% relative to the balance of $28.29 billion recorded in

December 2015. The decline in revenue was attributed to fall in nonoil revenue compared to the previous month before March 2016. It is
my opinion that with fall in oil price the revenue can be boosted by
concentrating and boosting the growth of the non-oil sector through
effective and efficient diversification of the economy as highlighted
earlier. It should be noted that external reserve has been drawn to
support the naira, payment for school fees abroad and Basic Travel
Allowance (BTA). But again on the fiscal side, what are our
authorities doing with the educational institutions, health, power,
and importation of simple equipments in order to add to its demand
side.
The Banking Stability: The stress test conducted on the Nigerian
Deposit Money Banks (DMBs) in terms of Capital Adequacy Ratio
(CAR), Non-Performing Loans (NPLs) and Liquidity Ratios (LR) as well
as the Return On Equity (ROE) and Return On Assets (ROA) revealed
mixed results, but were generally sound and favorable relative to the
prudential requirement. As at Feb 2016, the CAR stands at 16.55%
above the prudential requirement of 10-15% mark for banks with
national and international authorization. Similarly, during the same
period under review the NPLs and Liquidity ratios were above the
Maximum 5% and Minimum 30% prudential. While both ROE and
ROA marginally declined from 18.09 and 2.28 ratios in February 2016,
respectively. However, the banking sector is susceptible to
vulnerabilities particularly that of NPLs due to their exposure to the oil

companies as well as dollar loans. There should be need for
improvement of the efficiency and effectiveness in the allocation of
credit, foreign exchange and securities, and strengthening of the
transmission mechanism of the monetary policy as well as reducing
the structural vulnerability of the Nigerian economy. This can be
achieved by understanding the system very well using appropriate
data, policy and strategy to implement the proposed policies.
Exchange Rates: On the exchange rate, the official rate has been
stable while the parallel market has fluctuated from N300-N315 as at
23rd March 27, 2015. A lot has been done on the demand side of
foreign exchange; however, there is need to look at the supply side.
Here we have to prepare adequately to get the relevant data and
analysis. The gap between the official and parallel market is a
source of concern because for rational economic agents it
encourages round tripping which is very devastating to the
economy. The level of liquidity, growth, exchange rate and
inflationary trend suggest that some policy changes be put in place
to deal with some of the challenges affecting the economy on the
monetary side. The current situation requires tightening.
On the basis of the analysis made above, I vote in support of
i. Raising CRR from 20% to 22.5%
ii. Raising the MPR from 11% to 12%
iii. Retaining the Liquidity ratio at 30%

iv. To adjust the asymmetric corridor from +2/-700point basis to
+2/-500 point basis
In conclusion, The November MPC Policies and the hold that took
place in January did not produce the required result in terms of
effective control of the level of liquidity in the economy. Monetary
authorities have to keep an eye on growth and respond to policies
affecting it appropriately.

4.0
BARAU, SULEIMAN
Background
My vote at this meeting is largely informed by the fact that enduring
growth is only feasible within the context of stable macroeconomic
environment, thus the issues of rising inflation and excess liquidity
deserve urgent response in order for monetary policy to remain on
track. I also subscribe to a compelling need for robust fiscal and
structural policies given that monetary policy alone cannot deal with
these and related issues.
The risk matrix in both the global and domestic macroeconomic
environments appears relatively elevated since the beginning of the
current fiscal year. The tepid global growth that characterized fiscal
2015 is equally being envisaged in 2016 while pockets of financial
market volatility are quite discernible. In line with the trend since mid2014, commodity prices particularly crude oil prices have not been
faring well. Although a little bit of rally is currently being observed in
the global crude oil prices against the backdrop of likely freeze in
output by OPEC members, the sustainability of the observed gains
should be treated with guarded optimism given Iran’s position to
pump more oil in their bid to recover lost market share.
As expected, the vulnerability of the domestic economy to the
external environment suggests that key domestic macroeconomic
indicators should show less than satisfactory outcomes. Inflation has

burst the single digit threshold of the Bank while output growth
continues with its lackluster performance since end 2014. Evidence
of slowdown abound in the financial system particularly in the
capital market though the banking system remains resilient despite
the issues of rising NPLs, persistent liquidity surfeit, and excessive
demand pressure in the foreign exchange market.
The critical issues confronting us remain the need to stem the rising
inflationary trend, curtail liquidity surfeit in the banking system,
moderate pressure in the foreign exchange markets and possibly
provide some leverage to jump start growth. My candid view is that
monetary policy alone cannot deliver satisfactory outcomes on all of
these variables, hence the need for fiscal and strong structural
policies to complement the actions of monetary authority that we
have continued argued for.
Developments/Pressure Points
Global Environment
Lingering Softness in Global Recovery: Recent data and statistics
reveal that the weakness in global growth which became
pronounced in 2015 is far from being over. The interim global growth
for 2016 at 3.0 per cent is suggestive of flat trend relative to 2015,
which was not only below the long run average but equally the
slowest pace in the last five years. It is a matter of serious concern
that the post crisis recovery in the US is becoming susceptible to

setback on account of strengthening dollar and low investment in
mining. Perhaps, more worrisome is the diminishing growth prospects
for key emerging economies. For instance, the current recession in
Brazil could be prolonged and more intense than anticipated on
account of ongoing political uncertainty while the contraction in
Russia is being intensified by continuous slide in crude oil price. In
China, managing the rebalancing process constitutes a daunting
challenge to growth while flood is threatening the growth projection
for India.
These developments have far reaching implications on the domestic
economy. Notably, the recent rally in the price of crude oil
notwithstanding, medium term developments in the price of the
commodity may remain insufficiently positive to lift the country out of
trade imbalance trajectory. Secondly, the country’s ability to
diversify the economic base with a view to ameliorating the
dwindling fortune from crude oil may also suffer severe setback as
major emerging and advanced economies remain weak. Available
statistics indicate that the country’s non-oil exports declined by 58
per cent at end-December 2015 as global trade remained largely
subdued owing to cut-back on imports by countries like China and
other emerging economies.
Resurgence of Volatility in Global Financial Markets: Unfolding
developments since the beginning of the year are suggestive of
renewed wave of volatility in the global financial markets. Going by

