Central Bank of Nigeria Communiqué No. 90 of the Monetary Policy Committee
Meeting of Monday and Tuesday, July 22 and 23, 2013
The Monetary Policy Committee met on July 22 and 23, 2013 with 10 out of the
12 members in attendance. A new member, Mr. Stephen O. Oronsaye, who is a
Board member, replaced Professor Sam Olofin whose tenure as a Board
member had expired. The Committee reviewed the economic conditions and
challenges that confronted the domestic economy in the first half of the year,
particularly since the last MPC meeting in May 2013. It also re-evaluated the
short-to-medium term risks to inflation, domestic output, external balance and
financial stability.
International Economic Developments
Global economic recovery remained weak, as new risks have emerged
including the possibility of a further slowdown in growth in the emerging market
economies. The old risks of a recession in the Eurozone have persisted alongside
slowing growth in China and the possibility of tighter financial conditions when
central banks gradually exit from their current monetary accommodation
stance.

Consequently, global growth prospects have not improved. Blaming weaker
domestic demand and slower growth in several key emerging market
economies, as well as a more protracted recession in the euro area, the IMF in

July 2013 reviewed downward its global growth forecast. It also reviewed
downward its growth forecast for the US and China to 1.7 and 7.8 per cent, from
1.9 and 8.0 per cent in April 2013, respectively, but raised the forecast for the UK
from 0.7 per cent to 0.9 per cent in the same period. For the Eurozone which has
seen its longest recession since monetary union, the IMF projects a further
contraction of 0.6 per cent in 2013, which more or less doubled the earlier
forecast in April. The IMF has also cut the growth forecast for Brazil, South Africa,
India and Russia to 2.5, 2.0, 5.6 and 2.5 per cent from 3.0, 2.8, 5.8 and 3.4 per
cent, respectively. Japan’s growth rate forecast is projected at 2.0 per cent, up
from a forecast of 1.5 per cent.

The slowdown in global growth is likely to impact on commodity prices and thus,
adversely impact oil exporting countries like Nigeria. In addition, continued
fragility in financial markets continues to generate bouts of capital flow reversals
and inflows that are potentially disruptive to emerging and transition markets.
Domestic Economic and Financial Developments
Output
The National Bureau of Statistics (NBS) estimated the real Gross Domestic
Product (GDP) growth at 6.72 per cent for Q2 2013, slightly higher than the 6.56
per cent recorded in Q1, and 6.39 per cent in Q1 of 2012. Overall, GDP growth
for fiscal 2013 was projected at 6.91 per cent up from 6.58 per cent in 2012. The

non-oil sector remained the major driver of growth recording 7.91 per cent in
contrast to the growth rate of -0.68 per cent for the oil sector during the second
quarter of 2013. The drivers of the non-oil sector growth remained agriculture;
wholesale and retail trade; and services which contributed 1.72, 1.47, and 2.90
per cent, respectively. The Committee noted the continued decline in the
contribution of the oil sector to overall GDP and the underlying factors
responsible for this state of affairs. These factors include; sustained oil theft which
has led to a decline in output volumes in the face of an uncertain international
oil market and price signals, weak infrastructure, and downside risks due to
discovery of shale oil and the emergence of other African oil exporters
competing for Nigeria’s traditional oil market.
Prices
Inflationary pressures continued to moderate partly in response to the tight
monetary policy and base effect. The year-on-year headline inflation
decelerated to 8.4 per cent in June from 9.0 per cent in May. Also, core inflation
declined significantly to 5.5 per cent in June from 6.2 per cent in May and 6.9
per cent in April. Food inflation, however, rose to 9.6 per cent in June from 9.3
per cent in May 2013. Notwithstanding the moderation in headline inflation,
there are benign risks on the horizon, including the possibility of accelerated
fiscal releases in the later part of the year and the effects of the upward review
in electricity tariffs in line with the MYTO following the implementation of the full
deregulation of the energy sector.

The six-month inflation outlook indicates that inflation would remain within single
digit territory due to base effect and tight monetary policy. However, the current
state of government finances is likely to generate increased borrowing. The key
risks to the outlook, therefore, remain fiscal operations, increased pressure on the
exchange rate due to excess structural liquidity in the banking system and the
possibility of a capital flow reversal in the medium term.
Monetary, Credit and Financial Market Developments
Broad money supply (M2) grew by 0.71 per cent as at end-June 2013 over the
level at end-December 2012. When annualized, M2 grew by 1.42 per cent,
compared with the growth of 2.70 per cent in the corresponding period of 2012.
Thus, M2 growth was also significantly below the growth benchmark of 15.20 per
cent for 2013 and 7.60 per cent for Q2 of 2013.
Interest rates in the interbank money market moved in tandem with the level of
liquidity conditions in the banking system. The average liquidity ratio was 67.79
per cent compared with the prudential requirement of 30.0 per cent. Thus, the
average inter-bank call and open-buy-back (OBB) rates, which opened at 12.07
and 11.91 per cent on May 20, 2013, closed lower at 10.42 and 10.29 per cent,
respectively, on June 28, 2013. However, the average inter-bank call and OBB
rates for the period were 11.80 and 11.46 per cent, respectively.
The recovery in the Nigerian capital market continued, as equities market
indicators were upbeat in the review period. The All-Share Index (ASI) increased

