Central Bank of Nigeria Communique No 109 of the Monetary Policy
Committee Meeting of Monday and Tuesday 19th and 20th
September 2016
The Monetary Policy Committee met on 19th and 20th September
2016, amidst persistently subdued global and domestic economic
and financial environments. The Committee assessed the prevailing
global and domestic risks to September 2016, and the outlook for the
last quarter of the year. In attendance were 10 out of 12 members.
International Economic Developments

The Committee acknowledged the tepid growth performance of
global output, but noted the constraints imposed by lingering legacy
factors, the June 23rd Brexit vote, continuing weak demand in the
emerging
markets
and
contracting
productivity.
Whilst
the
advanced economies, led by the United States, are showing signs of

growth recovery, the outlook remains fraught with uncertainty as
long-term government bonds have nosedived to multi-year lows on
expectations of loose monetary policy from the advanced
economies and continuing depressed output in the Euro Area,
Japan and China. Consequently, the IMF had in July 2016,
downgraded its baseline global growth forecast to 3.1 per cent from
3.2 in April. The World Bank in its June 2016 Report on Global
Economic Prospects showed even less optimism in forecasting 2016
global output growth at 2.4 per cent from the 2.9 per cent in
January. The subdued global growth prospects is traced to
persistently weak aggregate demand in the emerging markets and
developing economies (EMDEs), soft commodity prices, diminished
investment, contracting trade, weak demand and rising inflation.
Volatility in the global financial markets appeared muted in the
second quarter of the year despite the UK Brexit vote. While crude oil
prices remained tepid following supply disruptions in Nigeria, Iran
and Iraq. Expectations of US interest rate hike remained ripe but not
heightened.

US economic growth firmed up at a seasonally-adjusted annualized
rate of 1.1 per cent in Q2 2016, although with a downward
adjustment of 0.1 per cent from an earlier first estimate of 1.2 per
cent. It, however, still represents a noticeable improvement
compared with the 0.8 per cent growth recorded in Q1 2016. The
improved performance of the economy was attributed to increased
private consumption spending, a robust labor market and increased
exports, even as retail sales and manufacturing output declined.

Japan’s economy expanded against the backdrop of weak wage
growth and an external sector that is undermined by a strong yen, at
an annualized seasonally adjusted rate of 0.2 per cent in Q2 2016
compared with 1.7 per cent in Q1 of 2016. Fearing that monetary
policy may be approaching its limits, the government on 2nd August,
approved a fiscal stimulus of ¥13.5 trillion (US$132 billion) in a spirited
attempt to jumpstart the economy, even as the Bank of Japan (BOJ)
dismissed market speculation that it was planning to stop its monthly

monetary stimulus program of ¥6.7 trillion ($69.07 billion). The massive
fiscal and monetary stimuli are, however, yet to have the desired
impact.
Real GDP in the Euro area expanded by 0.3 per cent, a significant
decline compared with the 0.6 per cent recorded in Q1 2016.
Downside risks and expectations from the Brexit vote may not have
crystallized yet and no attendant major economic shock to the euro
zone has yet been experienced. As such, many of the conditions
that had driven the recovery remained in place, suggesting that Q3
growth may further improve.
Following its September 8th, 2016 meeting, the Governing Council of
the European Central Bank resolved to leave its key interest rates on
the main refinancing operations, the marginal lending facility and
the deposit facility unchanged at 0.00, 0.25 and -0.40 per cent,
respectively. The Council also reaffirmed its commitment to sustain
the monthly asset purchases of €80 billion (US$90.4 billion) until end of
March 2017 or until a sustained adjustment is seen on the path of
inflation, towards the 2.0 per cent policy target.

The Bank of England (BoE), at its August 4th meeting, and in attempts
to further blunt the aftershocks of the Brexit vote, decided to cut its
benchmark interest rate for the first time since 2009, by 25 basis
points from 0.5 per cent to 0.25 per cent, the lowest ever in the
Bank’s history. The Committee voted to increase its monthly assets
purchase program financed through the issuance of reserves by
another ₤60 billion (US$80.4 billion) from ₤375 billion (US$502.5 billion)
to ₤435 billion (US$582.9 billion). Furthermore, the BoE revived its
financial crisis-era U.K. government bond buying program financed
through the issuance of reserves, up to ₤10 billion ($13.4 billion), in
effort to stimulate the economy and steer inflation towards its 2.0 per
cent target.

While major EMDEs continue to be constrained by low capital inflow,
the intractable macroeconomic environment faced in 2015 and
through to the first half of this year is gradually abating. The
prospects for near term full economic and financial recovery in the
EMDEs remain subdued, with the IMF (WEO July 2016 Update)

projected growth rate forecast for this group of countries at 4.1 per
cent, a downward review from 4.3 projected in April. However, the
resumption of growth is expected to be powered by rising credits
and a surge in government spending.

The potential alliance between OPEC and non-OPEC members like
Russia, to reduce quota, in the face of disruptions to production in
Nigeria, Libya and Iraq, have aided relative stability in crude oil
prices. Globally, general price levels remained tapered due to
sustained low oil and other commodity prices. In the advanced
economies, despite the uncertainties arising from the UK referendum,
accommodative monetary policy stance of the region’s central
Banks, negative interest rate in Japan and elsewhere, as well as
various fiscal stimuli, global inflation has remained suppressed. As
deviations in macroeconomic fundamentals in the advanced
economies and the EMDEs widen, monetary policy could continue
to diverge between the two in the short to medium term.
Domestic Economic and Financial Developments

Output
Data released by the National Bureau of Statistics (NBS) in August
indicated that the economy had slipped into recession following
another contraction in Q2, 2016. The August 2016 data showed
domestic output in Q2, 2016 contracted by 2.06 per cent. This
represented a decline of 1.70 percentage points in output from the -
0.36 per cent recorded in Q1, and 4.41 percentage points lower
than the 2.35 per cent growth in the corresponding period of 2015.
The non-oil sector contracted by 0.38 per cent, compared with the
0.18 per cent contraction in the preceding quarter. Agriculture;
Other Services; Education; Arts, Entertainment & Recreation; and
Information & Communication, grew by 4.53, 4.32, 2.88, 1.80 and 1.35
per cent, respectively.

The shocks associated with energy shortages and price hikes,
scarcity of foreign exchange and depressed consumer demand,
among others, apparently proved to be more damaging than
expected. Recognizing that the conditions which precipitated the

current economic downturn were not essentially sensitive to
monetary policy, the MPC again renewed its call for urgent
complementary fiscal policies to resuscitate production and
engineer
aggregate
consumption.
In
particular,
members
underscored the imperatives of diversification of the economy away
from oil into agriculture, manufacturing and services as well as more
efforts towards payment of salaries and arrears of public sector
employees; particularly in states and local governments to stimulate
aggregate consumption, as part of the overall fiscal policy menu kit.
On the supply side, efforts must be intensified at increased capital
expenditure to redress infrastructural deficits, improve the business
environment and spur growth.
Prices
The Committee noted that headline inflation (year-on-year) rose
again in August to 17.6 per cent, from 17.1 per cent in July 2016, thus
maintaining the upward trend since January 2016. The increase in
headline inflation in August reflected increases in both food and
core components of inflation. Core and food inflation have

increased from 16.93 and 15.80 per cent in July to 17.2 and 16.43 per
cent, respectively, in August 2016.
The Committee nonetheless, noted that the month-on-month
evolution of consumer price inflation has been less phenomenal.
The headline inflation index rose by 1.0 per cent in August from 1.3
per cent in July, 1.7 per cent in June; and 2.8 per cent in May 2016.
Similarly, the core index has been increasing at a decreasing rate
since May when it rose by 2.7 per cent. It moderated to 0.85 per
cent in August from 1.22 per cent in July and 1.83 per cent in June.
The same pattern of moderation is seen in the food (month-onmonth) index which rose by 1.2 per cent in August from 1.21 per cent
in July, 1.4 per cent in June and 2.6 per cent in May.
The MPC further noted that the pressure on consumer prices
continues to be associated with reform-related legacy and structural
factors including high costs of electricity, transport, production
inputs, as well as higher prices of both domestic and imported food
products. The MPC expects that with the onset of the harvest season,

the restrictive stance of policy as well as the flexible FX regime, prices
will begin to taper in the fourth quarter.
Monetary, Credit and Financial Markets Developments
Broad money supply (M2) grew by 8.08 per cent in August, 2016,
compared with the July level of 10.75 per cent. When annualized,
M2 grew by 12.12 per cent in August 2016 above the growth
benchmark of 10.98 per cent for 2016. Net domestic credit (NDC)
grew by 20.09 per cent in the same period, annualized at 30.14 per
cent. At this rate, the growth rate of NDC was above the provisional
benchmark of 17.94 per cent for 2016. The development in NDC,
essentially reflected the relative growth in credit to the private sector
of 21.07 per cent in the month, annualized to 31.61 per cent. Credit
to government grew by 1.99 per cent in August 2016, which
annualized to a growth of 3.0 per cent compared with the growth
benchmark of 13.28 per cent. The growth in M2 was traced to
exchange rate effect following the depreciation of naira in the
second quarter of the year.