the last meeting of the Federal Reserve System of the US, the
frequency of rate hike this year may be lower than earlier
anticipated but the ongoing divergence of monetary policy stance
between the euro area and the US would continue to fuel upside risk
to market volatility. In addition, uncertainties around Renminbi
exchange rate is a potential spillover of volatility to global financial
markets particularly in emerging and advanced economies. Indeed
available data has shown that European banks equity prices have
fallen by about 20 per cent since the beginning of the year while
global equities shed significant weight in the months of January and
February with Morgan Stanley Capital International (MSCI) World
Index plummeting by almost 10 per cent.
These developments could trigger new round of capital outflow in
the domestic financial markets, heightening pressure as well as
renewed wave of volatility in the naira exchange rate. It could be
expected that the overall impact of these risks on the banking
system may not be as severe as in the previous episode of global
financial instability on account of improved macro-prudential buffer
but the spillover should be expected to adversely impinge on the
current
faltered
growth
trajectory.
This
could
be
further
compounded by the intensification of imbalances in the external
sector due to rising deficit on the current account.

Domestic Environment
A number of issues would continue to pose upside risks in the
domestic economy and these include:
Rising Inflationary Pressure: Headline inflation, at 11.38 per cent in
February 2016, has crossed the single digit threshold of the Bank. The
inflation dynamic is a little bit complicated given that the pressure is
from both food and core components. An assessment of the upside
risks is suggestive that the inflation level may remain elevated over
the medium term. Among others, the exchange rate risk is prominent
as economic agents begin to adjust price level in line with
developments in the parallel markets even when they source foreign
exchange from the interbank window. To me, the initial price
adjustment is not much of an issue as this headwind would
eventually ease but the more knotty issue is the self-reinforcing
impetus to inflationary pressure which would inevitably increase
particularly if accretion to external reserves does not increase
substantially.
Persistent Liquidity Surfeit: When the Committee decided to
commence monetary easing in July 2016, the intention was to free
sterilized liquidity and make such available for bank lending.
Available evidence to date prove to the contrary. Private sector
credit increased, on annualized basis, by mere 8.70 per cent at endFebruary 2016 against an annual target of 13.28 per cent, while

between the last week of January and end-February 2016, the
average inter-bank and OBB rates were 1.43 and 1.26 per cent,
respectively. Comparing these market rates with the Monetary
Policy rate (MPR) of 11 per cent during the period presents a clear
case of liquidity surfeit in the banking system while the widereconomy lending is dismal. Besides, this development also shows
that MPR, which is supposed to be the signaling rate does not, as
earlier studies demonstrated, have significant influence on the
money market rates.
Rising Risk in Domestic Financial Markets: The Sovereign Yield spread
between Nigeria 10-year bond and similar US Treasury instrument
increased from 8.56 per cent at end-December 2015 to 11.65 per
cent by end-February 2016, an increase of 309 basis points. Yield
spread on similar instrument in Ghana increased by mere 127 basis
points while for South Africa it decreased by 34 basis points during
the period. In other words, while foreign investors’ risk perception for
Nigeria and Ghana has increased, the risk perception for South
Africa has decreased but more disturbing is that risk perception for
Ghana is lower than Nigeria. A major reason for this development is
heightened exchange rate risk and rising inflation in the country. The
implication of this is on the cost of financing domestic projects.
Given the amount of borrowing required to finance fiscal deficit in
2016 budget (about N2.2 trillion), the financing may have to be
carried out at higher interest rate with possible spillover to other rates

in the economy. This could also constitute additional headwinds to
growth.
Way Forward
Need to Halt Creeping Inflation: Growth issues are very pertinent in
macroeconomic policy but sustainable growth is only possible within
the context of a stable macroeconomic environment particularly
low and stable inflation. Latest empirical work undertaken by staff of
the Bank on inflation-growth nexus in Nigeria indicates that inflation
level of 13 per cent and above is inimical to growth. As pointed out
above, foreign investors are already responding to the evolving
macroeconomic environment through the pricing of long term
bonds. On this note, I am of the opinion that though we are
passionate about the need to jump start growth, it is expedient to
follow a path that can guarantee durable upward growth trajectory,
which is curtailing inflation to an acceptable threshold. Besides
monetary policy actions alone cannot deliver growth. This justifies
our sustained call for the pre-requisite structural and real sector
reforms to support monetary policy decisions. In light of this, it
becomes compelling to adjust the MPR upward
Strengthening of Agricultural and Food Policies: Analysis of inflation
especially from January 2016 reveals that the rise in core inflation has
been relatively moderate while food inflation particularly farm
produce has assumed phenomenal increase. Given the large share

of food in the average household budget, the effect is the new
elevated general price level. Under these circumstances, the
capacity of central bank to fight inflation is limited. It is therefore
incumbent for the Federal Government particularly, the Ministry of
Agriculture, to put in place robust policies for intervening in food
production and distribution.
Urgent Curtailment of Liquidity Surfeit: As pointed out earlier, liquidity
in the banking system has not led to improvement in private sector
credit. Secondly, in the face of low money market rates and apathy
towards private sector lending, the inter-bank foreign exchange
market would likely become the ultimate destination of the banking
system excess liquidity that had continued to put pressure on our
exchange rate and become a fertile ground for market bubbles.
Perhaps more worrisome is the fact that the disturbing weakness of
monetary policy transmission signaled by the excess banking system
liquidity threaten a loss of one of the vital tools of monetary policy.
Against this perspective, pending the deployment of appropriate
framework that would enable the banking system to channel excess
liquidity into the real sector, such liquidity should be sterilized.
Structural Policies: Price stability is a cardinal mandate of monetary
authority but monetary policy alone cannot address all forms of
inflationary pressures particularly if the causes are structural. The
structure of the economy contributed significantly to the current
inflationary trend. Among others, the nature of production and

