CENTRAL BANK OF NIGERIA COMMUNIQUÉ NO. 128 OF THE MONETARY
POLICY COMMITTEE MEETING HELD ON THURSDAY 23rd AND FRIDAY 24th
JANUARY, 2020
The Monetary Policy Committee (MPC) held its 271st meeting, the first
in fiscal 2020, on the 23rd and 24th of January, 2020. The Meeting held
in an environment of sluggish global economic recovery and financial
market vulnerabilities, and tepid domestic growth. The Committee
appraised these developments and the outlook for the first quarter of
2020, as well as the rest of the year. All the Eleven (11) members of the
Committee were in attendance.
Global Economic Developments
The headwinds that characterized the global economy in 2019
showed signs of moderation, giving way to improved prospects for
economic recovery in 2020. Consequently, global output is projected
to grow by 3.3 per cent in 2020 from 2.9 per cent in 2019. The downside
risks to the global outlook, include: broad slowdown in the advanced
economies; resurgence of financial stress in the Emerging Markets and
Developing Economies (EMDEs); rising geo-political tensions in the

Middle-East; and extreme weather conditions in some regions. Output
growth across major advanced economies, remains fragile, due to
weak recovery in manufacturing activities and sluggish rise in global
trade. Consequently, growth in the Advanced Economies is projected
to slow to 1.6 per cent in 2020, from 1.7 per cent in 2019. With most
EMDEs facing brighter prospects, output growth is expected to
recover to 4.4 per cent in 2020 from 3.7 per cent in 2019. The major
impetus for this recovery is expected to come from India, Brazil and
Russia.
In most advanced economies, inflation remained below their long-run
targets, reflecting weak aggregate demand in the Euro Area and
Japan, as well as moderating wage growth in the US, despite the
robust job performance. Central Banks in the advanced economies
are thus, expected to continue with monetary accommodation into
the medium term. In the EMDEs, however, inflation prospects remain
mixed, with some economies facing stronger upside risks than others.
Domestic Economic Developments
Real Gross Domestic Product (GDP) continued to improve, although
slowly. It grew to 2.28 per cent in the third quarter of 2019, compared
with 2.12 and 1.81 per cent in the preceding and corresponding
quarters of 2018, respectively. The improvement in growth was driven,
largely, by the performance of the oil sector, which grew by 6.49 per
cent, while the non-oil sector grew by 1.85 per cent. Staff projections
estimate real GDP in Q4 2019 and Q1 2020 at 2.20 and 2.35 per cent,

respectively. The Manufacturing and Non-Manufacturing Purchasing
Managers’ Indices (PMI) grew further in December 2019, for the 33rd
and 32nd consecutive months, to 60.8 and 62.1 index points,
respectively. The optimism in growth prospects in Q1 2020, and the rest
of the year, is anchored on the enhanced flow of credit to the private
sector, to improve manufacturing activities, and financial and
exchange rate stability. In addition, the Bank’s continued intervention
in Agriculture, and Small & Medium Scale Enterprises (SMEs) is
expected to boost growth. Identified headwinds to growth, however,
include; uncertainty in the oil market, high unemployment, rising
public debt and security challenges across the country.
The Committee noted the continued uptick in headline inflation (yearon-year) in December 2019 to 11.98 per cent, from 11.85 per cent in
the previous month. The increase in inflation, which was anticipated,
was largely attributable to increase in both the food and core
components, by 14.67 and 9.33 per cent in December 2019 from 14.48
and 8.99 per cent in November, respectively.
The increase in the food component reflects largely seasonality effect
and the impact of the continued insurgency in some food producing
areas of the country. Although, Staff forecasts suggest a short-term
upward trend in prices, the Committee believes that the Bank’s
continued intervention in the real sector is expected to increase
domestic production and lower prices in the medium-term.

The Committee observed that broad money supply (M3) grew by 6.22
per cent (year-to-date) in December 2019. Aggregate Credit (Net)
similarly grew to 27.33 per cent in December 2019, from 23.12 per cent
in the previous month. This was largely attributed to an increase in
Credit to Government, which grew to 92.95 per cent in December
2019, from 72.36 per cent in the previous month. Credit to the Private
Sector also grew to 13.61 per cent in December 2019, from 12.82 per
cent in the previous month. Consequently, sectoral distribution of
credit between end-May 2019 and end-December 2019 was as
follows: manufacturing (N446.44 billion); General Retail and Consumer
Loans (N419.02 billion); General Commerce (N248.48 billion);
Agriculture, Forestry and Fishing (N160.94 billion); Information and
Communications (N156.47 billion); Finance and Insurance (N129.87
billion); Construction (N86.54 billion); and Transportation and Storage
(N68.61 billion), amongst others. The Committee observed with delight
that, over the last six months, aggregate credit grew by N2.0 trillion
and urged the Management of the Bank to sustain the current
momentum of improved flow of credit to the Private Sector, while
exploring other options with the fiscal authorities to strengthen the
legal framework for the enforcement of credit recovery.
Lower money market interest rates, in the review period, reflected the
liquidity overhang in the banking system, resulting from the restriction
of individuals and non-bank corporates in the domestic economy
from participating in OMO bill auctions. Consequently, the monthly
weighted average Inter-bank call and Open Buy Back (OBB) rates fell