by 28.8 per cent from December 2012 to June 2013, while the equities Market
Capitalization (MC) increased by 27.3 per cent from N8.97 trillion on December
31, 2012 to N11.43 trillion on June 28, 2013. Improved earnings and investor
confidence in the economy contributed to the up-swing in stock prices. The
equities market median price-earnings ratio rose above the long-run median by
9.0 per cent in June 2013 indicating that share prices were recovering faster
than earnings and investor assessment of future returns was good.
External Sector Developments
At the Wholesale Dutch Auction System (wDAS), interbank and the BDC
segments of the foreign exchange market, the exchange rate depreciated to
N157.32/US$, N161.25/US$, and N163.00/US$ on July 19, 2013 from N157.30/US$,
N158.30/US$, and N159.50/US$ on 21st May, 2013. The Committee noted the
depreciation recorded in all segments of the foreign exchange market in the
review period on the back of a general sell-off by portfolio investors in emerging
and frontier markets following guidance by the US Federal Reserve Bank (FED)
with respect to its quantitative easing programs. It also observed that the
experience in Nigeria was not unique, as the spike in the US yields negatively
impacted financial markets globally. However, calm has since returned to the
financial markets following further clarifications by the FED that exit from
quantitative easing is not imminent and does not necessarily mean monetary
tightening. Thus, the Nigerian capital market has seen a rally, while the demand
pressure in the foreign exchange market has somewhat moderated. The

Committee, however, noted the build-up of structural excess liquidity in banks
balance sheets, which poses risks to the inflation and exchange rate outlook.
The Committee noted the increase in external reserves to US$47.99 billion as at
July 18, 2013 from US$43.83 billion at end-December, 2012, representing a rise of
US$4.16 billion or 9.49% year-to-date. This level of reserves provides cover for
approximately 11 months of import.

The Committee’s Considerations
The Committee was satisfied with the prevailing macroeconomic stability
achieved during the period, including the single digit inflation, stable banking
system, exchange rate stability, favourable output growth, capital market
recovery and growth in external reserves, thus sustaining internal balance and
external viability. The Committee also noted the recent volatility in the foreign
exchange market and also recognized that the commitment of the Bank to
defend the currency in the face of capital flow reversal and significant revenue
attrition has stemmed the depreciation of the naira. Consequently, the Bank has
been able to sustain the objectives of financial and price stability.
The Committee observed the build-up in excess liquidity in the banking system,
and expressed concern over the rising cost of liquidity management as well as
the sluggish growth in private sector credit, which was traced to DMB’s appetite
for government securities. This situation is made more serious by the perverse

incentive structure under which banks source huge amounts of public sector
deposits and lend same to the Government (through securities) and the CBN
(via OMO bills) at high rates of interest.
The Committee expressed strong concerns about the risks posed to government
revenues from oil theft, less than expected production, new discoveries of shale
oil, the fast increasing number of African oil exporters, the dwindling market for
Nigerian crude as well as the inevitability of a fall in global oil prices as well as
capital flow reversal, which may impact the current global (dollar) carry trade,
for which Nigeria has been a major beneficiary.
The Committee commended the Federal Government on its sustained efforts
towards fiscal consolidation in 2012 and stressed the need to reverse the loose
fiscal stance of 2013. The Committee articulated the monetary policy risks of
dwindling fiscal revenues to include: the crowding out effect of government
borrowing, depletion of excess crude savings and pressure on the exchange
rate. Available data indicates that capital expenditure is the first casualty of
dwindling government revenues as available resources are channeled into
funding non-discretionary recurrent expenditure.
The Committee considered the inflationary outlook for the rest of the year as
benign. However, principal risks remain largely due to the loose fiscal stance
and rising deficit, excess liquidity in the banking system and risks to the

exchange rate due to a combination of revenue shocks and external
developments.
Decisions
Having considered all the above factors, the Committee decided:
1. By a vote of 9 to 1 to hold the MPR at 12 per cent. One member voted for
a 50 basis points reduction;
2. By a vote of 9 to 1 to maintain the symmetric corridor around the MPR at
+/-2 per cent. One member voted for an asymmetric corridor;
3. Unanimity to retain the CRR at 12 per cent; and
4. 9 to 1 to introduce a 50 per cent CRR on public sector deposits. This will be
applied on Federal, State and Local Government deposits and all MDAs.
For other deposits CRR will remain at 12 per cent

Thank you.


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