Money market interest rates reflected liquidity conditions in the
economy. Average inter-bank call rate, which stood at 15.00 per
cent on 8th July 2016, closed at 30.00 per cent on August 26, 2016.
Between July 8th and 26th August 2016, interbank call rate averaged
24.95 per cent. The rates increased to 50.0 per cent on July 15, 2016.
The sharp increase was attributed to the drop in net liquidity during
the period.
The Committee noted a decline in the equities segment of the
capital market as the All-Share Index (ASI) fell by 3.51 per cent from
28,733.90 on July 18, 2016, to 27,725.40 on September 15, 2016.
Similarly, Market Capitalization (MC) declined by 3.55 per cent from
N9.87 trillion to 9.52 trillion during the same period. In addition,
relative to end-December 2015, the capital market indices fell by
20.06 per cent and 3.35 per cent, respectively, reflecting the
slowdown in the economy. Overall, the capital market did not show
vulnerabilities to domestic and external sector developments.
External Sector Developments

The average naira exchange rate weakened at the inter-bank
segment of the foreign exchange market during the review period.
The exchange rate at the interbank market opened at N285.25/US$
and closed at N305.90/US$, with a daily average of N302.87/US$
between July 1st and August 26, 2016. The Committee observed that
total foreign exchange inflows through the CBN increased by 89.14
per cent, from US$1,092.21 million recorded in July to US$2,065.79
million in August 2016. This increase was due mainly to receipts of
foreign flows within the month. Total outflows, however, decreased
by 4.57 per cent from US$2,728.12 million to US$2,603.35 during the
same period. In efforts to deepen the foreign exchange market and
stabilize the financial markets generally, a number of policy
instruments were deployed since the last MPC meeting, including an
increase in the benchmark interest rate and the directive to IMTOs to
sell forex directly to Bureau de Change Operators, in order to
improve liquidity in that segment of the foreign exchange market.
While challenges remained, the Committee expressed optimism the
policy menu was in the right mix.

The Committee’s Considerations
The
Committee
acknowledged
the
weak
macroeconomic
performance and the challenges confronting the economy, but
noted that the MPC had consistently called attention to the
implications of the absence of robust fiscal policy to complement
monetary policy in the past. The Committee also assessed the
impact of its decision to tighten the stance of monetary policy by
raising the MPR in July 2016. At the time, the Committee understood
the complexity of the challenges facing the economy and the
difficulty of arriving at an optimal policy mix to address rising inflation
and economic contraction, simultaneously. The Committee also
recognized that monetary policy had been substantially burdened
since 2009 and had been stretched. The Committee noted that new
capital flows into the economy, approximately US$1 billion, had
come in since July, while month-on-month inflation has declined
continuously since May 2016. Against this background, members
reemphasized the need to channel monetary policy instruments

essentially in addressing stability issues around key prices (consumer
prices and exchange rate) as prerequisites for growth.

The MPC noted that stagflation was indeed a very difficult economic
condition with no quick fixes: having been imposed by supply
shocks, culminating in twin deficits: fiscal and current account.
Consequently, the policy framework must be reengineered urgently
to provide a lever for reversing the negative growth trend. While the
imperative for ensuring financial system stability remains, the MPC
reiterated the fact that monetary policy alone cannot move the
economy out of its present condition.
The MPC considered the numerous analysis and calls for rates
reduction but came to the conclusion that the greatest challenge to
the economy today remains incomplete structural reforms which
raise costs, risks and uncertainty. The calls came mainly from the
belief that reducing interest rates will spur credit growth to promote
consumption and investment spending not only in the private sector
but also by the public sector. The Committee was of the view that in

the past, the MPC had reduced rates ostensibly to achieve the
above objectives; but found that rather than deploy the available
liquidity to provide credit to agriculture and the manufacturing
sectors, the rate cuts provided opportunities for lending to traders
who deployed the same liquidity in putting pressure on the foreign
exchange market which had limited supply, thus pushing up the
exchange rate.
With respect to providing opportunity to the public sector to borrow
at lower rates, the Committee agreed that while it was expected to
stimulate growth by encouraging aggressive spending, doing so
without corresponding efforts to boost industrial output by taking
actions to deepen foreign exchange supply for raw materials will not
help reduce unemployment nor would it boost industrial capacities.
The Committee was also of the view that consumer demand for
goods which will be boosted through increased spending may
indeed be chasing too few goods which may further exacerbate
the already heightened inflationary conditions. The urgency of a
monetary-fiscal policy retreat along with trade and budgetary

policy, to design a comprehensive intervention mechanism is long
overdue.

The Bank has since 2009 expanded its balance sheet to bail out the
financial system and support growth initiatives in the economy. While
stimulating economic growth and creating a congenial investment
climate always is and remains essentially the realm of fiscal policy;
monetary policy in all cases only comes in to support sound fiscal
policy. Nevertheless, the Bank has and shall continue to deploy its
development finance interventions to complement the overall effort
of fiscal policy towards reinvigorating the economy. The interest rate
decisions of the Bank are, therefore, anchored on sound judgment,
fundamentals and compelling arguments for such policy directions.
The Committee also feels that there was the need to continue to
encourage the inflow of foreign capital into the economy by
continuing to put in place incentives to gain the confidence of
players in
this
segment
of
the
foreign
exchange
market.
Consequently the Committee considers that loosening monetary

policy now is not advisable as real interest rates are negative,
heightened demand pressure exists in the foreign exchange market
while inflation is trending upwards.
The Committee noted the positive response of the deposit money
banks (DMBs) to the Bank’s call for increased credit to the private
sector between July and August. As the growth in the monetary
aggregates spiked above their provisional benchmarks, headline
inflation continued its upward trajectory in August 2016, and now
close to twice the size of the upper limit of the policy reference
band. Supply side factors including energy and utility prices,
transportation and input costs, have continued to add to consumer
price pressures. Members emphasized that improved fiscal activities,
especially, the active implementation of the 2016 Federal Budget,
and payment of salaries by states and local governments, will go a
long way in contributing to economic recovery. In the same
direction, the Committee urged the fiscal authorities to consider tax
incentives as a stimulus on both supply and demand side of
economic activities

Outlook
The data available to the Committee and forecasts of key variables
suggest that the outlook for inflation in the medium term appears
benign. First, month-on-month inflation has since May 2016 turned
the curve; second, harvests have started to kick-in for most
agricultural produce and should contribute to dampening consumer
prices in the months ahead; and third, the current stance of
monetary policy is expected to continue to help lock-in inflation
expectations which, has started to improve with the gradual return
of stability in the foreign exchange market. In this light, the MPC
believes that as inflows improve, the naira exchange rate should
further stabilize. Overall, the major pressure points remain the
challenges in the oil sector (production and prices), output
contraction, and other financial system vulnerabilities as well as
foreign exchange shortage.
The Committee’s Decisions
The Committee assessed the relevant risks, and concluded that the
economy continues to face elevated risks on both price and output

fronts. However, given its primary mandate and considering the
limitations of its instruments with respect to output, the Committee
elected to retain the current stance of policy, evoked at its last
meeting when it raised the MPR from 12 to 14 per cent. Conscious of
the need to allow this and other measures like the foreign exchange
market reforms to work through fully, the Committee decided to
retain all the monetary policy instruments at their current levels.

In summary, all 10 MPC members voted to:
(i) Retain the MPR at 14.00 per cent;
(ii)
Retain the CRR at 22.5 per cent;
(iii) Retain the Liquidity Ratio at 30.00 per cent; and
(iv) Retain the Asymmetric Window at +200 and -500 basis
points around the MPR
Thank you for listening.
Godwin I. Emefiele
Governor, Central Bank of Nigeria
20th September 2016

PERSONAL STATEMENT BY THE MONETARY POLICY
COMMITTEE MEMBERS


1.0
ADELABU, ADEBAYO
An assessment of the latest macroeconomic data reveals
intensification of key challenges confronting the economy since the
beginning of the current fiscal year. Inflation continued its upward
trend for eight
consecutive months with headline inflation
accelerating to 17.61 percent in August 2016 while the 2016Q2
output growth at -2.06 percent confirmed the widely held
speculation that the economy is in recession. Besides, a number of
other macroeconomic indicators continued to display less than
satisfactory performance. The level of external reserves at US$24.52
billion at end-August represents a decline of 13.29 percent
compared with the position at end-December 2015 while the
pressure on the exchange rate continued unabated. Development
in the global economy is equally less supportive with global growth
trailing below medium term average while the level of tension in the

global financial markets remained considerably elevated on the
heel of uncertainty surrounding the timing of monetary policy
tightening by the US Fed as well as the forthcoming presidential
election in the US.
In light of the fact that the economy is now in stagflation mode, it is
absolutely compelling for policy makers to carefully deploy optimalmix of policies in order to avoid costly trade-off. With respect to
inflation, the challenge is a bit complicated to the monetary
authority because the pressure is from both the core and food
elements. For instance, core inflation increased by 17.61 percent in
August, on year on year basis, while food inflation increased by 16.43
percent during the period. It should be expected that the increase in
the MPR by 200 basis points in the July meeting would sufficiently
address the concern over the core components leaving the issue of
non-core elements outstanding. The key drivers of non-core
components are legacy factors such as the increase in petroleum
products prices and electricity tariffs in the early part of the year

while the ongoing sharp adjustment in the exchange rate is
providing additional headwind.
As alluded to in my last statement, it should be expected that the
impact of upward adjustment in petroleum prices and energy tariffs
may wane soonest which, invariably, implies that the major
challenge to inflation over the medium term is the instability of the
exchange rate. As such, a prominent consideration for decision at
this meeting is the need to stabilize the exchange rate. Exchange
rate at the interbank market depreciated by 54.82 percent in the first
eight months of the year while the margin between the BDC and the
interbank markets equally widened considerably on the backlash of
mounting demand pressure in the FX market. An assessment of the
dynamics of FX flows in the first eight months of the year reveals a
steady net outflow except in the months of February and May.
Although, it is expected that the proposed commencement of PTA
disbursements by Travelex could stem the demand pressure but the
adverse supply shock appears stronger while the medium term
outlook does not offer a respite in view of many likely sources of

headwinds. First, the issue of negative term of trade shock through
the plummeting oil price should be taken as a permanent shock. This
thesis is drawn largely from the fact that the continue drop in price is
driven principally by supply related factors. Among others, recent
forecast of supply by the OPEC shows that supply may exceed
projection in 2017 as a result of enhanced production by non-OPEC
members particularly Russia. Second, the widely expected hike in
the policy rate by the US Fed would invariably further strengthen the
dollar with the attendant increase in net outflow of capital from
developing and emerging market economies.
Within this context therefore, I am of the view that ongoing price
discovery in the FX market should be allowed unimpeded albeit
guarded interventions to avoid sharp swings that could disrupt
orderly conduct of economic activities particularly in the banking
sector. My view is premised on both theoretical construct and
practical experience. From theory, the famous Balassa-Samuelson
thesis posits that sustainable appreciation in real effective exchange
rate could only come about through productivity gains which are

completely outside the confinement of monetary policy. Productivity
gains rest squarely on structural reforms. From practical perspective,
experiences in some other climes, notably Japan, have shown that
the level of exchange rate is fairly immaterial but the paramount
consideration to economic agents is the degree of stability as such
would engender confidence. Within this context therefore, I hold
considerable deal of reservation against further increase in the
policy rate on the sole basis of mitigating slide in the value of the
domestic currency.
The other key issue is the contraction in output for the second
consecutive quarter, thereby pushing the economy into recession.
The issue bring to the fore again the necessity for deep structural
measures. The infrastructural deficit arising from long period of
neglect in investment in critical infrastructure particularly power
needs to be addressed head on. This notwithstanding, monetary
policy cannot afford to stand aloof at this critical point, more so in
view of the evolving paradigm on mandate of monetary policy
which seeks to accommodate inclusive growth. While the Federal