sharply to 3.82 and 3.24 per cent, in December 2019, from 11.42 and
10.73 per cent, respectively, in the previous month.
The Committee noted the improved performance in the equities
market, as the All-Share Index (ASI) and Market Capitalization grew by
11.61 and 18.27 per cent, respectively, between end-October 2019
and 10th January, 2020. This was indicative of the shift by domestic
investors from the money market to the equities market in response to
the Bank’s policy to restrict their investments in the OMO bills auction.
The MPC also noted the improved performance and sustained
resilience of the banking system, evidenced by the continued
moderation of the Non-Performing Loans (NPLs) ratio from 6.6 per cent
in October to 6.1 per cent in December 2019. The Committee noted
that the improvement reflected the Bank’s continued deployment of
heterodox policies to ensure that NPLs fell below the prudential
benchmark of 5.0 per cent.
Outlook
Although global output is projected to expand moderately in 2020,
compared with the previous year, the overall medium-term outlook
for the global economy remains uncertain, due to the persistence of
several headwinds. These include: the lingering trade tensions
between the US and its major trading partners; rising levels of both
corporate and public debts; continued geopolitical tensions in the
Middle-East; fragile recovery of manufacturing activities; and the

narrowing policy space by which central banks in the advanced
economies can respond to future macroeconomic shocks. In
addition, predicted weather-related disasters could pose further
threats to global output recovery.
On the domestic side, available data on key macroeconomic
indicators show prospects of improved output growth for the
economy in 2020. Revised projections for 2020, show that the
economy is expected to grow by 2.50 per cent (IMF), 2.10 per cent
(World Bank) and 2.35 per cent (CBN). The underlying projection is
anchored on the following conditions: enhanced flow of credit to the
real sector of the economy; sustained stability in the exchange rate;
continued CBN interventions in agriculture and non-agricultural Small
and Medium Enterprises (SMEs); and the effective implementation of
the Economic Recovery and Growth Plan (ERGP). The downside risks
to this projection are primarily the rising stock of public debt and lack
of fiscal buffers. Others include the persistent security threat in major
food-producing areas, poor and inadequate infrastructure and weak
public and private sector investment.
The Committee’s Considerations
The Committee noted the persistent increase in the inflation rate,
which stood at 11.98 per cent in December 2019. It also noted that
the inflation was driven by both monetary and structural factors.
Having addressed the monetary factors, the headroom for further
monetary policy measures has become constrained, being

supported by empirical evidence which suggests that inflation above
12.00 per cent is inimical to output growth in the Nigerian economy.
The MPC thus called on the fiscal authorities to speedily address
legacy structural impediments giving rise to upward-trending price
developments.
Amongst
these,
the
Committee
identified
infrastructure deficit and the long-standing clashes between
herdsmen and farmers, which are constraining domestic production
and contributing substantially to the rise in food inflation. The MPC,
therefore, urged the Federal Government to relentlessly seek
innovative ways of addressing security challenges across the country
in order to boost aggregate food supply. The Committee further
noted the contribution of imported food and other tradeables to the
rise in price levels but emphasized the opportunity to ramp up
production of domestic substitutes supported by the Bank’s
development finance initiatives, particularly in agriculture and
manufacturing sectors.
The Committee noted the improvement in the financial soundness
indicators, growth in assets of the banking system and the gradual
switch in the composition of DMB assets from investments in
government securities to growth in credit portfolio. It, however, noted
that lending rates at the retail segment of the market had remained
fairly sticky downwards as deposit rates had declined substantially. It
also noted that in some cases, DMBs were not encouraging term
deposits in their portfolios and therefore, emphasized the Bank’s

commitment towards the implementation of the Loan-to-Deposit ratio
(LDR) policy.
On fiscal operations, the Committee applauded the Government for
the recent signing of the 2020 Finance Bill which opens a new vista of
opportunities in public financial management. The MPC, however,
cautioned that public debt was rising faster than both domestic and
external revenue, noting the need to tread cautiously in interpreting
the debt to GDP ratio. The Committee also noted the rising burden of
debt services and urged the Fiscal Authorities to strongly consider
building buffers by not sharing all the proceeds from the Federation
Account at the monthly FAAC meetings to avert a macroeconomic
downturn, in the event of an oil price shock.
It urged Government to gradually reduce reliance on oil receipts and
focus on revenue diversification through reforms of the tax system. The
Committee also called on Government to rationalize fiscal
expenditure towards reducing the current excessively high cost of
governance.
The MPC expressed concern about the rising inflation, which
increased consecutively in the last 4 months as at December 2019 to
11.98 per cent and higher than its target range of 6-9%. This rising price
level is attributable to a combination of structural and supply side
factors, expansionary fiscal policy; and growth in money supply arising
from rising liquidity surfeit in the industry due to changes in the Bank’s
OMO policy. In furtherance of its primary mandate to maintain price