distribution of goods and services played a significant role. For
instance, the official price of Petrol Motor Sprit (PMS) is N86/litre but
most economic agents obtained the product at a price above the
official rate while the parallel market rate became the basis for
costing inputs and pricing outputs. As I have said in my previous
statements, structural policies that could fast track the turnaround of
domestic refineries as well as build new ones are inevitable.
Relatedly, higher transportation cost contributed considerably to the
up-tick in price level in the months of January and February. These
points to the fact that the dominant use of road transport in the
haulage of goods need to be reviewed and replaced by more
efficient means like rail and water ways if inflation is to be addressed
sustainably via the traditional monetary policy tools.
Besides, the high degree of import constitutes serious issue for
inflation when there is large variation in exchange rate. An open
economy that seeks to control inflation must of necessity take into
consideration movement in the exchange rate. Within the domestic
economy,
nominal
exchange
rate
at
the
official
window
depreciated by about 22 per cent at end-February on year-on-year
basis while general price level increased by about 2 percentage
points during the period. Anything short of this should be regarded as
abnormal. The logical way forward is to reduce the level of level of
import by stimulating domestic production through appropriate
policies.

It is instructive to stress that significant reduction of pressure in the
foreign market would be achieved if these structural issues could be
addressed and this would, invariably, reduce the risk in the financial
markets.
Decisions
Against the background of the need to address the lingering liquidity
surfeit while simultaneously stemming the rising tide of inflation
particularly the core component, I voted as follows:
i.
MPR be increased by 200 basis points from 11 to 12 per cent
ii.
CRR be increased by 250 basis points from 20 to 22.5 per cent
iii.
Asymmetric corridor around MPR be adjusted to +200/-500
basis points
iv.
LR to remain at 30 per cent.

5.0
GARBA, ABDUL-GANIYU
Metaphors
I feel compelled to use three metaphors to illustrate the dilemma
that confronts monetary policy and indeed, macroeconomic
management in Nigeria today so that we could all have the
conversations that is necessary for policy effectiveness and
achieving the mandates of the monetary and the fiscal authorities.
The first metaphor is the ‘medical diagnostics metaphor’. When a
doctor suspects that a patient is anemic, it is sound medical practice
to send the patient to the laboratory for a full blood count test.
When the result is ready, the doctor carefully and thoroughly
analyses it to understand the problem, and if necessary recommend
additional tests to determine underlying problem(s) and consult with
relevant colleagues/team members before determining the best
intervention for the patient. To transfuse a patient without screening
the blood and without knowing the blood type of the patient is
murderous and a serious criminal breach of the ethics of medical
practice and the laws of any sane nation. No sane persons will use
the services of such a doctor unless they were suicidal. Most serious
countries will keep such doctors off medical practice for the entirety
of their lives. Recently, a 46 years old US medical doctor was
sentenced to 30 years to life in prison by a judge in Los Angeles after
murder convictions in connection with prescription drug overdose

deaths of three of her patients. She was convicted for recklessly and
criminally prescribing drugs fueled by greed. The implications of this
metaphor for monetary policy is that more than ever before,
rigorous, critical and mandate focused and evidence based
diagnostics is needed first, because so much has changed in the last
decade and second, because good and bad policies have long
lasting effects. Shortness of the policy sight dooms policy analysis,
policy choice and actions and policy effectiveness. This is why I keep
repeating the point that my vote is for “harnessing and directing all
available intellectual and political resources to engage the fiscal
authorities to develop a strategic macroeconomic management
framework for Nigeria” for the medium to the long term.
The second metaphor is the ‘tapeworm metaphor’ and it addresses
the dangers of quick-fix measures. A hungry person decides to
swallow live tapeworms with a large dose of hope that his hunger
would be satiated. Clearly, to swallow life tapeworms whole
because one wants to satiate hunger pangs is a quick fix to a
hunger problem, but an unwise solution. For only the tapeworms will
benefit from such folly. Indeed, the health of the individual will
become inversely proportional to the health of the tapeworms in the
individual.
The
tapeworm
metaphor
implies
that
trading-off
monetary policy independence for exchange rate stability using
portfolio flows was bound to profit only portfolio investors. Sooner
rather than later, their rational behaviours would destabilize the

foreign exchange market and further limit the latitude of the MPC for
effective monetary policy. It was also very clear from the credible
evidence from sound research papers on the Nigerian Foreign
Exchange Management that the Retail Dutch Auction System
(RDAS) is inherently unstable because it inevitably creates arbitrage
opportunities which rational speculators would inevitably take
advantage of. The data on global economic slow-downs particularly
in China from 2013, forward guidance on US Fed rate hike and the
‘Bernanke effects’ of May 2013 and historical pattern of movements
of commodity prices all pointed to headwinds from negative
commodity price shocks and reversals of portfolio flows out of
commodity exporters and emerging markets. It was also clear that
negative commodity price and reverse financial flows tend to have
the most destabilizing effects on the financial markets and
macroeconomic management of small open commodity exporters.
It was also obvious to the discerning that exchange rate instability
and widening spreads were highly probable in the absence a
forward looking and creative macroeconomic management
strategy. For it was clear that a backward looking strategy will fail to
ensure the allocation of scarce forex resource to those who could
best use it to create tangible values and create jobs in Nigeria.
Simply put the real economy and jobs were at risk not in 2015 or 2016
but as far back as December 2011. To think that the journey to
stagflation began only recently is to think amiss.