Government continues to fine-tune the various reform measures
particularly on the energy sector, the monetary authority should also
put in place complimentary measures. In this regard, it is a welcome
development that the recent measures by the Bank to exclude
certain items from interbank forex demand has started showing
positive results. An assessment of the current account of the balance
of payment for the second quarter of the year revealed that trade
deficit moderated considerably as a result of decline in import
largely traced to items excluded from interbank foreign exchange
market. In order to consolidate on the gains of such policy therefore,
some form of assistance should be given to domestic production of
commodities in this category such as rice and other staples with a
view to completely eliminating these items from import list. Thus, I
would reiterate my support for specialized credit schemes such as
NIRSAL in order to jump start the production of these commodities.
With respect to enhancement of productivity, massive investment in
infrastructure is germane but there is also the need to recognize the
limitation imposed by resource envelope in view of obvious

challenge of low oil prices. The fiscal authority obviously needs to
inject resources which could be sourced from either domestic or
external market. I however hold some reservations to sourcing from
domestic market, at least for now. Apart from the fact that domestic
public debt is becoming too high, credit to the private sector is
growing at a pace required for an economy in recession. Credit
growth to the core private sector as at end-August was 18.63
percent, significantly below an acceptable threshold for an
economy in recession. Further borrowing from the domestic market
therefore presents additional challenge of stifling credit to the
private sector with far reaching implications on growth. From this
viewpoint therefore, I lend my support to the proposed external
borrowing by the fiscal authority but on such terms and conditions
that are highly concessionary terms to avert another debt overhang.
Against this background and given the need to allow full transmission
of the upward adjustment in the MPR at the last meeting, I would like
to propose for the retention of all monetary policy measures
currently in place.

2.0
ALADE, SARAH O.
At -2.06 percent, the second quarter GDP numbers show a deeper
GDP decline than witnessed in the first quarter, dragging the
economy officially into recession. Although a reversed June inflow
data showed an increase, the increase is not enough to keep the
economy from sliding into deeper recession. The decision at this
meeting is whether policy should respond to the price stability or
growth objective. With accelerating inflationary pressures, policy
should still favor price stability as rising inflation will erode
purchasing power and further depress growth with headline
inflation reaching 17.6 percent in August from 17.1 percent
recorded in July. Given these developments monetary policy
should remain focused on fighting inflation and attracting foreign
investments to cushion the loss in foreign exchange earnings from
oil. I will therefore support a hold on monetary policy rate.
Global growth remains tepid amidst uncertainty: Although the
United State economy added 151,000 jobs in August, it was a

slower momentum than in the past. Despite August’s weaker-thanexpected results, labour market has been one of the bright spots in
the American economic recovery. Job growth since the beginning
of the year has outpaced the performance of the broader
economy, which has averaged annual growth rate of less than 1
percent as uncertainty and elevated volatility in the global
financial markets continue to exist. The International Monetary
Fund’s (IMF) World Economic Outlook (WEO) for July 2016
downgraded its baseline forecast for global growth to 3.1 percent
from 3.2 percent in the April version. In the Emerging Market and
Developing economies, weak aggregate demand and low
commodity prices have translated to output decline and resulted
in difficult economic and business environment. Depressed
commodity prices continued to pose downside risk to growth in
emerging markets, especially on commodity exporting countries,
thus, dampening prospects for near term economic and financial
recovery in those economies.

Gross Domestic Product (GDP) growth continues on a negative
trajectory: Output growth in the second quarter continued on a
steeper decline than what was experienced in the first quarter. The
effect of energy shortages, high electricity tariffs, fuel price hikes,
scarcity of foreign exchange and depressed consumer demand
continued to dampen growth in the second quarter. In addition,
the implementation of the 2016 budget remained slower than
expected affecting the speed of economic activities at a time
when fiscal policy is needed to complement the efforts of
monetary policy to spur growth. Second quarter GDP growth
contracted by -2.06 percent compared to a -0.36 percent
recorded in the first quarter. This represented a decline of 1.70
percentage points in output from the first quarter numbers The
decline in GDP in a normal circumstance would have called for a
reduction in monetary policy rate, however recognizing that the
conditions which precipitated the current economic downturn
were not sensitive to monetary policy interventions, in the face of
rising inflation and dry up of capital inflow, monetary policy must

focus on its core mandate of price stability as rising inflation would
erode the purchasing power if not checked. Efforts to spur
economic growth will require the cooperation and collaboration of
monetary and fiscal policy and delicate balancing of both global
events and domestic risks. Therefore, policies targeted at
expanding the revenue base such as improving tax administration
and broadening the tax base should be pursued vigorously. In
addition, the on-going discussion on concessional borrowing with
multilateral organizations should be intensified to increase capital
expenditure to redress infrastructural deficits, improve the business
environment and spur growth.

Headline inflation has remained elevated during period. Headline
inflation further increased to 17.61 percent in August 2016, from 17.10
percent recorded in July. The increase in headline inflation in August
reflected increases in both food and core components of inflation.
Core and food inflation have increased from 16.93 and 15.80 per
cent in July to 17.2 and 16.43 per cent, respectively, in August 2016.

However the rate of increase is declining, headline inflation index
rose by 1.0 per cent in August from 1.3 per cent in July, 1.7 per cent
in June; and 2.8 per cent in May 2016. Similarly, the core index has
been increasing at a decreasing rate since May when it rose by 2.7
per cent. It moderated to 0.85 per cent in August from 1.22 per cent
in July and 1.83 per cent in June. The rising inflationary pressure was
largely a reflection of structural factors, including high electricity
tariff, high transport cost as a result of higher fuel prices, high cost of
inputs, low industrial activities as well as higher prices of both
domestic and imported food products. The persistent upsurge in
inflation calls for balanced monetary and fiscal policy intervention to
mitigate the effect on the poor. Since high inflation hurts the poor as
it erodes their purchasing power and affects investment decisions
negatively, policy middle ground to achieve the objective of lower
inflation and growth should be pursued.

The recently adopted foreign exchange regime is bringing more
transparency into the foreign exchange market. After a period of

restriction in the foreign exchange market, a new market driven
approach was adopted in June, 2016. This has brought the needed
transparency, price discovery and greater participation in the
market. In addition, the new framework is attracting inflows into the
market, increasing supply and ensuring continuation of economic
activities, although more should be done to further increase supply.
In addition, the decision to increase the monetary policy rate will
further help encourage foreign inflows, curb capital outflow and
provide liquidity to the interbank market. At this time, monetary
policy should be focused on restoring confidence in the domestic
economy and increasing supply of foreign exchange to attract
inflows.

Against this background, I support policy continuity by voting for a
hold on the policy rate to gradually bring inflation under control
and bring interest rate to a less negative territory. Decreasing rate
at this time will make interest rate more negative which is bad for

investment at a time when the nation needs all the investment it
can get to support growth.
I therefore support the retention of Monetary Policy Rate at 14
percent, the retention of Private Sector Cash Reserve Requirement
(CRR) and Liquidity Ratio at 22.5 percent and 30.00 per cent
respectively; and retention of the Asymmetric Window at +200 and
-500 basis points around the MPR to help attract capital inflow and
spur growth.

3.0
BALAMI, DAHIRU HASSAN
In the July 2016 World Economic Outlook, the IMF marked the global
economic growth rate downwards from 3.2% in 2015 to 3.1%. The
vulnerabilities and risks to global economic activities include:
slowdown and rebalancing of the Chinese economy, decrease in
investment and trade, deflation in Europe, monetary policy
divergence between the US and other major economies, declining
capital flows to emerging and developing economies, prolonged
weak oil and other commodity prices, and regional political tensions.
However, the global level of inflation is likely to remain subdued as a
result of weak demand and negative output gaps as well as plunge
in crude oil and other commodity prices.
These global shocks have effects on the domestic economy. The
2016 first quarter GDP growth rate has witnessed a downward trend
of -0.36% while the second quarter rate was -2.06%, which is partly
due to decline in industry, construction and services growth;
technically confirming the Nigerian economy is in recession – a
situation of severe contraction phase of the business cycle involving

high rates of unemployment, inflation and a decline in national
income.
Inflation rate has increased sharply from 9.62% in January 2016 to
16.59% in July, and rose further to 17.6 % as at the end of August with
a forecast of 18.37 per cent for mid September 2016. This rising trend,
as stated earlier in my July statement, has been driven mostly by
structural reforms such as the PMS subsidy removal which led to high
cost of transportation, increase in electricity tariffs as well as
liberalization of the exchange rate. The slide in the nation’s external
reserve from USD 28,207.64b in 2015 to USD 25.0b in September 2016
is not unconnected with the drop in global oil prices as well as the
reduction in crude oil production due to the vandalization of oil
pipelines and facilities by the Niger-Delta militants. This eventually has
caused a depreciation of the naira with the attendant increase in
risk weighted assets and drop in CAR to 14.56 per cent in August
2016, increase in the ratio of NPLs above the prudential limits of 5 per
cent at 13.42 per cent as at August 2016, and a fall in the ROA and
ROE to 2.03 per cent and 16.32 per cent in August 2016 as against