and monetary stability and in view of the anticipated medium-term
liquidity surfeit from maturing OMO bills held by local private and
institutional investors, which would not be rolled over, the Committee
considered it prudent to raise the CRR to curtail liquidity surfeit in the
banking system.
The Committee is confident that increasing the CRR at this time is
fortuitous as it will help address monetary-induced inflation whilst
retaining the benefits from the Bank’s LDR policy, which has been
successful in significantly increasing credit to the private sector as well
as pushing market interest rates downwards. The Committee further
encouraged the Management of the Bank to be more vigorous in its
drive to improve access to credit through its pursuit of the Loan-todeposit ratio policy as doing this would help, not only in creating job
opportunities but also help in boosting output growth and in
moderating prices. It is noteworthy that Gross credit in the industry
grew by N2 Trillion between May 2019 and December 2019;
channeled primarily to the employment-stimulating sectors such as
agriculture and manufacturing, in addition to increased lending to
the retail and SME segments, which is expected to help boost
domestic output growth in the short to medium term. To retain the
gains from credit expansion and current industry focus on lending, the
Committee advised the Bank to sustain its LDR Policy and in addition
continue to deploy its DCRR policy which directs new funding for
greenfield projects and expansion to critical sectors of the economy.

The Committee’s Decision
On the arguments to tighten, the Committee noted that given that
inflation rate inched up in December 2019 and that the rate is still
above the upper band of the 6-9 per cent threshold, tightening may
be necessary to tame the rising trend in inflation. In addition, the
relatively bearish outlook of the equities market indices points to
waning investor confidence in equity in preference for coupon rate
on bonds. Raising the policy rate, could be a policy choice to reverse
the tendency and attract more foreign portfolio investments. Also, the
risks to the level of reserves persist as prices of oil futures remain
uncertain. Policy tightening would enhance the accretion to foreign
reserves and attain relative stability in the foreign exchange market.
Moreover, raising rates would reinforce the stability of the foreign
exchange market as an upswing in the rate will inhibit demand
pressures in the market through a decline in money supply.
Although tightening would limit the ability of DMBs to create money,
ultimately leading to a reduction in money supply and curtail their
credit creation capabilities, which would eventually lead to rising cost
of credit and credit risk as DMBs re-price their risk assets, the MPC
believes that the aggressive pursuit of the current loan-to-deposit ratio
policy thrust would continue to help to catalyze credit growth and
positively impact growth and prices.
On the decision to loosen, members noted that the relative stability in
the foreign exchange market provides confidence to foreign

investors. There is, therefore, no immediate concern that loosening
would exert pressures on the foreign exchange market in the near
term. In addition, an accommodative monetary policy stance would
motivate banks to lend to maintain their profit performance and
would result in decline of the overall cost of production. This would
further affirm the Bank’s support for stimulating output growth.
The Committee also feels that the downside to loosening is that it
could amplify inflationary pressures as the economy experiences
increased liquidity surfeit, particularly if loosening drives growth in
consumer credit, without corresponding adjustment in output, thus
escalating inflationary pressures. An interest rate reduction would
increase money supply and exert pressure on the exchange rate.
Moreover, an accommodating monetary policy stance may not
necessarily lower the retail lending rate, as interest rates are generally
sticky downwards.

On the argument for a Hold, the MPC acknowledged that a mix of
heterodox monetary and financial policy measures have recently
been deployed by the Bank. Noting the existence of a lag between
the policy pronouncement and its impact on the economy, a hold in
the rate would ensure its efficient impact on the economy. The
Committee noted the slow pace and low rate of economic growth
as real GDP growth of 2.10, 2.12 and 2.38 per cent in Q1, Q2 and Q3
2019, respectively, being below the population growth rate, still needs

sustained policy support. Maintaining monetary policy rate at its
present level is essential for sustainable support to growth before any
possible adjustments. This will enable policy to react suitably to
developments as they occur in the near term. In addition, retaining
the current policy position provides avenues to evaluating the impact
of the heterodox monetary and financial policies to support lending
by the banking industry without altering the policy rate.
On the downsides to holding, the Committee noted that it would
reduce the speed of economic recovery relative to loosening, exert
a drag on output growth, as DMBs continue to utilize bonds sales
instead of engaging in financial intermediation to the private sector.
In view of the foregoing, the Committee by a decision of 9 members,
voted to alter the Cash Reserve Requirement (CRR) by 500 basis points
from 22.5 to 27.5 per cent, while leaving all other policy parameters
constant. Two members voted to leave all parameters constant.
In summary, the MPC voted to:
1. Change the CRR from 22.5 to 27.5 per cent;
2. Retain the MPR at 13.5 per cent;
3. Retain the asymmetric corridor of +200/-500 basis points around the
MPR;
4. Retain the Liquidity Ratio at 30 per cent.

Thank you.
Godwin I. Emefiele
Governor, Central Bank of Nigeria
24th January, 2020