Central Bank of Nigeria Communiqué No. 66 of the Monetary Policy
Committee Meeting, November 03, 2009


The Monetary Policy Committee (MPC) at its meeting today reviewed the domestic and
external economic and financial developments for the year so far. The international
economic scene, in the Committee’s view, has turned out to be better than was projected
about six months ago. Developed countries that were most adversely affected by the
severe economic and financial crises have shown some signs of improvement in terms of
output. However, questions remain on the durability and sustainability of the recovery.
There are also concerns over the high unemployment rates in these economies, although
the stock and housing markets showed some evidence of picking up. The financial sector
has been stabilized and measures are set to closely monitor and regulate it. The prices of
primary commodities including crude oil have risen largely due to the fiscal and
monetary stimulus and on news of recovery. The rise in commodity prices however has
given rise to concerns about resurgence of inflation in the near future. Emerging
countries on their part have registered fairly good growth rates and are poised to make
further gains in 2010. The main concerns in the international economy relate to the
robustness of the recovery and the possibility of incipient inflationary tendencies. It is
against this background that the question of timing and dimension of fiscal and monetary
tightening is being debated.

The Committee reviewed the domestic economic developments bearing in mind the
evolving international economic and financial situation. The review underscored the
need for strengthening the on-going efforts at working out economic policies with
reference to a desirable medium term path of economic growth along with price and
financial stability. Monetary policy, the Committee emphasized, has to play an active
role in the fulfillment of this task.

In the short run, however, the space available for monetary policy is somewhat limited by
the uncertainty about the sustainability and robustness of economic recovery in most
major trading partner countries, the fiscal constraints largely brought about by the

growing gap between the rising expenditure demands and revenue receipts and the
overall deceleration in domestic economic activities. The Committee noted with
satisfaction that there has been a gradual downward movement in inflation in recent
months but observed that this has mirrored essentially the slack demand. The Committee
also noted that structural measures currently being undertaken to strengthen the banking
sector and to foster financial stability would pave the way for improved effectiveness of
monetary policy in the short to medium term. The Committee welcomed the recent
upward movement in the prices of crude oil in international markets and hoped that it will
be sustained in the near future. It considered the external payments situation to be
manageable. In the Committee’s view, the behavior of short term money market interest
rates and exchange rates is in general consistent with the market fundamentals.

Key Macro-economic and Financial Developments

Output and Prices: Data on real GDP growth for Quarter 3 of 2009 is not yet firm but the
provisional estimate of the National Bureau of Statistics (NBS) is 7.58 per cent. The NBS
reported that in Quarters I and II, output grew by 4.50 per cent and 7.22 per cent,
respectively. The Committee felt that on the basis of the output growth recorded thus far
and other indicators, growth in 2009 would remain robust.

The inflation rate as measured by the year-on-year increase in ‘all items’ consumer price
index was 10.4 per cent in September 2009. This outcome is lower than the headline
inflation of 15.1 per cent in December 2008 and lower than the average headline inflation
of 12.6 per cent for the first 9 months of the year. Food inflation has been between 12.5
and 13.0 per cent in Q III of the year.

Monetary and Financial Market Developments: Broad money (M2) at the end of
September 2009 showed an increase of 5.6 per cent on a year-on-year basis. The year-onyear movement in narrow money (M1) was negative 4.2 per cent as at end-September
2009 mainly on account of the decline in demand deposits. The trends in money supply
movement reflect the fall in net foreign assets and slowdown in credit to private sector.

This implied that the aggregate demand is not adequate, suggesting the need for the
continuation of an accommodative monetary policy.

Notwithstanding the low monetary growth, money market rates, reflected market
realities. With the inter-bank money market guarantees in place and the measures to
strengthen the banking sector, confidence in the money market has improved. This is
reflected in the downward movement in the daily unsecured call rates. The average call
rate for September 2009 was 9.98 per cent compared with 10.38 per cent in August and
17.64 per cent in July. The secured open buy-back (OBB) rate was 6.71 per cent for
September, 2009, a shade higher than the 6.67 per cent in August but lower than the 7.47
per cent in July. The spread representing the counterparty credit risk thus narrowed to
327 basis points in September as against 365 basis points in August and 1017 basis points
in July. In October, the call rate averaged 6.95 per cent while the average OBB rate was
6.08 per cent, the spread being mere 87 basis points.

The Committee noted that in October excess reserves of banks with the CBN were high
with the average daily excess reserves exceeding the average in any of the preceding four
months of the year. Some banks took recourse to standing deposit facilities with sharp
increase since the middle of the month. No bank accessed the standing lending facilities
during the same period. While this could be considered a structural phenomenon in view
of the mid-month Federation Accounts Allocations, the sharp recourse to standing deposit
facility and non-use of the standing lending facility in the latter-half of the month seem to
suggest that there is scope to reset the rates on standing facilities so as to eliminate
perverse incentives and encourage banks to enlarge their asset portfolios in a prudent
manner.