2.48 per cent and 20.55 per cent witnessed in June 2016. In addition,
the depreciation has led to an increase in the cost of importing both
producer and consumer goods. Also, the high lending rate has not
been economically friendly either, which as a point of note, kills
investment and stifles economic growth. The interest rate has ranged
from 27% in December 2015 to 28.73% in May 2016.
The All Share Index (ASI) got to a low of 23,916.15 in January 2016
down from 28,642.25 in December 2015, before rising to 27,889.44 in
July 2016. The performance of the capital market in Nigeria has not
been very active due to exchange rate problems and hike in the US
monetary policy rates that led to increase in the level of FDI outflow,
while the ASI and market capitalization declined by 3.4% and 3.6%
respectively.
It should be noted that domestic shocks are important as global
shocks and the ability of the Nigerian economy to sustain future
growth will depend on the domestic policy response to the global
economic situation. So therefore, what monetary policy response
can be put in place to get the economy out of the recession? How

do we increase the foreign exchange inflows and promote growth
without jeopardizing price stability which is critical to growth?
This would require effective coordination between monetary and
the
fiscal
authorities
to
stimulate
the
economy
through
diversification, providing credit at lower rates to the major growth
drivers of the economy such as agriculture, manufacturing, and
mining, raising liquidity in the economy to stimulate consumption,
investment, and trade, as well as attracting capital inflows and
taming inflation. On the basis of the analysis I vote to hold to:
I.
Retain the MPR at14.00 per cent.
II.
Retain the CRR at 22.5 per cent.
III.
Retain the liquidity ratio at 30.00 per cent, and
IV.
Retain the asymmetric window at +200 and -500 basis points
around the MPR.
This would allow the effects of MPC actions taken in July to
fully manifest before other major policy options are
considered.

4.0
BARAU, SULEIMAN
Background
My vote is to hold at this meeting, largely informed by the need to
allow full transmission of the impact of the 200 basis points increase in
the policy rate at the last meeting. Macroeconomic condition
remains weak mainly on account of legacy factors, thus, inflation is
still trending up albeit at a slower rate while the second quarter data
on GDP growth confirmed the reality of recession. This, in essence,
implies the economy is in stagflation phase. Beside the stagflation
issue, the pressure in the interbank FX market remains elevated while
the margin in rates between the interbank and the parallel markets
continues to widen.
In terms of monetary policy measures at this meeting, it is well known
that the task of managing stagflation cannot be shouldered by
monetary policy alone, thus the strategy at this period should be a
coordinated fiscal and monetary policy measures as I have
expounded in a number of previous MPC statements. More
fundamentally, I am convinced that the various monetary policy

measures taken so far are in the right direction and in fact, visible
positive outcomes should begin to crystalize soonest. My assertion is
based on the assessment of some underlying statistics which reveals
the commencement of the process of correction in major
imbalances of key macroeconomic sectors. Data on Balance of
Payments shows that current account deficit reduced by about 80
percent in 2016Q2 compared to the corresponding period of 2015
and Month-on-Month measures of inflation are trending down while
Year-on-Year measure is only increasing at a declining rate. These
reflect ongoing adjustments in the economy in response to the
various monetary policy measures particularly since the last quarter
of 2014. The key issue therefore is to remain focused and be on track
in our approach by not sacrificing long terms goals on the altar of
short term often political gains while simultaneously collaborating
with the fiscal authority for complimentary policies.
Thus in view of far reaching measures taken in the last couple of
meetings and bearing in mind the relatively long transmission lag in
monetary policy, I opt to vote for a hold in monetary policy stance.

Pressure Points
Global economic recovery still remains weak and the prospects of
improvement is not only diminished but it equally exhibits
considerable divergence across many developed and emerging
market economies. Apart from the impact of well-known lingering
challenges such as the softness in output of many big emerging
economies, a worrisome evolving challenge is the rising tension in
the global financial markets basically due to the current as well as
the anticipated rally in the US dollar. In the EU, although the Pound
Sterling is showing a gradual rebound from the initial sharp slump
following Brexit decision in June, equity prices particularly for
European banks are still lower than the pre Brexit period. Thus, a
sizeable number of investors in the EU are reallocating their portfolio
in favor of dollar denominated assets which may further strengthen
the dollar. Another major force that is providing support for the US
dollar is the action or anticipated action of notable global central
banks including the US Federal Reserve System (Fed). The concern

about the stance of the Fed policy rate since the beginning of the
year is not about imperativeness of further tightening but the
appropriate time. Latest economic data particularly on inflation
which is now close to the threshold of 2 percent suggests that the
time is almost ripe. Probable reasons why the rate hike may not take
place at the September’s meeting of the FOMC are mainly softness
in consumer demand, weakness in manufacturing and the
attendant slowdown in job growth. Invariably, if the rate hike does
not take place in September, it may not likely exceed December.
The point here is that investors are already forming expectation
along this scenario with implication of sharp increase in the demand
for the dollar. Another central bank whose action will weigh heavily
on global financial market is the Bank of Japan (BoJ). The concern
about BoJ is heightened on the backdrop of its reputation of
aggressive quantitative easing. Developments in Japan revealed
that key macroeconomic indicators continue to deteriorate despite
the massive stimulus program by the Government. This has
compelled the BoJ to move its interest rate to a negative territory

with the intention to weaken the Yen but, obviously, this could also
trigger investors’ flight to safe haven which is mainly dollar
denominated assets. Furthermore, some other central banks like
Reserve Bank of New Zealand and Reserve Bank of Australia are
contemplating further easing of monetary policy stance though for
different reasons. Thus, it should be expected that the US dollar will
continue to appreciate against many currencies particularly
emerging economies currencies including the Naira. For Nigeria in
particular, further rally in the US dollar poses additional risk to the
external sector as crude oil becomes more expensive to economic
agents that are holding other currencies thereby constraining
demand.
Beside financial market issue, some political issues in the global
environment are also exerting significant downward pressure on the
prices of crude oil. The key concern now is oversupply as the market
becomes cynical of the success of the deal on output cap between
OPEC and Russia. In view of this development, OPEC has revised its

earlier forecast of drop in output as supply may receive significant
boost from non-OPEC members.
Domestic Environment
The risk matrix in domestic macroeconomic environments has not
been significantly altered from the condition that prevailed at the
last meeting held in July, suggesting that legacy factors are at work.
Headline inflation on year-on-year basis continued with the upward
trend since January, increasing to 17.6 percent in August with the
pressure emanating from both food and core components. The
development is underpinned by the lingering effect of upward
adjustment in the prices of fuel and electricity which took place in
the early part of the year as well as exchange rate pass through
occasioned by the depreciation of the Naira exchange rate.
Furthermore, as widely envisaged, the latest statistics by the National
Bureau of Statistics (NBS) revealed that output contracted by 2.06
percent in 2016Q2, confirming that the economy is in recession. The
issue is a bit worrisome given that the contraction is from both the oil
and non-oil sectors. Projections from some sources, including the IMF,

show that the economy would remain in recession up to the end of
2016 while some recovery could be expected in 2017. Invariably, this
challenge has taken its toll on critical developmental indicators
particularly employment with the latest data showing that
unemployment rate accelerated from 12.1 percent in the first
quarter of the year to 13.3 percent in the second quarter, while
underemployment increased from 19.1 to 19.3 percent during the
same period. Besides, the banking system is just recovering from the
adverse impact of the shock to oil price, thus continuing
deterioration in economic activities may pose considerable threat to
the quality of banking system assets.
Another key challenge is the lingering demand pressure in the
foreign exchange market which continues to widen the margin
between the interbank and the BDC’s rates. It is noteworthy that the
adoption of flexible exchange rate model is enhancing the process
of price discovery in the interbank market but the current margin of
about 30 percent between the interbank and the BDC rates is
clearly above the tolerable limit. The threat to stability in rates would

be from both demand and supply sides. On the demand side,
among other factors, the huge margin between the two markets,
obviously, creates strong incentive for agents in the interbank market
to exploit the arbitrage opportunities. From the supply side, global
developments as discussed above as well as recurring crisis in the
Niger Delta region, constitute key challenge.
Discussions/Way Forward
Contemporary discourse on our current economic predicament
(recession and stagflation) has largely been by commentators who
are not well informed. Booms and Busts are cycles that characterize
open market macro-economies, often with short term time span.
Stagflation is the less common and more complicated economic
scenario where there is declining growth and heightened inflation.
We have not witnessed Boom-Bust cycles in a measured way in
Nigeria largely because our economy is not matured and also
because developments in the external environment for a monoproduct economy have largely been favourable. In my view we are
in a recession now for the following reasons;

Sustained decline in the price of oil
Severe reduction in production and export due to militancy in
the Niger Delta
Fiscal indiscipline – poor system of revenue generation and
terrible culture of high recurrent and low capital expenditure
Lack of a disciplined implementation of oil price based fiscal
rule. Expenditure pattern has always been pro-cyclical
Lack of domestic savings and willingness to embark on
structural reforms to diversify the economy in a disciplined and
sustainable manner.
Aggressive easing of monetary policy since the collapse of
Lehman Brothers in 2008 – this has severely curtailed the
efficacy of monetary policy.
Poor handshake between fiscal and monetary authorities.
In addition, there has recently been uninformed view that the
Central Bank of Nigeria and by implication, the Monetary Policy
Committee should take measures that should bring Nigeria out of
recession. Can monetary policy alone take the country out of

recession? No. Indeed as a result of unprecedented structural
liquidity, we have almost reached the limit of the efficacy of
traditional tools of monetary policy formulation and implementation.
Manage the Exchange Rate: Current inflationary trend is driven by
both legacy factors and exchange rate depreciation but there is
high likelihood that the effect of legacy factors would wane in the
near to medium term. In essence, the drivers of the uptick on-yearon year basis could be attributed to the legacy factors while the
exchange rate is the single factor that has been unstable on monthly
basis. Thus, efforts should be made to stabilize the rate in this market
in order to effectively anchor the expectation of economic agents.
The major challenge in the foreign exchange market at the moment
is largely from the supply side. It is noteworthy that the various
measures taken so far have moderated the rate of forex outflows but
the rate of inflow has decelerated faster than outflow. For example,
available data shows that average outflow in the first half of 2016
decreased by about 37 percent compared to the trend in the
second half of 2015 while inflow decreased by about 46 percent