The third metaphor is the ‘recovering addict metaphor’. The
recovering drug addict who after being released from rehab seeks
advise on how to stay off drugs from the drug dealer who aided him
to develop dependence on drugs is doomed to suffer a relapse. The
dealer clearly has a conflict of interest between truth and profit and
a rational drug dealer would rather have a client than a friend. This
metaphor applies to Nigeria’s fiscal processes where in terms of its
conflict between saving excess crude and at the same time
doubling its public debt every 14 quarters between 2007 and 2016
on the advice of institutions that profit from its borrowing. Like the
addict, Nigeria is urged on; on a borrowing binge on the
disingenuous premise that it is under-borrowed in disregard of the
fiscal and monetary trade-offs and crowding-out effects.
When you put together, the consequences of the three metaphors,
you get a strategic conundrum that makes purposeful, effective and
consistent monetary and fiscal policy very difficult to achieve. Were
experience the best teacher as the cliché say, then we would have
learnt from the aftermath of the jumbo loan of 1978 and of the
capital account liberalization of 2006. Then we would have
prepared for the shocks that were inevitable given the scope of
quantitative easing globally and the risks of nomalisation.
Failures to learn the rights lessons lead to repeated cycles of errors at
rising costs. I believe the window of opportunity for changing the

strategic character of Nigeria’s macroeconomic management is not
widening or remaining static. I believe the earlier we have
purposeful, effective and sustainable harnessing and utilization of all
available intellectual and political resources to develop a peoplecentered strategic macroeconomic management framework for
Nigeria, the better for the Nigerian people. When the United States
confronted the global financial crisis in the summer of 2008, the fiscal
and monetary authorities and the US Senate and Congress worked
together
with
the
Presidential
candidates
-
John
Mccain
(Republican) and Barack Obama (Democratic) - to put together a
comprehensive strategy that started to steer the ship of their state
from the precipice even when it required many to commit
ideological volte-faces. I believe that Nigeria has been at such a
point for some time. Every delay makes it more difficult and more
costly.
Background to Decision
At the March 2016 MPC I asked and attempted to answer many
questions before deciding. The questions included: (i) What are the
real problems confronting the economy and what are their
underlying and immediate causes? (ii) What can we learnt from the
recent domestic and global economic strategies, policies, interests,
behaviours, market processes, the outcomes and the paths? (iii)
What are the short to medium term domestic and global outlooks?

(iv) What do we know about the stagnation-inflation process, the
allocation and pricing relations in the segmented forex and money
markets, the relationships between the spot and futures forex market,
the relationships between fiscal and monetary policies in the recent
pasts, the effectiveness and efficiency in the allocation the loanable
funds and forex and the short to long term effects of capital account
liberalization of debt and equity? In addition, how has policy choices
affected uncertainties, risks, expectations and rational behaviours of
key players? How do we separate the short term noises in the
markets and policy space from the trend factors? How strong the
exchange rate is pass-through and how effective and symmetrical is
the transmission mechanism of monetary policy? What is the real
trade-off compatible with medium to long term low inflation growth?
What are the likely effects of a high leverage fiscal expansion
budget on the feasible options of monetary policy hence, on the
effectiveness of monetary policy in 2016? (v) What are the domestic
and global medium term outlooks? (vi) What the relationships
between fiscal, monetary, prudential (macro and micro) and
development finance policies? (vi) What are the strategic goals set,
the binding constraints, the inherent trade-offs and framework for
evaluation and choice of the best feasible options as well as the
evaluation criteria? These are some of the questions that needs clear
answers to in the conversations leading to a people-centred
strategic macroeconomic management framework for Nigeria.

In a policy choice context, the framing of options is rather limited
and costly trade-offs may be the price to pay for strategic and
coordination weaknesses. What we know from the Economic Report
prepared by Bank Staff is that there has been for at least 10 quarters,
a steady build-up of stagnation pressures mainly in industry (peaking
in the four quarters of 2015) and a build-up of inflation from
November 2014 and with the most significant increase in February
2016. The build-up is partly explained by the deflationary monetary
policies, the Bernanke effects which triggered the exit of portfolio,
exchange
rate
generated
supply
shocks
and,
eventually,
commodity price shocks amplified by the economic slowdown in
China, Japan and the Eurozone.
It is clear from the pattern of stagnation and inflation that exchange
rate pass-through is a key factor in both. It is also clear from an
evaluation of the over thirty three exchange and trade related
administrative measures between June 2014 and January 2016 that
the consistent shifting of demand pressures first from RDAS market to
interbank, then from interbank to BDCs and finally from BDCs to the
parallel market has been a strong factor in (i) the widening of the
exchange rate spread and the attractiveness of the arbitrage
opportunities and (ii) the growing importance of the parallel forex
market which ought to have been kept so small that its noise value is
greatly minimized as it was when the Wholesale Dutch Auction
System (WDAS) was in operation. It is also, evident from data that the

growth of money supply driven by a spike in demand deposits in
December 2015 and February 2016 and the final shift in forex
demand to the parallel markets in January 2016, the announced
commitment to supply a key player forex contributed significantly to
the unprecedented spread between the ‘official interbank’ and the
parallel rate from January 2016. The data on utilization of forex and
indeed on allocation of credit do not show that economic activities
with the highest output and employment elasticities attract forex or
credit under both tightening and easing regimes. The high interest
rate spreads and rising exchange rate spread signal market malfunctioning problems that need to be urgently corrected as part of a
comprehensive strategy.
The MPC communiqué has given forward guidance about its
commitment to forex market comprehensive strategy. Therefore, as
MPC works towards the comprehensive strategy, the main issue for
me at this MPC is stemming the drift into the global stagflation trap of
the 1970s. The 1970s ‘stagflation trap’ made it clear that the
traditional demand management strategies were ill-suited to
correcting supply shocks. This is because a short-run trade-off
between unemployment/growth and inflation does not exist.
Stimulus programmes of Presidents Nixon, Ford and Carter
administrations (before President Carter appointed Volcker as Chair
of the UD Fed) worsened the stagnation and the inflation and
helping the neoclassical counter revolution in macroeconomics. If

