Central Bank of Nigeria Communiqué No. 73 of the Monetary Policy Committee
Meeting, November 22-23, 2010
The Monetary Policy Committee (MPC) met on 22nd and 23rd November, 2010 to
review domestic and international economic and financial conditions in order
to reassess the options for monetary policy for the rest of the year and beyond.
On the global scene, the Committee noted with concern the continued
slowdown in global economic recovery, especially in the US against the
backdrop of the huge US trade deficit, requiring both domestic and external
rebalancing of demand.
On the domestic front, the MPC noted the high economic growth rate and the
progress made towards restoring stability in the banking sector. It, however,
observed with concern the continued high inflation rate and reiterated the
urgent need for fiscal consolidation and the continuation of comprehensive
economic and structural reforms to remove supply-side bottlenecks.
Key Domestic Macroeconomic and Financial Developments
Output and Prices:
The Committee observed the sustained impressive output growth recorded thus
far in 2010. Provisional data from the National Bureau of Statistics (NBS) indicates
that real Gross Domestic Product (GDP) is estimated to grow by 8.29 per cent in
the fourth quarter of 2010, up from 7.86 per cent recorded in the third quarter.
Overall GDP growth for 2010 is projected at 7.85 per cent compared with 6.96
per cent recorded in 2009. The non-oil sector remained the main driver of overall
growth.
The Committee, however, cautioned that the recent slowdown in economic
activity in some major advanced economies could have adverse effects on
commodity-producing economies like Nigeria, notwithstanding the expected
high crude oil prices in the international markets. While urging greater efforts at
diversifying the economy, the Committee stressed the need for policy reforms to
address the binding growth constraints on the domestic economy, especially,
infrastructural inadequacy. The Committee noted with satisfaction the progress

made thus far on the power sector front, but stressed the need for renewed
focus on the petroleum and agricultural policy sectors. The continued
dependence of the country on imported food and energy, which is totally
avoidable, is one of the main sources of erosion of our foreign reserves.
The year-on-year headline inflation (rebased) stood at 13.4 per cent in October
2010 relative to 13.6 per cent in September 2010. Food inflation was 14.1 per
cent in October, down from 14.6 per cent in September. However, core
inflation rose to 13.2 per cent in October from 12.8 per cent in September. The
persistence of high inflation remains a major challenge, when viewed against
the relatively good harvests, improved supply of petroleum products and weak
expansion of credit to the private sector. This reality further underscored the
need for addressing supply-side constraints in the medium to long term, and the
urgent need to restrain debt-financed government spending in the short term.
The MPC reiterated its earlier position on the threat of inflationary pressure arising
from high inflation expectations, calling for stronger fiscal prudence to support
the monetary policy stance. This is particularly critical for improving the
dynamics of policy coordination. Nevertheless, the Committee would continue
to monitor price developments with a view to taking appropriate policy
measures to stem any inflation threat and ensure that the upside risk to growth is
minimized.
Monetary, Credit and Financial Market Developments:
Provisional data showed that relative to end-December 2009, broad money
(M2) grew by 4.25 per cent in October 2010, which, when annualized
represented a growth of 5.10 per cent. Reserve money (RM), which stood at
N1,653.86 billion at end-December 2009, fluctuated downward and by
November 15, 2010, stood at N1,4449.95 billion.
Available data showed that in October 2010, aggregate domestic credit (net)
grew by 19.69 per cent over the December 2009 level, and by 23.63 per cent
when annualized. Credit to government (net), which grew substantially by 53.35
per cent over end-December 2009 (or 64.02 per cent on annualized basis), was
the major source of expansion in aggregate credit. Credit to the private sector,
grew marginally by 3.22 per cent (or 3.86 per cent on an annualized basis). In
general, the growth in monetary and credit aggregates remained below the
long term trends.
The interest rates at the interbank segment of the money market responded to
the increase in the Monetary Policy Rate (MPR) effected at the last meeting of
the MPC in September in line with policy expectation. Consequently, in October

2010, the average inter-bank call and open-buy-back (OBB) rates rose
significantly to 8.45 and 7.53 per cent, respectively, representing increases of 526
and 461 basis points from the 3.19 and 2.92 per cent recorded in the preceding
month.
Developments in market interest rates indicated that the retail lending rates
were still relatively high. The average maximum lending rate moderated slightly
to 21.85 per cent in October from 22.20 per cent in September while the
average prime lending rate stabilized at 16.66 per cent.
The weighted average savings deposit rate remained relatively stable while the
consolidated deposit rates increased to 2.31 per cent in October from 2.07 per
cent in September. Thus, the spread between the maximum lending rate and
the consolidated deposit rate narrowed marginally to 19.54 per cent in October
from 20.14 per cent in September.
The domestic capital market continued to show some signs of recovery. The AllShare Index (ASI) increased from 23,050.59 at end-September to 25,301.34 as at
15th November, 2010, or by 9.8 per cent. Market capitalization (MC) - equities
only, increased by 43.1 per cent from N5.65 trillion to N8.08 trillion over the same
period. The number of deals increased by 21.6 per cent, while the volume and
value of shares traded decreased by 38.5 and 62.7 per cent, respectively. The
increase in ASI and MC was principally due to the share price increases in the
Banking, Food & Beverage, insurance and Oil/Gas sectors, and new and
supplementary listings of shares on the exchange. The Committee believes that
the effective take-off of the Asset Management Corporation (AMCON) and
progress made on resolution of the banking system crisis have been major
contributions to this improvement in sentiment.
External Sector Developments:
The foreign exchange market remained relatively stable. The total foreign
exchange inflow in October was US$2.38 billion, representing a decrease of
US$0.32 billion or 11.85 per cent below the US$2.70 billion recorded in the
preceding month. Total outflows or payments in October amounted to US$3.46
billion, a decrease of US$1.62 billion or 31.89 per cent compared with US$5.08
billion recorded in the preceding month. Consequently, the net outflow during
this period was US$1.09 billion.
Inflows from autonomous sources in October were US$10.43 billion compared
with US$7.55 billion in September. Cumulatively from January-October 2010,
total foreign exchange inflows to the market amounted to US$ 88.32 billion
comprising funds from the CBN (US$21.15 billion) and from autonomous sources