during the same period, suggesting the need to improve the supply
side of the forex market. It is on this basis that I would advocate for
the retention of the current tight stance of monetary policy with
particular emphasis on the maintenance of current level of the MPR
while not ignoring further administrative measures that could reduce
demand pressure.
Special Credit Schemes: As mentioned in my statement of last
meeting, the present economic phase requires a lot of innovations in
policy arena to address the multifaceted challenges. Broad money
supply (M2) increased by mere 8.08 percent in the first eight months
of the year. In light of the growth challenges, some form of
arguments may be canvassed for reduction in monetary policy rate
but I clearly do not see any need for this. Firstly, stability in
macroeconomic
environment
is
required
to
foster
growth
sustainably. Second, in view of the oligopolistic structure of the
country’s banking system, pricing of credit is more of supply than
demand driven, and as a consequence, a reduction in the policy
rate may not necessarily translate into reduction in lending rate

particularly when other binding constraints to improvement in asset
quality of the banking systems are yet to be addressed. Thirdly,
Interest rate is a problem but is not the key problem of
manufacturers. Fourthly, studies have not established a clear
correlation between MPR and lending rates. Fifthly, MPR adjustment
has not necessary led to private sector credit growth. Therefore, a
pragmatic approach towards addressing the growth challenge
should be based on identification of certain critical sectors that must
be supported through intervention.
A careful diagnosis of the inflation dynamics reveals that the major
drivers particularly on monthly basis are imported food items such as
rice and vegetable oil. I would therefore emphasize the need to
strengthen the special intervention of the Bank with a view to
building the progress made in the production of these food items.
Such approach would not only address growth but inflation
challenge would equally be substantially addressed.
Strong Sectorial Policies: The need for the diversification of the
economy has always been identified but this has not been pursued

with discipline. The current challenges are indication that the era of
treating diversification related issues with levity is over. The good
news however is that considerable space exists for diversification
even within the oil sector. The import bills on refined petroleum
products currently constitutes over 60 percent of total import bills,
thus a major source of demand pressure in the interbank foreign
exchange market, in addition to the fact that frequent removal of
subsidy on imported petroleum products continue to trigger inflation
pressure. As a result, there is a compelling need to address all
impediments on the path of downstream investments in the oil and
gas sector and provide support towards the establishment of a local
refining capacity that is private sector driven.
Solutions to recession: Some thoughts; Some of the short term
solutions include firstly - short term efficient borrowing (FCY) – largely
in foreign currency because they are cheaper, Federal Government
balance sheet is exchange rate lodged and will elicit the least
inflationary impact. Secondly, fiscal spending and not monetary fiat;

Thirdly, fixing the Niger Delta problem; Fourthly, price stability – low
and stable inflation and exchange rate (given its pass through).
Some of the long term solutions we have been harping on include;
Firstly, structural reform; we need to say less here; Secondly, effective
diversification to have dominance of non-oil export as source of
revenue via foreign exchange earnings and taxes. Currently oil
accounts for about 10% of our GDP directly and analysts argue that
it indirectly accounts for over 60% of our GDP growth. This scenario
has to be consciously reconstructed to elicit less dependence on oil.
The current recession provides the opportunity for us to do this;
Thirdly, fiscal discipline/consolidation. Earnings from oil should largely
be saved or used to diversify the economy. We must streamline
recurrent expenditure and ensure that more resources are elicited
from other sectors of our GDP apart from oil; Fourthly, anti-cyclical
fiscal policy in order to elicit savings from windfall which, if we done,
in the past would have been a source of counter recessionary of
spending.

Decision
In light of the issues discussed above, I am of the view that the
subsisting monetary policy measures are on the right track and more
fundamentally there is a need to allow the hike in policy rate at the
last meeting to fully transmit through the economy. In addition, the
monetary authority should direct its intervention schemes towards
critical sectors that have impact on both output and inflation.
I therefore propose for the retention of all measures of monetary
policy currently in place.

5.0
GARBA, ABDUL-GANIYU
Context
The problem with the Nigerian economy is not recession! Neither is it
stagflation. Both are effects, not causes. The principal problem I
believe is a persistent and long standing unwillingness to urgently
“harness, direct and put to effective use the best available
intellectual and political resources” to develop a forward looking
medium to long term strategic macroeconomic management
framework for Nigeria with the wellbeing of Nigerians as its principal
end. The shock (oil price and quantity) is also, not the problem. It is
the failure to anticipate and consistently and effectively respond to
shocks within a medium to long term framework that is the problem.
For every building, the foundation is critical. If the foundation is deep
and master builders use superior materials to expertly build the
foundation suitable for the location and the building, the foundation
will carry the weight of the building and withstand stresses including
earth tremors. However, when inferior materials are used, the

building will crumble when subjected to even the most minimal
stress.
Before the GDP growth turned negative in the first two quarters of
2016, the path of the economy had turned southwards many
quarters before then. Growth peaked in the third quarter of 2013
and began to steadily decline from the fourth quarter of 2013 with
industry the worst hit; unemployment has been trending upwards for
more than a decade; national savings and real investment has been
receding as part of sustained trend of public and private dis-savings
for many years; reserves of over $65 billion in 2008 was steadily
depleted by the funding consumption goods and services, fuel
import games and capital flight; the public debt is almost twice its
level before Nigeria used more than $18 billion to free itself from the
sovereign creditor cartel; the problem of twin deficits gradually crept
upon us in 2014 as the inevitable negative oil price shocks followed
the events associated with tapering and the misalignment of policies
between the US and the EU; cost-push inflation began creeping in in

the aftermath of the devaluations of November 2014 and gathered
steam as exchange rate spread widened from February 2015.
The “loud noise” about recession and stagflation is distracting from a
deeper and clearer focus on the real problem: a perverse model of
development driven by consumption of imported goods and
services, fuel imports, low-value added primary exports, sustained
de-industrialization; capital flight masquerading as financial flows
and the creation of rent havens in both the real and financial sectors
which distorts access, pricing and allocation and undermines growth
and employment generating innovations.
The dominance of the policy discourse by “recession or stagflation
diagnostics” is dangerous because it has elevated shallow,
superficial and misleading conversations into national prominence
with a present hedonistic orientation that puts the future at great
risks. Inevitably, the misdiagnosis is narrowing conversations to
dangerous quick fixes that could potentially do great harm to the
future capacity of government and citizens to leverage on
endowments to build sustainable value adding economic systems.

When the federal government was advised more than a decade
ago to reduce investments in oil and gas (a cash cow) and to sign
production sharing contracts, the negative effects on the structure
of government expenditure and on future flows of revenue was
discounted. Yet, the structure of contracts is having a powerful
impact on government finances. When states were empowered to
borrow outside the framework of the Fiscal Responsibility Act of 2007
and repayments locked-in to future revenue allocation, the effects
on the future of state finances and governance were discounted.
When the refineries are not delivering values that will reduce the
demand for US$, they hurt employment, growth and the stability of
the Naira. Savings from domestic refining will generate far more
positive current account balance than what government could raise
from the Eurobond markets or from sale of assets. Reversing the
disincentives to remittances by giving beneficiaries access to their
resources in the currency of origin will generate far more financial
inflows that portfolio flows or any similar “tapeworm remedies”.

Quick fixes in strategic vacuums such as selling national assets to
fund consumption of imported goods and services, fuel imports and
to attract foreign investment and support the value of the Naira; the
selling of US$ to BDCs, borrowing and spending to dig the economy
out of a hole, adopting accommodative monetary policies to
stimulate growth, raising interest rates to attract portfolio flows to
support the Naira cannot fix the weak foundations of the economy.
On the contrary, they will deepen the hole and weaken the
foundations further.
It is important to remember that Nigeria has been selling its national
assets since 1986-88; that it has willfully promoted financial
contagion, asset price bubbles, capital flight and instabilities through
capital account liberalization and de-industrialization that have
harmed long term growth by expending its savings on the
consumption of imported goods and services, fuel imports and
capital flight; through de-industrializing policies (various episodes of
generalized increases in supply prices; deterioration in public
infrastructural assets; public bias against locally manufactured cars,

furniture and consumables and the budget effects of unequal
income distributions which favour imported goods and services and
capital flight).
Students of economic history will know that no nation successfully
digs itself out of the depth and breadth of economic decline that is
Nigeria’s situation in the short term. There are sufficient examples:
United States and the global economy (1973-86); Japan (1990-date);
Eurozone (2008-date); Brazil (2013-date) just to mention a few.
Decision
I vote to hold. The primary reason for my vote is that monetary policy
rate has lost its potency for stimulating growth and employment and
for reducing domestic prices and the pressure on exchange rate
which passes through to prices directly and indirectly through high
inflation expectations.
The interest rate corridor used as the signaling device for influencing
the interbank rate has long collapsed. Lower rates have been
undermined by conflicting movements in money supply and by the

interest rate asymmetries institutionalized by deposit money banks
who pass-on lower rates to borrowers with high interest rate
elasticities (the big ticket borrowers who account for most of
borrowed funds) and pass-on higher interest rates quickly to
borrowers with low interest rate elasticities (retail borrowers who have
higher output and employment elasticities). The favoured sectors are
the rent havens (oil and gas, general commerce, utilities, etc.) that
have low growth and employment elasticities. The unfavoured
sectors are not only constrained by costs, they are also constrained
by access and by policy bias. The AMCON effect has created a
liquidity challenge that has weakened the effectiveness of monetary
policy since 2012. Fixing the malfunctions in the forex, money, stock
and security markets to minimize the predominance of rentier
activities are far more important than changing interest rates.
The state of the economy, believe me, does not need any policy
dissonance between monetary and fiscal authorities. I have
repeatedly argued that neither fiscal nor monetary policies could
solve the problem. I had emphasized that “the cross-cutting causes

of the stagflation demands analytical breadth, depth and clarity
well beyond the typical requirements for monetary policy because
the networks of cause-effect relations that produce stagflation
extend far beyond the domain and reach of monetary policy.” I
have also argued that “it is a potentially disastrous error to expect
and to demand that monetary policy carries the economy either
through traditional instruments or in combination with expansions in
its balance sheet.” It is far more dangerous to anchor policy on the
savings of foreign nationals in a global economy where only the risk
lovers are more likely to be attracted at unusually high and harmful
premiums.
I am still convinced that there is an “urgent need to harness, direct
and put to effective use the best available intellectual and political
resources” by both the fiscal and monetary authorities to develop a
forward looking strategic macroeconomic management framework
for Nigeria.” This is the critical foundation upon which medium to the
long
term
effectiveness
of
macroeconomic
management
compatible with the long term wellbeing of Nigerians could be built.