we fail to learn from history, we are condemned to repeating it and
much higher costs.
The lessons of history imply that the MPC has to decide which goal it
could most effectively achieve in the short term for it is impossible for
monetary policy on its ‘sore legs’ to stimulate growth and deflate the
economy at the same time. Paul Volcker’s US Fed chose inflation.
Inevitably, the sacrifice ratio was high not only for the US which
suffered several episodes of recessions, but more for those who
naively walked into the ‘debt trap’. The high costs within the US
could partly be attributable to both recognition and action lag
which in turn, could be explained by weight given to political
exigencies in decision making. The lessons for me are clear, getting
out of a stagflation trap is neither easy nor low cost. That is why
getting into the traps of stagflation, debt and capital account
(equity and debt) is very dangerous and ought to have been
avoided when they lay in the future.
It is clear to me from available evidence that (i) monetary policy has
more effective impact on inflation in the short term, (ii) the
impending fiscal expansion will be inflationary and crowd-out private
investment given its high leverage structure, (iii) the asymmetrical
nature of interest rate and the malfunctions in the credit market and
the rational behavior of DMBs rendered the easing at the September
MPC ineffective and counterproductive (the release of the ‘forex
chasing liquidity’ that MPC had been mopping-up since the huge

quantitative easing of 2009-2014 contributed to exchange rate
pressures), (iv) the consistent shifting of demand towards the parallel
market contributed to the sustained widening of exchange rate
spreads; (v) inflation has asymmetrical effects on poorer individuals,
households small businesses and domestic producers (through
negative budget and supply shocks), and (vi) effective fiscalmonetary-prudential-development policy coordination is necessary
indeed critical to job creating growth and to macroeconomic and
financial system stability. To want is not to have: nothing can be
produced out of nothing!
I am persuaded based on what we know about (i) the recent
inflationary pressures (it was triggered by exchange rate passthrough effects of recent forex market shifts and amplified by the
post-September 2015 liquidity shocks and the lingering fuel crisis), (ii)
the structural path of economic stagnation, (iii) the asymmetrical
nature of interest rate policies and (iv) domestic and global
economic and financial outlook, my vote is for a tightening regime.
Clearly, a tightening regime conflicts with the requirements for
reversing economic stagnation. The easing at the last two MPCs of
2015 which I did not support, did not achieve lower interest rates or
greater access by real sector operators because the allocation
pattern in key markets – money and forex – are biased against real
sector operators. Without correcting for the factors that predisposes
the financial markets to allocate to sectors that have lowest output

and employment elasticities and to wholesale borrowers that have
higher default risks, easing is unlikely to generate real investment,
growth and job creation. Yet, a runaway inflation undermines the
mandate of the MPC. The balance of policy effectiveness is on the
side of tightening checking the advance of inflation pressures. The
status quo not only is unable lower lending rates and interest rate
spread, it has undercut inflation through its effects on exchange rate
and undercut growth through by triggering significant supply shocks
through its exchange rate effects and allocation bias.
In the constrained policy space that the MPC is in, tightening is the
best option for the short term. It allows MPC to work to fix to the
transmission mechanism that has been considerably weakened and
distorted by attractiveness of inverted intermediation and the pricing
and allocation problems of the forex and money markets that have
trend effects on growth and employment. Therefore, I am
convinced about the urgent need to correct and avoid further
escalation of inflation expectation and pressures. I am also
convinced about the urgency of a forward looking comprehensive
strategic framework for evaluating options based on sound
knowledge about nexuses, constraints, trade-offs, strength of
transmission mechanisms, hysteresis and the true cost-benefits of
alternative choices to help the MPC make wise, effective and
sustainable decisions.

Decision
First, I strongly support the forward guidance about a comprehensive
strategy for foreign exchange management framework. In addition,
my vote reiterate my conviction about the urgent need to harness,
direct and put to effective use the best available intellectual and
political resources to engage the fiscal authorities to develop a
forward looking strategic macroeconomic management framework
for Nigeria” for the medium to the long term effectiveness of
macroeconomic management compatible with the long term
wellbeing of Nigerians. The great challenge for MPC is to deliver on
the promise of a forward looking comprehensive strategy and for the
fiscal and monetary authorities to deliver on a forward looking
strategic macroeconomic management framework for Nigeria.
Second, to stem and prevent a runaway inflation and its adverse
economic consequences, I vote for:
1. Increase in CRR by 2.25% to 22.5%
2. Increase in MPR from 11% to 12%
3. Asymmetric Corridor of -5 (SDF), +2 (SLF)
4. Hold liquidity Ratio at 30%

6.0
UCHE, CHIBUIKE U

A disturbing development that MPC was faced with at this meeting
was the issue of rising inflation. With inflation rate now officially above
MPR, there is very little room for maneuvre. This is because any
investment at the current MPR will yield a negative real return for the
investor.
This
has
negative
consequences
for
both
the
competitiveness of our financial instruments and the health of our
banking sector in general. Unfortunately, this inflation problem may
get worse when Government begins to implement its 2016 deficit
budget. In my humble opinion, therefore, there is now a strong case
for monetary policy tightening.
In following the above route however, there is need for extreme care
especially given the fact that the resultant higher interest rates is
likely to negatively impact on the stability of the Nigerian banking
system. This is especially so because for some time now we have
been witnessing a slow but consistent rise in the nonperforming loan
portfolio of banks in the country. Tightening monetary policy at this
time will therefore further increase the pressure on the NPLs of
Nigerian banks. The fact that the consequences of the last banking
crisis in Nigeria continue to rear its head in AMCON’s financial
statements remain a major reason for my trepidation in this regard.
Given the current level of inflation, I am in total agreement with the
assertion that the tightening of monetary policy at the present time