such as oil companies, international institutions and home remittances (US$67.17
billion). The Committee noted with satisfaction the complementary role of
autonomous inflows in moderating demand pressure in the foreign exchange
market.
In October, the WDAS average closing rate was N151.25/US$ compared with
N151.07/US$ recorded in September, representing a depreciation of 18 Kobo
(0.12 per cent). On November 15, 2010, the WDAS exchange rate was
N150.29/US$ compared with N151.25/US$ for October, representing an
appreciation of 96 kobo (0.64 per cent)
At the interbank segment, the average buying and selling rates for October,
were N151.68/US$ and N151.78/US$, compared with N152.51/US$ and
N152.61/US$ respectively recorded in September, representing an appreciation
of 83 kobo (or 0.54 percent). On November 15, 2010 the corresponding rates
were N150.65/US$ and N150.75/US$ as against N151.68/US$ and N151.78/US$, in
October, registering an appreciation of 103 kobo (or 0.68 per cent)
At the BDC segment, the average buying and selling rates in October were
N151.98/US$ and N153.98/US$ respectively, compared with N152.30/US$ and
N153.80/US$ in September. The buying rate represented an appreciation of 32
kobo (0.21per cent) while selling rate represented a depreciation of 18 kobo (or
0.12 percent). The buying and selling rates on November 15 were N151.50/ US $
and N153.50/ US$ compared with N151.98/US$ and N153.98/US$ for October,
represented an appreciation of 48 kobo (or 0.31 per cent). Thus, the stability of
the naira exchange rate since the first half of 2009 continued into 2010. The
MPC believes that the relative stability in the foreign exchange market is likely to
be sustained in the near term. The Committee would continue to monitor
developments in the market to ensure that measures are taken to eliminate
speculative demand and exchange rate volatility.
The gross external reserves stood at US$34.27 billion on 15th November, 2010
compared with US$33.597 billion as at end-October and US$34.59 billion as at
end-September.
The committee noted the elevated demand for foreign exchange at the WDAS
which led to an increase in reserve utilization to defend the currency. It also
noted recent moderation of demand pressure following Central Bank’s
interventions to curtail speculative demand. It, however, stressed that the
solution to reserve accretion have to be in implementation of appropriate
reforms to industrial and trade policy aimed at reducing import-dependence,
and these are beyond the scope of monetary policy.
The Committee’s Considerations

The key concerns noted by the Committee were:
1.
The elevated inflation levels;
2.
Rising government expenditure and borrowings with the possible
crowding out effects on the private sector; and
3.
Demand pressure in the foreign exchange market, leading to reduction in
external reserves.
The view of the Committee is that the solution requires both fiscal and monetary
measures, and reiterated the need to eliminate unnecessary subsidies that add
to government expenditure and debt. There is need also for continuing reforms
in the economy particularly in the energy and agricultural sectors to curb high
import bills through appropriate fiscal policies. The Committee remains
conscious of its core mandate and reaffirms its commitment to price stability to
engender sustainable economic growth.
The MPC remained committed to exchange rate stability in order to attract
foreign direct investment and anchor expectations. The MPC emphasized
greater communications with stakeholders to remove speculative demand in
the foreign exchange market. It also held that, in view of the low price elasticity
of demand for imported necessities, depreciation of the currency would not in
itself address the structural problem of import-dependence.
The Committee continued to urge greater fiscal responsibility and commitment
to reforms that will enhance the effectiveness of monetary policy.
Overall, members agreed that there is need for tightening, but the discussions
centered on the form and the timing of the tightening. After due consideration
of the pros and cons of various policy options, the Committee agreed on a
majority decision of 6 to 4 members to retain the current policy rate, given the
need to retain flexibility and allow the effect of the previous rate increase to
work through the system, against the argument for immediate increase in view
of the elevated inflation risk. Also, the Committee agreed by a majority of 9 to 1
members to narrow the corridor around the MPR by reintroducing the symmetry
of +/- 200 basis points.
Decisions
The MPC’s decisions were therefore:
1.
To Retain the Monetary policy Rate (MPR) at 6.25 per cent.

2.
To adjust the corridor to +/- 200 basis points, implying Standing Lending
Facility (SLF) rate of 8.25 per cent, and Standing Deposit Facility (SDF) rate
of 4.25 per cent.
3. Maintain the policy stance of a stable exchange rate.
4. Continue to monitor inflationary trends with a view to taking appropriate
steps as and when necessary.
5.
On the stance of monetary policy in the year ahead, the Committee
reaffirmed that monetary policy would seek to exert pressure on
aggregate demand, thereby helping to lower inflation expectations.

In addition, monetary policy would stand ready to provide adequate and
timely liquidity to support credit dynamics that would sustain fiscal
mechanisms to bolster growth.
Sanusi Lamido Sanusi
Governor,
Central Bank of Nigeria
Abuja
November 23, 2010