It ought to be clear to all stakeholders that the economic and
welfare costs are growing every second as the recognition,
consensus and action lags by the relevant actors in the
macroeconomic policy space are lengthening!

6.0
NNANNA, O. JOSEPH
MAJOR GLOBAL ECONOMIC DEVELOPMENTS:
The review of global macroeconomic indicators suggests that the
uncertainties that characterized growth in 2015 have continued to
persist during the third quarter in 2016. The International Monetary
Fund has downgraded 2016 global growth forecast from 3.2 percent
to 3.1 percent. The key macroeconomic headwinds acting as push
factors include increased financial market volatility, labor market
rigidity, weak oil price and declining capital flows into emerging
markets. Overall, a tepid recovery has been recorded in the
advanced economies – especially, in the United States and the
United Kingdom.

However, in Sub-Saharan Africa, growth has declined driven by
persistent commodity price shocks and lingering effects of Brexit.
Similarly the aftershocks of growth rebalancing and uncertainties
surrounding the Brexit vote may have contributed to growth
slowdown in China and some countries in the Eurozone respectively.

Given the asymmetric effect of global macroeconomic fragilities on
growth performance across regions, there is need to exercise
caution in considering policy choices in addressing its consequences
on the domestic economy.
Recent domestic macro-economic developments:
The emergence of: twin deficits, rising inflation and unemployment,
negative output growth, illiquid foreign exchange market and
exchange
rate
volatility
characterized
the
major
adverse
developments during the review period.
Data from the National Bureau of statistics revealed that growth
further contracted sharply from -0.36 percent in Q1 to -2.06 in Q2 of
2016. Both oil and non-oil sectors contributed to the negative growth
in the Gross Domestic Product (GDP), as business confidence
declined to all time low. The overall “Confidence Index” registered
negative -24.1 percent, indicating respondents’ pessimism on the
macro
economy
during
the
period.
The
combinations
of
infrastructure deficits – especially, electricity supply; external reserves
constraints and exchange rate volatility impacted adversely on the

manufacturing sector. Consequently, factories operated at below
capacity, workers were laid off and unemployment worsened.

Generally, the headline inflation had been on an upward swing
since June, rising from 17.1 percent in July to 17.6 percent in August
and forecasted to rise even further - driven by rising food inflation
and the pass through effect of exchange rate depreciation. Other
contributing push factors include: rising petroleum products prices,
and increase in electricity tariff.
The monetary policy of the Central Bank of Nigeria during the period
was expansionary, deliberately designed to accommodate the
challenges faced by the fiscal authorities. And as such, Credit to the
Government rose by 151.6 per cent on year-on-year basis;
representing
115.5
percentage
point
increase
above
the
programmed target. The Government’s fiscal operations during the
period was generally, weak and characterized by huge expenditure
overruns and dwindling revenue collection, and resulted to
substantial overall deficit of -2.8 per cent of GDP. This deficit was
largely financed by the Central Bank and the deposit money banks.

Developments in the balance of payments (external sector) were
generally disappointing. In US dollar terms, the provisional visible
imports value as at Q2 2016 was $11.2 billion, while exports stood at
$9.3 billion, resulting to a current account deficit of some $404.7 (-
0.88 per cent of GDP).
The Stance of Monetary Policy – CBN’s Core Mandate:
The recent adoption of flexible exchange rate regime and time
consistent monetary policy rate (MPR) coupled with mix of demand
management strategies have contributed to the gradual accretion
to reserves, and improved portfolio inflows due to high asset yields
and stable macro- economic outlook.
In its 251st Meeting held on July 25-26th 2016, the Monetary Policy
Committee
after
its
thorough
review
of
macro-economic
developments during the period decided to abandon its fixed
exchange rate regime for a flexible regime and to adopt: (1) An
MPR of 14.0 per cent (2) A CRR of 22.5 per cent (3) A liquidity Ratio
(LR) of 30 per cent and (4) An asymmetric corridor of +200 and -500
basis points around the MPR. It should be recalled that these policy

targets were adopted against the backdrop of rising inflationary
pressures and foreign exchange market illiquidity. To be sure, the
major objective of this policy stance was to achieve the CBN’s
statutory mandate of price stability and to induce foreign portfolio
inflows in the face of weak commodity prices. Surely, the socioeconomic milieu under which the 252nd MPC Meeting met and
deliberated was not different from that of the 251st MPC Meeting.
Specifically, the sustained weakness in the global oil price has
continued to impact negatively on Nigeria’s external reserves in
particular, and the macro-economy as a whole. Thus far, the
external reserves have decreased from US$27.756 in March 2015 to
US$24.53 as at September 15, 2016. The heightened demand
pressure in the forex market has led to a substantial depreciation of
the naira exchange rate and stagflation. These developments
clearly undermine the achievement of the statutory mandate of the
CBN, if left unaddressed.

Conclusion

Against this backdrop, notwithstanding the seeming apprehension
the temporary negative impact which the recent adoption of a
flexible exchange rate regime and the pegging of the MPR at a
comparatively high rate, might have caused, nevertheless, the
consequence of this decision has started to yield visible positive
results, as inflows through the Central bank increased by 89.14
percent, from US$1,092.21 million in July to US$2,065.79 million in
August, 2016. With liquidity slowly but steadily returning to the market,
I see merit in sustaining the MPR rate 14.0 percent at a time when
inflation is running at above 17.0 per cent. With the restoration of
liquidity in the forex market, the naira exchange rate is bound to
stabilize and inflation will be restrained. Furthermore, I see merit in
sustaining the Cash reserve requirement at 22.5 per cent and the
Liquidity Ratio at 30.0 per cent and keeping the asymmetric corridor
unchanged, in order to safeguard the safety and soundness of the
financial system.

7.0
SALAMI, ADEDOYIN
The screaming news headlines announcing the call for reduction in
policy interest rates by the Hon. Minister of Finance provided an
interesting backdrop for this meeting of the Monetary Policy
Committee (MPC). Whilst less public channels of communication
may have been preferred, the seeming tension between Monetary
and Fiscal Policy reflects the challenging nature of Nigeria’s present
economic circumstances.
With other members, I voted at the end of discussions to hold the
Monetary Policy Rate (MPR) at its current level of 14percent.
In the run-up to this meeting, the National Bureau of Statistics (NBS)
released figures for both inflation and output. Overall or ‘Headline’
prices were reported to have risen by 17.6 per cent in August when
compared with the same month a year ago – the tenth consecutive
monthly increase since October 2015. Similar to Headline Inflation,
both Food and Core Inflation rose to 16.43percent and 17.20percent
respectively.

Whilst year-on-year inflation remains high and rising, the rate of
increase has however continued to slow when prices are measured
on a Month-on-Month basis. Available figures show that Aggregate
or ‘Headline’ Inflation rose by 1percent in August when compared
with the previous month – the slowest rate of increase since Feb.,
2016. The same measure shows that the increase in food price, at 1.2
per cent, remains unchanged when compared with July 2016. The
rate of increase in Core inflation also declined to 0.9 per cent in
comparison to the increase of 1.2percent the previous month.
The measure of Output, Gross Domestic Product (GDP), for the 2nd
quarter of the year (Q2-2016) showed that the production had
shrunk further thus providing official confirmation that our economy
had tipped into a recession. Worse still, the data shows widespread
and long-lasting contraction amongst some of the biggest sectors.
While Agricultural sector grew quite robustly, other major sectors
either contracted of slowed quite sharply.

Coupled with rising inflation, it is quite clear that the Economy is in a
place worse than the professional Economist’s nightmare of
stagflation!! Bank Staff presentation on Banking System Stability (BSS)
rounded-off a dismal picture of economic and business conditions.
The BSS presentation showed the non-performing loan (NPLs)
portfolio of banks in Nigeria had risen to 13.42 per cent – to think it
had been officially recorded at 4.88 per cent at the end of 2015! Not
only is the ‘official’ figure now a multiple of the regulatory threshold
of 5percent, I continue to be very fearful that the figures on offer
may not represent the full extent of the balance sheet weakness of
the Nigerian Banking System.
Theory and evidence around the world is clear that the Regulator is
‘always the last to know’. Indeed, the Regulator only catches up
with Sector Operators when a crisis blows open. Given the
fundamental weakness of the Balance Sheet of the Central Bank of
Nigeria, the prospect of a banking system crisis doesn’t bear thinking
– yet, despite the assurances of Bank Staff and Management, I
remain concerned.

Given the foregoing, it was quite clear that colleagues and I would
have our work cut-out trying to respond appropriately to the cocktail
of challenges.
In voting to hold the MPR unchanged, I take the view that raising
interest rates cannot solve any of the challenges by which we are
confronted. Reducing rates will, given the present circumstances,
also not address the issues identified in previous paragraphs.
In a recession, raising interest rates will further damage the economy
by reducing much needed investment. Furthermore, the financial
stability issues identified will also worsen as the higher cost of credit,
arising from raising interest rates, undermines the ability of borrowers
to repay outstanding loans. The prospect of attracting foreign
capital inflows represents perhaps the only reason which can be
advanced for a higher Policy rate. This prospect, as I will now argue,
is an exercise in futility.