must include an increase in MPR. While I support the need to
increase MPR, to the extent that it does not pose a material danger
to our banking system stability, I consider it prudent to reiterate that I
am not convinced by the argument that enhancing our country’s
competitiveness in attracting foreign currency investments should
also be an incentive for increasing MPR. As I have consistently
argued in some of my past policy statements, the time has come for
Nigeria to impose some form of restrictions on the inflow of foreign
‘investments’ into the country. This should be specifically aimed at
discouraging short term portfolio inflows. History has taught us that
such speculative capital inflows only offer temporary relief, mainly in
the arena of exchange rates, and generally cause more harm than
good. I therefore see no harm for the country to insist that the only
types of foreign capital it will welcome are those that have long term
investment intentions.
From the above, it is clear that the problem of monetary stability in
Nigeria is more complicated than increasing MPR. Despite the
obvious fiscal policy gains that resulted from the implementation of
the TSA, inflation has continued to trend upwards. The main reason
for this trend is the nation’s inability to diversify its economy away
from its current overdependence on oil rents. With persistent low oil
prices, which has thus far shown no credible sign of abating, the
ability of the country to continue to fund the indulgence of its

citizens in all manner of imported goods which has been
encouraged over the years by high oil prices is now very doubtful.
The result of the above is the current unrelenting pressure that is now
being put on the exchange rate of the Naira. Given the dynamics of
the exchange rate mechanism that is currently in place in Nigeria, a
distinct and robust parallel market has emerged and the gap
between the exchange rate in this market and that in the official
market has continued to widen. This has created immense
opportunities for arbitrage. The fact that prices and inflation in
Nigeria currently correlate more with the parallel market exchange
rate is evidence that such arbitrage opportunities are being
exploited.
I am of course aware that the exchange rate mechanism in the
country is currently being reviewed with the view of reducing (or
eliminating) the variance between the official and parallel
exchange rates for the Naira. It is however important to stress that
whatever exchange rate management system that is arrived at will
be unsustainable if the Nigerian economy continues to be
dependent on oil rents.
On its part the CBN has been exploiting its developmental role in its
attempt to promote the diversification of our economy. It has, for
instance, recently used exchange rate allocation restrictions as a
tool to discourage the importation of some 41 items. As I stated in an

earlier policy statement, I am in full support of the CBN’s attempt to
exploit its developmental function in its bid to aid sustainable
national economic development. I however believe that there is
need for more studies in this area before continuing on this
trajectory. This is particularly important given the fact that the CBN
has a long history of exploiting its developmental function. Learning
from the mistakes and/ or successes of the past will in my view lead
to the formulation of more effective policies in the above direction.
Despite its developmental role potentials, there is a limit to what the
CBN can achieve without the support of the fiscal authorities. In my
view, for instance, the time has come for the Federal Government to
ban the import of all goods that can be manufactured locally.
Another way to encourage local industrial development is to impose
hefty tariffs on luxury goods and goods that have reasonable local
substitutes. Although these measures may appear extreme, the stark
reality, in the light of the current international oil prices, is that Nigeria
is no longer in a position to support the import dependent appetite
of its citizens.
It is of course obvious that for any meaningful progress to be made in
the direction of promoting local industries, there is an urgent need
for the Nigerian Government to also tackle the country’s poor
infrastructure, declining educational standards, declining ethical
standards, porous borders and rampant corruption that has now
been engrained in our system.

In summary therefore, I support a tightening of monetary policy at
the present time. I therefore vote as follows: (1) to increase MPR by
100 basis point from 11 percent to 12 percent (2) to retain the
asymmetric interest rate corridor of + 200/- 700 basis points around
the MPR; (3) to increase CRR by 250 basis points from 20 percent to
22.50 percent; and (4) to retain Liquidity Ratio at 30 percent.

7.0
YAHAYA, SHEHU
The Global Economy
The possible effects of the changes in global economic and
financial variables, including that of our main trading partners on the
Nigerian economy have remained fairly stable over the last quarter
of 2015- positive GDP growth rates in US, UK, a bit lower but still high
growth rates in China, high growth rates in India, much lower growth
in the Euro area, slowed growth in South Africa, negative growth
rates in Japan Brazil and Russia. Most oil producing countries are still
facing difficult challenges. This underlines the importance of
developing new trading partners. Worth noting is the additional
stimulus injected into the Eurozone by the ECB to support growth and
the prospects for further normalization of interest rates in the US
during 2016.
General price levels as well as food prices and raw materials remain
low in US, UK, Europe and much of Asia and are expected to remain
generally low or even in some cases dip, for much of 2016. Crude oil
prices rose to around $40/barrel in mid-March, but it is not evident
that even this modest rise can be sustained, due to persisting supply
glut and the prospects of resumed expansion in shale oil production
once the $40 dollar threshold is crossed. For oil producing countries
including Nigeria, the effects of pressures on the local currency is
impacting significantly on local prices.