Stock market developments continued to be marked by caution. In October 2009, the
year-on-year declines in the average share price index and market capitalization were
47.0 per cent and 42.4 per cent respectively. The declines, however, are an improvement
over the average declines of 57.6 per cent in the share prices and 50.7 per cent in market
capitalization in the first nine months of the year. This may be attributable to the

emerging news that the financial conditions of the domestic banking sector has been
strengthened by the injection of funds by the CBN and the major stock markets of the
world have shown improved investor sentiments following reports of imminent recovery
in the medium term.

External Sector Developments: The foreign exchange market has been stable. The
official exchange rate stood at an average of N149.3578 per US dollar in October 2009.
The inter-bank market rate averaged N150.1252/$US. There was thus a slight
appreciation of the Naira during the month. The spread between the rates has continued
to be insignificant.

Foreign exchange reserves stood at US$43.34 billion as at end September 2009, an
improvement of about US$ 1.64 billion over August, mainly owing to the receipt of the
SDR allocation. As at October 30, 2009, foreign exchange reserves are provisionally
estimated to be US$43.05 billion. Crude oil prices in the international markets have
edged upward in recent weeks. If the current oil price trend is sustained and if the
expected recovery in both developed and emerging countries is realized, there will be
further improvement in the level of foreign exchange reserves, with implications for
liquidity and exchange rate management. The Committee will continue to ensure stable
exchange rates determined by market forces.

The Committee’s Considerations

The Committee observed that while inflation has decelerated, it is important to recognize
that seasonal factors and the planned deregulation of the prices of petroleum products
pose a major risk to inflation outlook in the near to medium term. It is this context that
heightens the criticality of the policy dilemma now being faced by the Central Bank of
Nigeria (CBN). Providing further impetus to the current accommodative monetary policy
could be inflationary in the short to medium term whereas the gap between the likely
output growth and the trend rate of growth as well as the fragility of economic recovery
in many of the systemically important countries point to the need for maintaining

monetary accommodation along with reasonable fiscal stimulus. The Committee also
noted the existing paradox of the co-existence of system-wide liquidity shortages as
reflected in the data on monetary and credit aggregates and abundant liquidity with some
banks as evidenced from the data on standing facilities. The CBN, in the light of these
considerations, has to take a balanced view of the measures required for fostering growth
prospects and containing inflationary pressures on a sustained basis and also to further
strengthen the liquidity management.

Decisions

In the light of the above, the Committee took the following decisions:

1. The Monetary Policy Rate (MPR) will remain unchanged at 6 per cent, but an
asymmetric corridor of interest rates around the MPR is introduced. The rate on
the standing lending facility will remain at 200 basis points above the MPR, while
the rate on the standing deposit facility will be 400 basis points below the MPR.

2. There will be quantitative easing to bridge the gap currently estimated at about
N500 billion between the levels of the current monetary aggregates and the
benchmark levels for 2009. The modalities for quantitative easing include
investments in bonds to be issued by Asset Management Company (AMC). The
setting up of AMC, however, is subject to the approval of the National Assembly.
Other modalities include the redemption of promissory notes issued by the
Federal Ministry of Finance as well as by the CBN in connection with the
retirement of debt and liabilities arising from purchase and assumption of failed
banks.

3. Purchase of loans by banks under the AMC will be based on terms aimed at
strengthening the balance sheets with a focus on asset quality, improving liquidity
and capital adequacy as well as on reducing debt overhang relating to the stock
market in order to stimulate activity in the capital market.

4. With effect from November 16, 2009, the temporary ban placed by the CBN on
the use of Bankers’ Acceptances (BAs) and Commercial Papers (CPs) will be
lifted. Guidelines will be issued by the CBN prior to that date.

5. In view of the fact that the audit of banks have been concluded and adequate
provisions have been made for non-performing loans and to stimulate credit
growth and strengthen banks’ balance sheets, the 1 per cent general provision on
performing loans contained in the existing prudential guidelines is hereby waived
for the year 2009 as a countercyclical measure. New prudential guidelines will be
issued before the end of Q1 2010.

The totality of these measures is aimed at improving system liquidity and financial
stability to regenerate confidence in the Nigerian markets and to further stimulate growth.
The MPC is conscious of the upside risks as a result of quantitative easing but holds the
view that progress in the execution of capital projects and favourable outlook on
agricultural output growth will moderate the upside risks. The priority, therefore, is to
stimulate growth in output and to ensure financial stability with a view to improving the
effectiveness of monetary policy.

Sanusi Lamido Sanusi
Governor,
Central Bank of Nigeria
Abuja

November 3, 2009