As I argued at the meeting in July when a majority of MPC members
decided to raise MPR, the fundamental misalignment of Nigeria’s
Policy Stance made Nigeria an unattractive destination for any but
those with extreme risk appetites to invest. I haven’t changed that
view. Indeed, it was strange – almost macabre - to witness a Central
Bank which had spent much time disavowing foreign capital reverse
itself and expect to be credible. Since that meeting, the Central
Bank has proceeded to picking winners and losers; micro-managing
all aspects of forex market activity. This position is unsustainable. In
addition to continuing to severely erode confidence in Nigeria’s
policy making, manipulating the market in this way will eventually
breed sharp practices.
The current scarcity of Forex will not be resolved by the current
tactics. Resolving the Forex scarcity will require either borrowing what
is needed or inducing flows through fiscal measures – especially in
the oil sector.

The option of reducing interest rates also does not apply. Economic
theory suggests that reducing the cost of borrowing will stimulate
investment. This process assumes the absence of concerns around
Financial System Stability. Prior to August, despite banking sector
liquidity of almost 47percent - significantly above the 30percent
regulatory requirement - credit to the ‘Core Private Sector’ had
been growing slower than inflation – in other words, contracting
when adjusted for rising prices. This situation is unsurprising given the
worsening portfolio of non-performing loans.
In other words, releasing additional liquidity to reduce lending rates
in the face of the unwillingness of banks to lend simply provides
banks with resources that won’t be devoted towards productive
sector lending. In the best case scenario, Government Treasuries will
be the destination for any injection of liquidity as banks seek to
strengthen weak balance sheets. The worst case scenario has
easing liquidity conditions simply provide further ammunition to
destabilize a Forex market already reeling!!

What the foregoing illustrates clearly is that without reform, we are at
the limit of the effectiveness of Monetary Policy.
The present conditions call for a fundamental review of fiscal and
monetary policy interventions. With regard to liquidity management,
I have raised the possibility of variable Cash Reserve Ratio (CRR). This
may be instituted by moving CRR from being a lever of regular
Monetary Policy management to become a Macro-Prudential
Lever. If for example, 3-bands are set, Banks know well in advance
what CRR will apply as their Balance Sheet changes. This not only
removes some of the uncertainty which attends the run-up to MPC
meetings, it also provides a greater measure of freedom to Banks in
managing their affairs – that can’t be a bad thing!!

8.0
UCHE, CHIBUIKE U
The current state of the Nigerian economy clearly highlights the
urgent need for fiscal and monetary authorities to work more closely
together. With the economy in recession, industrial production
declining, unemployment and underemployment on the increase
and inflation and bank NPLs in double digit territory, it is clear to all
stakeholders that there is very little monetary policy, on its own, can
do to change the direction of the Nigerian economy. Tightening
money supply by raising interests rates, for instance, is unlikely to
contain the current inflationary pressures. This is especially so given
the structural nature of inflation in Nigeria. It is for instance public
knowledge that fuel and energy prices which have more to do with
exchange rates are important determinants of inflation in Nigeria.
With the troubling developments in the parallel market exchange
rate for the Naira, it is not surprising that the prices of petroleum
products in the country has come under pressure. There are for
instance, reports that petrol is now being sold above the official
price of N145 per litre in more than half of the states. This certainly is

not good news for inflation in our country. On the positive side, it is
pleasing to note that the view that MPR should be raised mainly
because it will encourage foreign portfolio inflows is gradually losing
currency within MPC. Any such inflows that do little to influence the
development of the real sector is at best speculative capital.
The alternative strategy for MPC is to reduce MPR with the hope that
it will help promote real sector development. This however makes
little sense at the present time. This is partly because real rates are
already in negative territory. Any move in the above direction will
therefore
further
discourage
savings
and
impede
bank
intermediation. Perhaps more important is the fact that perennial
structural problems with our economic production infrastructure has
consistently made it difficult for banks to narrow the variance
between their lending and deposit rates. In the present situation
where banks are forced to provide their own electricity, security,
water supply and sometimes roads, it would be foolhardy to expect
the interest rate variance of such banks to reduce materially simply
by reducing MPR which is already in negative territory in real terms.

In the light of the above, it is clear that there is a limit to what
monetary policy can do. There is therefore need for more strategic
cooperation between the monetary and fiscal authorities if we are
to stand any chance of getting out of this recession. With the
possibility of a dramatic rise in both oil prices and quantities
produced in Nigeria greatly diminished, the above need for
cooperation is even more urgent.
Bluntly put, unless we are able to diversify our economy away from
oil rents, there may be no other viable path out of our current
recession. It is in the light of the above reality that I believe that the
current talk about Nigeria borrowing and spending its way out of this
recession needs to be contextualized. In recent times, for instance,
we have seen the Nigerian debt profile rising unenviably with very
little, in terms of economic growth, to show for it. It is for instance, fair
to state that Governments, at various levels, have mostly been
borrowing to meet recurrent expenditure. Without materially
improving the infrastructure necessary for real sector development
and economic growth to take place, the idea that our country

would borrow and spend its way out of this recession will remain an
illusion. The obvious pressure to continue in our bad habit of
borrowing simply to meet recurrent expenditure must be resisted.
Given the current level of oil prices, it is clear that we do not have
any obvious cash flow streams that can help repay our currently
ballooning national debts. It is therefore safe to conclude that these
debts will increasingly constitute a problem for our economy, which
is already in dire straits, at least in the short and medium term.
In the light of the above, the view that we can spend our way out of
the present recession needs to be carefully rethought and
rephrased. This can only make sense if recurrent expenditure of
government is drastically curtailed. For this to happen, the over
bloated size of government, which is the elephant in the room, has
to be addressed. This will create the conducive environment
required for government to pay more attention to capital
expenditure. This will help promote the development of the
necessary developmental infrastructure that is critical to real sector

development and the diversification of our economy away from oil
rents.
Based on the above arguments, I have come to the careful
conclusion that the best line of action for MPC at the present time
will be to maintain status quo. It is my hope that we will in future see
more cooperation between the fiscal and monetary authorities.
While it is possible for us to borrow and spend our way out of the
current recession, this can only be possible if government recurrent
expenditure is drastically reduced. The focus of Government must be
the development of infrastructure necessary for the promotion of
real sector development.
I therefore vote as follows: (i) to retain the MPR at 14.00 per cent; (ii)
to retain the CRR at 22.50 per cent; (iii) to retain the Liquidity Ratio at
30.00 per cent; and (iv) to retain the Asymmetric Window at +200
and -500 basis points around the MPR.

9.0 YAHAYA, SHEHU
The Domestic Economy
With a GDP fall of 2.06% in Q2 2016 year on year, the reality of a
recession has hit the Nigerian economy, but a recession that is
combined with considerable inflationary pressure. The effects of the
disruptions in oil production, gas output that have been experienced
in the last few months have combined with the consequent
reductions in electricity production and forex shortages to impact
significantly on the GDP of the country. The most significant
contraction came from the oil sector, where output fell 17.5%, and
this obviously had a big effect on oil-related or oil dependent sectors
that are nominally classified as non-oil. Hence the industrial sector
output fell by 2.03%, with the sharpest decline occurring in the food,
beverages and tobacco sub-sector. Construction also declined by
0.28%. Worryingly, disruptions to oil output persisted into the third
quarter. This means that the fall in GDP may not yet have bottomed
out. Only domestic food output presents a bright figure, with output
increasing by nearly 1%, led by increases in cassava, yam and

livestock- and this is before the harvest season in the northern part of
the country. This, along with the policy measures being implemented
by the government and the Central Bank to stimulate agricultural
production, gives a basis for some guarded optimism.
The delay in implementing the budget, particularly capital
expenditure, has meant that the stimulatory objective of the budget
is yet to kick in. The government is currently making efforts to speed
up the implementation of the capital budget, but this will not come
in time to have the desired positive impact on third quarter growth.
One of the more far-reaching consequences of the economic
recession and the delayed budget implementation is the steady
increase in the rate of unemployment for each of the last six quarters
since Q4 2014, at a time when it is more difficult to evolve alternative
survival measures.
The rise in price levels are also persisting, with the headline inflation
at 17.61%, year on year, in August. Food inflation was at 16.43%,
while core inflation was 17.21% during the month. Imported food,
bread and cereals (due to cost of rice and wheat imports)m made

a substantial contribution to the inflationary pressure in August and
this is largely attributable to the naira depreciation effect. Despite
the rise in general price levels, it is pertinent to note that the monthon month increase in headline inflation for August 2016 is 1%, which is
the lowest since February 2016. It is therefore hoped that the
inflationary pressure, though likely to increase in the next few months,
may be beginning to slightly taper off, unless fresh shocks hit the
economy. It is also pertinent to note that the inflationary pressure
was mainly (but not exclusively) stoked by the increase in fuel prices
and the depreciation of the Naira.
With regard to the foreign exchange market, there is still substantial
pressure on the value of the Naira, despite the many measures that
are being deployed by the Central Bank to address this challenge.
Firstly, non-oil exports have not been able to ameliorate the fall in
foreign exchange earnings due to the fall in output and price of oil.
Non-oil exports are estimated to have fallen by 27% between June
and July 2016. Secondly, the liberalization of the foreign exchange
market, the managed float and the innovative use of futures markets

have rationalised the market, but have not yet attracted sufficient
levels of foreign portfolio investments into the country or sufficiently
closed the gap between the inter-bank and parallel foreign
exchange markets. One of the key factors is the uncertainty over the
level of oil output, which has compounded the low prices. Hence
the level of foreign reserves continues to fall steadily. In this regard, it
will be difficult to significantly increase confidence in the foreign
exchange market until the supply disruptions have been curtailed.
Although the banking and financial sector is still robust, it is obviously
coming under increasing pressure. It is coping with the depreciation
in the value of Naira because of the net positive foreign assets
position of the DMBs, but there are increasing challenges with
respect to non-performing loans, especially in sectors such as oil and
gas due to foreign exchange exposures, and in power and energy.
ROEs and ROA are also suffering, but deposits and assets are still
rising. While vigilance must remain high, there is no immediate threat
to the sector.