Domestic Economy
Q4 GDP dropped to 2.11%, the lowest in the year, with an overall
growth rate of 2.79% in 2015, much lower than forecast. The decline
in growth rate was mainly driven by a sharp fall in the oil sector
during the quarter and a significant drop in manufacturing
production. It is instructive to note that, increased lending to the
manufacturing sector and privileged access to foreign exchange at
the official rate did not translate into higher output.
Output in the power sector stagnated. The non-oil sector grew at a
slightly faster rate than in Q3 2015. Agriculture also grew, but not fast
enough. Special attention needs to be paid to this issue if agricultural
production is actually to serve as the bulwark for pulling the non-oil
economy forward. One important consequence of the low growth
rate is that unemployment has risen consistently in each quarter of
2015, reaching about 7.5 million in Q3 2015, which is a jump of 24%
over the previous quarter.
One of the most significant developments in the domestic economy
is the big jump in headline inflation to 11.38% in February 2016, year
on year, as compared to 9.62% in the previous month. Most of the
increase emanated from core inflation, particularly processed food,
housing, water, electricity, gas fuel. The increase in food inflation,
though lower than core, was mainly driven by increases in imported
rice and bread (due to the imported wheat component). Here, the

exchange rate effect is evidently significant. It is important that the
right and measured response to this price hike be developed.
From the foregoing, it seems clear that the foreign currency market
and the fixing of the Naira exchange rate is posing some challenges
that need to be addressed. In particular, the parallel market rates
appear to be having a significant effect on price levels, particularly,
but not exclusively for imported goods. On the positive side, the pick
up in prices of crude oil has led to an increase in external reserves to
US$28 billion by Mid-March. However, it is not at all apparent that this
increase will be sustained- hence measures to adapt to the long
term decline in oil prices must continue to be developed and
implemented, including a longer term strategy for the foreign
exchange market to avoid a significant decline in reserves,
intolerable pressures on the official exchange rate, declines in
inward foreign currency flows.
The banking sector remains robust, with respect to capital, asset and
income based measures, as well as a lower level of risk on the Net
Open Position, albeit with slight declines in capital adequacy, return
on equity and on assets, as well as an increase in NPLs. Liquidity in
the banking system has remained quite high, with a significant
proportion of it in the form of deposit for forex. It is pertinent to note
that injections of liquidity emanating from the loosening of monetary
policy has been, to a large extent, used for forex bids, and has not
translated, in any significant way, into lower interest rates or higher

levels of lending to the productive sectors. Lending concentration
remains a cause for concern.
Conclusion and Vote
Most of the evidence is pointing towards persistent oil glut in the
medium term and therefore low prices. It is necessary to develop a
long term approach to the foreign exchange market, which
obviously has an important effect on prices, foreign reserves,
portfolio investment and FDI and therefore growth. This approach
should be set, not just as a short term response to declines in forex
supply, but as part of wider strategic objectives of growth, job
creation and a more egalitarian society.
The other important task is to respond to the short term threat of
inflation. In devising the right response, it matters if the causes of the
current spike in prices is due to transient factors or due to unfolding
cumulative effects of pressures in the foreign exchange market,
increases in the cost of fuel and power etc. It is also important that
the overall objective of supporting expansionary fiscal policy to
stimulate growth is not lost sight of. At the moment, the real MPR is
negative. We consider the cumulative effects of various factors as
providing a better explanation of the spike in prices. Approval of the
budget later in the month and the surge in fiscal spending may also
generate additional pressure on price levels. Moreover, the banking
sector is characterized by excess liquidity. Under the circumstances

we deem it essential to tighten monetary policy and therefore vote
as follows:
Raise the MPR by 100 basis points to 12%.
Asymmetric corridor to be tightened to +2/-5
Raise CRR to 22.5%
Liquidity Ratio remains at 30%

8.0 EMEFIELE, I. GODWIN, GOVERNOR OF THE CENTRAL
BANK OF NIGERIA AND CHAIRMAN, MONETARY
POLICY COMMITTEE
Global economic performance throughout 2015 was generally
tepid and uneven as output growth dropped to 2.3 percent in the
fourth quarter from 2.6 percent in the third quarter. Though mediumterm outlook remain modest, growth is projected to gain marginal
traction in 2016 with the IMF forecasting a rate of 3.4 percent during
the year. The fragile global economic environment reflects
depressed demand, rising uncertainties and enormous vulnerabilities
especially
among
key
emerging
markets
and
developing
economies. Nonetheless, recovery and expansion in advanced
economies is envisaged to remain largely robust buoyed by
relatively benign conditions and accommodative monetary policy.
In the US recovery is expected to be sustained albeit at a cautious
pace, fuelled by cheaper energy and modest private demand. The
euro area is also likely to continue its rebound largely on the back of
dynamic private consumption.

Average growth among emerging markets and developing
economies is forecast to increase slightly from 4.0 percent in 2015 to
4.6 percent in 2016. This is regardless of rising uncertainty related to
developments in China, softened commodities and energy prices,
financial markets fragilities, and weak global trade. The key

downside risks to the envisaged fragile recovery in emerging
markets and developing economies include the withering capital
flows, currency volatility, fiscal vulnerabilities, and heightening
geopolitical tensions. On the back of the uneven global outlook,
accommodative monetary policy is expected to largely remain
among advanced economies even as emerging markets and
developing economies generally deal with currency and structural
issues.

In Nigeria, recent data by the National Bureau of Statistics shows
that domestic output growth decelerated further to 2.1 percent in
quarter four of 2015 from 2.8 percent in quarter three. At that pace,
fourth quarter growth is 1.7 percentage points lower than its level in
the corresponding period of 2014. Growth for the entire 2015 slowed
to 2.8 percent from 6.2 percent at the end of 2014 and the average
of 5.3 percent in the preceding three years. Though growth in the
non-oil sector decelerated from 7.2 percent in 2014 to 3.8 percent
in 2015, it continued to be the driver of overall growth given the
deeper contraction of the oil sector from -1.3 percent to -5.5
percent over the same period. By respectively contributing 1.23,
0.83 and 0.76 percentage points to non-oil growth, services,
agriculture and trade sub-sectors remain the key growth propellers.
In line with various forecasts including staff estimates, we expect a
moderate pick-up of growth to between 3.5 and 4.0 percent in

2016, especially if global conditions improve. I note that the major
domestic impediment to growth is the apathy of the financial sector
to lend to the real private sector even in the presence of enormous
systemic liquidity.

On domestic prices, the year-on-year headline inflation rose sharply
from 9.6 percent in January 2016 to 11.4 percent in February.
According to the National Bureau of Statistics, this sudden ascent
was attributable to the effects of acute fuel scarcity, exchange rate
pass-through (especially to imported foods), and the hike in energy
tariffs. Consequently, both the food and the core components of
inflation rose during the month to 11.4 percent and 11.0 percent
from 10.6 percent and 8.8 percent respectively, in the preceding
month. Though the underlying causes of inflation in February were
essentially structural and supply sided, it is exigent to curb its ascent
in order to ensure that the projected trend of future inflation reverses
downward.

Data on domestic monetary, credit and financial conditions
indicated that, during the review month, broad money supply grew
by 2.3 percent over preceding December. This implies an
annualised monetary expansion of 13.7 percent relative to the
provisional programmed target of 15.2 percent. Similarly, net
domestic credit increased by 3.7 percent which annualises to 22.3

percent and is 7.0 percentage points below the 29.3 percent
expansion provisionally targeted for 2016. The flow of credit to the
private sector was unacceptably far less than anticipated. With a
growth rate of 1.5 percent, the annualised growth at 8.7 percent
was significantly below the target rate 13.3 percent. I note once
again that sluggish growth of credit to the private coexisted
perversely with a highly liquid money market.

The extent of liquidity surfeit in the banking system is reflected in the
repeatedly low interest rates in the market. Starting at 0.5 percent
and 2.8 percent on 25 January 2016, the interbank call and OBB
rates, respectively, recorded averages of 1.4 percent and 2.7
percent between 25 January and end-February 2016. The aberrant
concurrence of excess liquidity in the banking sector and poor flow
of credit to the private sector is expounded by the lethargy at
lending to the real sector of the economy due in part to a
heightened default risk. Developments at the domestic capital
market indicated a rare return of bullish episodes at the equity
segment. Starting at 23,916.2 points on 29 January 2016, the AllShare Index of the Nigerian Stock Exchanged grew by 8.1 percent
to the 25,853.6 points as at 14 March 2016. Over the same period,
Market Capitalisation rose by 8.0 percent from ₦8.2 trillion to ₦8.9
trillion.

During the review period, the exchange rate of the Naira to the US
dollar at the interbank market continued to steady around
₦197.00/US$ with a daily average of ₦196.99/US$ between 25
January and 14 March 2016. This reflected the strong commitment
of the CBN to safeguard the domestic currency, even in the
presence of immense speculative pressures, using a mix of orthodox
and alternative policy measures. I note, once again, that fostering a
sustainable autonomous inflow of foreign exchange is expedient
and imperative as this can feasibly ease the pressure on our gross
official reserves. In this regard, the Bank is currently working on a
number of initiatives that will boost the supply in the foreign
exchange market. On official reserves, our data indicate a decline
of 0.8 percent in 30-day moving average position from US$28.1
billion as at end-January 2016 to US$27.9 billion on 18 March 2016.

On the whole, I note the multiplicity, complexity and simultaneity of
challenges confronting the Nigerian economy at this time. These
include decelerating growth, rising inflation, excess liquidity, low
credit to the productive private sector, and a constricted foreign
exchange supply. Most of these are largely attributable to low
crude oil prices and its spill-over effects on structural vulnerabilities
and a constrained fiscal space. In recent times, the MPC has
adopted a largely accommodative stance of monetary policy to
prop flagging growth. The aim was to release liquidity into the

system with a view to elevating the flow of credit to the real sector.
While the policies succeeded in raising the level of liquidity in the
banking system, it however did not translate immediately to
increased credit to the core private sector. Instead, financial
institutions channelled the excess liquidity to the foreign exchange
market and increased downward pressure on the Naira exchange
rate. Consequently, the goal of bolstering growth was stymied while
the heightened pressure on the exchange rate transmitted to rising
inflation. In addition, the continued delay in ratifying the 2016 fiscal
budget further complicated growth outcomes, as the attendant
uncertainty around fiscal policy delayed investment decisions.

I reiterate that the structural vulnerabilities of the Nigerian economy,
which was once again undraped by the prolonged fall in crude oil
prices, is underpinned by a problem of weak aggregate supply.
Nigeria needs to learn from the experiences of past episodes of low
oil prices and accept the current episode as an opportunity to
diversify the economy once and for all. To this end, the CBN will not
relent in its efforts at supporting the broad diversification of the
economy and the build-up of our domestic productive capacity. It
is in this regard that I deem it fitting to be tactful in tackling the
problems of slowing growth, rising inflation, liquidity surfeit and poor
private sector credit. Given the apparent trade-offs inherent in
policy decisions, we need to make some sacrifices and choose the

least costly policy options.

I strongly believe that in the medium term, we need to boost
productivity and domestic supply capacity to ensure that jobs and
goods are in abundant supply. On its part, the CBN will sustain and
strengthen its development finance initiatives to ensure that
concessionary credits are channelled to strategically selected real
sector ventures. In the immediate term, however, there is need to
tame inflation which has maintained an upward trajectory over the
last year. It is also imperative to rein in the banking system’s excess
liquidity which is stoking the pressure on the exchange rate. On the
balance of inflation-output trade-off, it is most optimal at this time to
tighten the noose on inflation and reduce the speculative pressures
on the exchange rate. To mitigate an excessive sacrifice of output
growth, the CBN development finance schemes will be used to
channel concessionary credit to the private sector. I am of the view
that this option will correct the perverse simultaneity of excess
liquidity and poor credit and will moderate exchange market
pressure and the attendant pass-through to inflation.

I therefore vote as follows:
1. 100 basis points increase in MPR from 11.0 percent to 12.0
percent;

2. 250 basis points increase in CRR from 20.0 percent to 22.5
percent;
3. Narrow the asymmetric corridor from +200/–700 basis points
around the mid-point of the MPR to +200/–500 basis points; and
4. Retain Liquidity Ratio at 30 percent.