The Global Economy
Prices in the economies of Nigeria’s main trading partners are low
and there is little chance for any price surges. Oil prices are also likely
to remain weak over the medium term, despite occasional short
term surges driven by specific events, mainly due to over-production,
uncertainties over OPEC output controls and weak growth in the
global economy. Growth in the US is positive, but still relatively low,
growth in EU countries is quite weak. Brazil, Japan are faced with
very low or negative growth rates in the medium term and the
effects of Brexit are still generating uncertainties in the global
economy. While growth is still high and stabilizing in China and
expanding in India, the overall picture is such that there is unlikely to
be a major impetus to growth in Nigeria from substantial demand
increases in the global economy in the near term.
Summary and Conclusion
There are clearly many factors combining to determine the current
dynamics of the Nigerian economy. At this moment however, the
main nexus for the short term appears to be the foreign exchange

market. Following the liberalization of the market, it is necessary to
stabilize the value of the Naira. This will help provide the right signal
to allow better planning for domestic investments, give an incentive
to foreign investors, stabilize PMS prices, thereby stemming any
additional inflationary pressures therefrom and help alleviate
speculative pressures in the market. The key thing is to augment the
supply of foreign currency in the market and stabilize reserves. This
must be done in the short term to allow time for the various policy
measures articulated by the government to be implemented and
have some impact on diversification and local value addition, which
will mainly be visible only in the medium and long term. This must be
done without undermining efforts to re-generate growth. At the
same time, it is necessary to maintain stability in the financial sector
and avoid compounding the challenges facing financial institutions.
Much of what needs to be done has to come from the fiscal
authorities. Monetary policy instruments can only play a minor role as
they will have very limited effectiveness at this particular juncture.

At the last MPC meeting in July, the monetary policy rate was raised
by 200 basis points in an effort to stave off inflationary pressures and
to attract foreign portfolio investments. Capital importation in the last
3 months has risen to just over US1 billion, much higher than in the
previous months. However, about two-thirds of that occurred in
June, before the last MPC meeting, raising questions as to whether
the primary impetus for this was the increase in rate or simply the
effect of the liberalization of the forex market. Also, as mentioned
above, although headline inflation rose in August as compared to
July, the rate of increase was lower than in the previous 5 months.
How much this is attributable to the policy rate hike is not clear,
especially since a close look at the components contributing to the
headline inflation reveals that they are largely related to Naira
depreciation and PMS de-regulation effects.
In consideration of the above therefore, it is important to have a
clearer picture of the effects of the last policy rate increase before
additional measures in that direction could be taken. Another policy
raise at this time should not be contemplated as it would be

counter-productive in a situation of deepening recession. It would
also make public debt service more difficult as well as complicate
the challenges facing the financial sector without necessarily
delivering a substantial increase in PFI. Yet, lowering the policy rate is
not appropriate, not just because the effects of the last raise are yet
unclear and a complete reversal within 2 months would be unwise,
but also because price levels are still rising and are forecast to
continue rising until the end of the year
I therefore vote to maintain the current policy stance with respect to
MPR, the corridor, CRR, liquidity ratios.

10.0 EMEFIELE, I. GODWIN, GOVERNOR OF THE CENTRAL BANK OF
NIGERIA AND CHAIRMAN, MONETARY POLICY COMMITTEE

Global economic conditions remained weak in the first two quarters
of 2016 as short-term outlook dampened. Consequently, the 2016
global growth forecast was downgraded to 3.1 percent and 2.4
percent by the IMF and World Bank, respectively. These reflected
the weak demand, fragilities and uncertainties in both developed
and developing economies. Recovery in the United States, though
positive, remains marginal, while the palpable fear of deflation
continued to threaten productivity and demand in the Euro Area
and Japan. With the June 2016 vote to exit the European Union,
prospects of the UK economy seem to have been undermined. The
ongoing rebalancing and slowdown in China together with the
weak performance of the most emerging markets and developing
economies further complicated the state of the global economy,
worsened the volatilities in the financial markets and diminished
short- to medium-term outlook.

Altogether, the weak global conditions are having protracted
adverse effect on the Nigerian economy as they expose the deep
structural weaknesses that are inherent in the macroeconomy.
Recent data indicate that Nigeria tipped into technical recession in
the first of 2016 with two consecutive quarters of contraction. From
an output growth of 2.1 percent in 2015Q4, the economy
contracted by 0.4 percent in 2016Q1 and 2.1 percent in 2016Q2
despite a quarter-on-quarter growth of 0.8 percent. The 2016Q2
contraction reflected the 17.5 and 0.4 percent decline in oil and
non-oil GDP, respectively; with the latter accounting for 91.7
percent of overall performance. The moderate contraction of the
non-oil sector was cushioned by positive growths in: agriculture;
information & communication; water supply; arts, entertainment
and recreation; professional, scientific and technical services; and
Education and Other Services.
As I noted in my earlier statement, the contractions during in the first
half of 2016 were traceable to the legacy shocks experienced since
2014. Noticeably, the spill-over effect of lower oil prices on foreign

exchange availability and constricted fiscal space was reinforced
by acute energy shocks (fuel and electricity), weak domestic
demand and poor financial markets sentiments to weaken the
performance and prospects of the domestic economy. As the
effects of the underlying shocks lingers, I cautiously sense that the
contraction may persist, albeit at a reduced pace, throughout 2016.
I note that overriding weight of foreign exchange in the economic
performance reflects the high propensity of Nigerians to import.
Throughout the first six months of 2016 trade balances were
negative as year-on-year imports grew by 21 percent in 2016Q2
while exports fell by 29.4 percent. A cursory analysis suggests that
rising imports may reflect aversion for substandard domestic
products rather than an innate taste for foreign goods. Hence,
effective diversification of the economy may require quality
assurances, standards enforcement and consumer protection in
Nigeria. Nonetheless, I maintain that a broad-based diversification
of the economy remains non-negotiable, incontrovertible and
exigent at this time.

Nigeria’s economic performance in the first half of 2016 was
compounded by ascending inflation rate. From a single-digit rate of
9.6 percent in January 2016, year-on-year headline inflation grew to
17.1 percent in July 2016 and 17.6 percent in August 2016. The rising
inflation does not only reflect the ascents of both food and core
components of inflation, it more critically underlines the imperatives
of imported inflation which rose from 11.2 percent in January 2016 to
20.7 percent in August. Again, this typifies the undue influence of
foreign exchange on the every aspect of the Nigerian economy
and the urgent need to delink the country from these influences. I
note that although inflation rose in August, it is decelerating.
Similarly, month-on-month rates are steadily declining with headline
growth falling from 1.3 percent in July to 1.0 percent in August. This
can be attributed to the moderating impact of some of our past
actions to curb inflation.
Monetary and financial data shows an annualised growth of 12.1
percent for broad money supply (M2) in August 2016 relative to the
target of 10.9 percent. At annualised rates of 30.1 and 31.6 percent,

apiece, net domestic credit and private sector credit exceeded
their benchmarks of 17.9 and 13.4 percent. However, analysis of
money market interest rates showed that average interbank rate
stood at 25 percent between July and August 2016. I remain of the
view that rising private sector credit, irrespective of the interest rates,
needs to be properly channelled productive sectors with high level
local content of raw materials. I believe that this will have significant
multiplier effects on output and employment without amplifying
pressures in the foreign exchange market. This is especially
important as the naira-dollar exchange rate depreciated from
₦292.90/US$ on 19 July 2016 to ₦305.5/US$ as at 16th September
2016.
Overall, I note that as the impact of the shocks persists, the
challenges of the Nigerian economy will continue into the third
quarter. In-house analysis suggests high likelihood of growth
contractions, rising inflation, high unemployment rate and the twin
deficits lingering into quarter three. However, following our recent
policy decisions and as the legacy effects of the energy price shock

(fuel and electricity) dissipates; I expect key economic indicators will
improve in the near-term, in the absence of further adverse shocks.
We expect that as the effect of past policy decisions to begin to
touchdown fourth quarter outcomes may start improving. Hence, it
is genuinely likely as the base effect wanes, inflation rate may begin
its return to single in the first quarter of 2017. It is also highly probable
that the contraction would have reversed and the technical
recession ended at that date.
However, whereas we cannot fine-tune monetary policy endlessly, it
is imperative to understand the core of our economic challenges. I
note that Nigeria’s marginal propensity to import, at between 0.7
and 0.8, is significantly high. These figures imply that about 70 to 80
percent of every extra naira to economic agents in Nigeria will find
its way to the foreign exchange market to seek imports.
Expansionary macroeconomic policy, if not properly targeted, will
export jobs and debilitate Nigeria’s economy. I reiterate the need to
identify high impact productive ventures in Nigeria with near-zero
import content to benefit from fiscal stimuli. This will ensure that the

multiplier effect of the extra spending in maximised locally with
minimal leakage abroad.
In conclusion, I note that the choice before us today remains
intricate as it revolves around the trade-off between inflation and
growth in a stagnating economy. Though inflation remains largely
structural, evidence suggests that our bold policy decisions are
beginning to slow it down. Month-on-month rates are falling across
all components while the year-on-year rates are decelerating. It is
crucial to ensure that inflation rate in medium-term is effectively
curtailed.
Nonetheless, it is also important that we allow the effect of past
policy shocks to asymptotically dissipate in order not to subvert the
natural trajectory of impulse-response relationships. In addition, on
the balance of evidence, I assert that the current level of the
monetary policy rate is optimal and appropriate. Attempts to
reduce the rate at this time will be counterproductive as it goads
the time inconsistency problems associated with macro-policies. It

may also have tangential adverse effects on the foreign exchange
market if it deters inflows. The level of liquidity in the system is
adequate to drive growth if appropriately channelled. In this
regard, there is no need for the central bank to create new liquidity
as this may complicate inflation without benefiting growth.
The task now is to ensure that fiscal stimuli are creatively transmitted
to productive ventures with near-zero import content, if the
multiplier effect of the marginal spending is to be maximised.
Based on the foregoing, I vote to:
1. Retain the MPR by 200 basis points to 14.0 percent;
2. Retain the CRR at 22.5 percent;
3. Retain the asymmetric corridor at +200/–500 basis points; and
4. Retain Liquidity Ratio at 30 percent